Analysis of the operating environment, risks and opportunities

Finland and Estonia

Valio is the market leader in Finland and Estonia, as well as a strong local player with two production plants in Estonia alongside 13 in Finland. Valio operates as a cooperative business in Finland, committed to take in and process all the raw milk produced by its owner entrepreneurs, and pay its sales income to dairy farmer entrepreneurs in the price for raw milk. In Estonia, Valio is the biggest purchaser of Estonian raw milk on market terms.

In Finland, Valio competes with multinational corporations in the consumer products market. Arla is a competitor in all product segments, plus Danone in yoghurts, Unilever in spreads, and Nestlé in snacks and baby foods. Valio’s biggest competitor in Estonia is local company Tere.

The potential for growth in Finland has been limited in recent years. Valio’s strengths include brand products, such as Valio Oivariini® and Valio Oltermanni®, as well as progressive novelty items, and special products. Valio special milks, including Valio Eila®, Valio Plus™, and Valio Arki® milk drink are a significant success.

In addition to competition from imports, private label products have increased their market share in Finland. In basic milks in particular, total private label sales have overtaken Valio’s position as market leader.

Valio’s success is built on Finnish raw milk, which is the highest quality in the EU, an efficient production structure, innovative Valio brand products, our own distribution, and responsible business operations.

Other markets

Valio has one processed cheese plant in Russia. Local dairy know-how and milk production is promoted through cooperation with one particular dairy and a small number of dairy farms.

Russia was Valio’s biggest export market prior to the import embargo imposed by Russia on food products from the EU. The embargo commenced in August 2014 and slashed Valio’s total net sales by almost 20%. The raw milk had to be processed into less profitable industrial products instead and that continues to be the case. Valio has maintained a presence in the Russian market through local subcontracting and its own processed cheese production, but net sales in Russia for 2015 are only a fraction of those in 2014.

During 2015, Valio has successfully expanded its business in other consumer markets in Sweden, Denmark and the US. Consumer product markets in China and Central Europe are being targeted in late 2015 or early 2016.

In Sweden and Denmark, Valio is growing especially through sales of lactose free products and yoghurts, all exported from Finland.

In the US, Valio sells both Finnish-made and locally contracted cheeses. A sales network has been built during 2015 for consumer butter manufactured in Finland.

In China, Valio is one of the three biggest sellers of demineralised whey powders. Valio DEMI® powders are used as an ingredient in baby foods. Valio’s clean and reliable production processes are a significant competitive advantage.

Valio exports e.g. milk powder and industrial butter, and licenses its innovations worldwide. In 2014, Valio exported products to 55 countries, accounting for around 30% of Finland’s food exports and 97% of the country’s dairy product exports.

Global competition is fierce in each territory and in all product categories.

The future of milk procurement

At the beginning of 2015, there were around 8,300 dairy farmer entrepreneurs operating in Finland, some 7,000 of which supplied milk to Valio. The number of dairy farms fell by 5.1% in 2014 while that of dairy cows rose by 0.6% with an average of 34 cows per Finnish dairy farm.

Raw milk production in Finland totalled some 2,288 million litres in 2014, up 3.1% on 2013. The average yield per cow has increased and Valio took in over 80% of the raw milk produced in the country in 2014. Finland is not quite 100% self-sufficient in milk production.

Dairy companies and cooperatives look to attract dairy farmer entrepreneurs by paying a high price for raw milk and offering valuable services. Dairy farmer enterprises can choose to be part of a Valio owner cooperative that supplies milk to Valio, or supply milk to Valio’s competitors.

Valio’s ability to pay for raw milk was hampered in 2014–2015 by the cessation of exports to Russia, decreased purchasing power in Finland, and the low prices of industrial products on global markets which were primarily due to the oversupply of milk in Europe and declining demand in China. Furthermore, Valio is not permitted to compete on market terms in Finland’s basic milks market and is obliged to sell around 10% of the raw milk it collects to competitors at cost price.

