Analyses of size economies in the England and Wales dairy sector have generally been made on the basis of comparisons of input‐output measures. These measures have been classified according to input use and farm size and have led to conclusions about efficiency and structural change. This paper examines the influence of managerial ability on economies of size using econometrically estimated long‐run average cost (LAC) functions from Milk Marketing Board data for 1980/1. The results show that the LAC curve is U‐shaped though skewed to exhibit greater economies than diseconomies of size. Better managed farms are shown to produce any given level of output at lower average cost. Moreover, they have larger optimal levels of o