This paper focuses on dairy herd performance in the United Kingdom and southern Australia, where feed costs have been estimated to comprise between 40 and 67% of the total costs of production. The efficiency of conversion of grazed pasture, home grown forages and purchased feeds into milk has a major bearing on farm profit. Feed conversion efficiency (FCE), defined as ‘kg milk of standardised composition with respect to protein and fat concentrations produced per kg feed dry matter consumed’, is a useful measure of the performance of a farm feeding system, but is seldom used by dairy farmers. It could also be defined as ‘g protein plus fat produced per kg feed dry matter consumed’, given that farmers are often paid for these components. The value of estimating FCE on an annual or shorter-term basis is discussed in relation to accepted principles of feed utilisation and dairy cow energy requirements. The implications of feed intake, conversion of ingested nutrients into absorbed nutrients and the subsequent utilisation of these nutrients for milk production or other purposes, as well as the effects of stage of lactation on FCE, are reviewed. Measuring FCE and identifying opportunities for improvement is relatively straightforward in housed feeding systems, but is more problematic under grazing. Hence, approaches and the key assumptions in estimating FCE in grazing situations, as well as possible limitations of these estimates, are discussed. Finally, a case study examining the potential impact of improved nutritional strategies on FCE and on margin over feed costs is presented. It is concluded that, to remain profitable, dairy farmers need to have a sound knowledge of cow nutrition, along with appropriate measures of FCE to monitor the performance of their milk production system. Such indicators of the biological performance of the farming system are most useful when used in conjunction with appropriate measures of economic performance.