As a result of these unique market conditions, some dairy farmers switched from Valio to its competitors. Valio is nevertheless able to procure sufficient milk to meet both its domestic and export requirements. In Estonia, Valio purchases local raw milk for products manufactured for the Baltic States markets and its availability is well managed

Trends that affect operating conditions

Valio Group’s long-run operating conditions are affected by consumer demand for dairy products and the concurrent scale of milk production in the world’s big dairy countries, New Zealand and the US, together with Central Europe. Further impacts comprise industrial product prices and any political regulation related to milk production volumes and subsidies paid to milk producers.

Crucial success factors include the stability of Finland’s broader industrial operating environment, geopolitical cohesion, the implementation of appropriate changes in the company’s production structure, and finding skilled labour.

In the mid- and short-term, operating conditions are affected by market mechanisms in Finland, Russia, Sweden and the Baltic States, Valio’s ability to develop new products that attract consumers, the success of Valio products in both the Food Service and retail sectors in Finland and nearby markets, and the Swedish Krona and US dollar exchange rates.

Valio’s long-term goal is to secure profitable milk production and the self-sufficiency of dairy production in Finland, and to deliver profitable growth in consumer product exports.

Valio aims to pay the best price for raw milk in Europe to its owner entrepreneurs.

A decline in milk production profitability and a considerable fall in the number of dairy farms in Finland would have a number of impacts including the collapse of domestic beef production, disappearance of jobs related to the dairy industry, and the deterioration of operating conditions for the domestic dairy processing industry. Milk production is the only profitable form of agriculture in most of the country and the milk production chain provides around 30,000 jobs in Finland.

The challenge in milk production is the fluctuating volume of global milk production, and the industry’s dependence on the cost of feed, which is also prone to volatility. Milk oversupply peaks quickly manifest as an increase in cheap imported products in Finland. A few poor years of grass and grain crops may raise feed costs significantly. Dairy farms are also significantly dependent on energy. The price received by Valio milk producers for their raw milk depends on Valio products’ success in the marketplace.

Milk production is affected by global trends

In the long term, global milk production and processing will probably be affected by climate change, the availability of clean water, and the growth of dairy product consumption in the developing countries.

Valio’s operations are impacted by the quantitative development of milk production around the world, success in industrial and consumer product exports, and the development of milk production volumes in Finland.

From the perspectives of climate change and water availability, Finland offers a natural environment for milk and beef production. According to a study conducted by the Natural Resources Institute Finland (2015), Finland’s forests make for carbon neutral milk production, there’s plenty of clean water for cows, grass for silage grows all over the country, and other forms of agriculture to secure food production for the nation are impossible to practise in large parts of the country. The advancement of climate change might cause trouble for food production globally but would probably not adversely impact Finnish milk production.

Valio takes climate change into account in its operations by developing primary production resource efficiency, and energy efficiency in its own production structure. In logistics, recycled carbon dioxide from industrial emissions is being introduced alongside biofuels. Milk collection and distribution routes have been optimised in terms of environmental impacts.

Valio takes national nutrition recommendations and food trends into account in its product development e.g. by manufacturing low fat products and halving the sugar content in its snack products over the next five years.

Valio responds to demands for ethical food production and animal treatment e.g. by improving active guidelines on the treatment of cows and calves and on good barn building practices, as well as by promoting grazing for cows and the well-being of dairy farmer entrepreneurs. Valio does not use soy in its production chain and Valio products are GMO free.

Risks and opportunities

The greatest risk factors attached to the operations of Valio and its dairy farmer entrepreneurs are posed by changes in the demand for dairy products and the global milk supply. An increase in milk supply quickly drags global market prices down and so affects the prices of surplus batches coming into Finland as well as general dairy prices.

Other risks may include a fall in the demand for products of animal origin, a considerable decrease in milk production in Finland, and the significance of price over quality in food products. One risk concerning Valio alone is the distortion of competition in the company’s key market, namely Finland, because that market is regulated without accounting for the fact that it has become supranational.

Valio’s opportunities stem from world-class pioneering in R&D and dairy technology expertise. Examples include Valio’s lactose free milk drink production technology, and protein technology. Other opportunities lie in the expansion of the consumer products business beyond nearby markets into Central Europe and China, and increasing the consumer product range in the US, Denmark and Sweden.

In the long term, the Russian market also constitutes an opportunity due to its proximity and size as well as Valio’s recognition and appreciation there.