Operating environment analysis; risks and opportunities

Finland and Estonia

Valio is the market leader and strong local player in Finland where it has production plants in 12 locations and in Estonia with two plants. 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 all 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 the consumer products market in Finland, Valio competes with Finnish dairy companies and multinational corporations. Arla is a competitor in all product segments, plus Danone in yoghurts, Unilever in spreads and snacks, and Nestlé in baby foods. Valio’s biggest competitor in Estonia is local company Tere.

The potential for growth in Finland has been limited in recent years, and Valio has lost a portion of its market share especially in basic milks with Valio whole, semi skim and fat free milks each falling below 20%. The company’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 proving reasonably successful.

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 are promoted through co-operation with a fresh products dairy and a small number of dairy farms.

Russia was Valio’s biggest export market prior to the import embargo imposed by the country 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. Valio has nevertheless maintained a presence in the Russian market through local subcontracting and its own processed cheese production, increasing net sales there for 2016 but to only a fraction of those in 2014. Valio’s significant brands in Russia are Valio Viola® processed cheese, Valio Oltermanni® cheese, and Valio Clean Label fresh dairy products.

Sweden is an important export market for Valio selling products manufactured in Finland. The most significant categories are lactose free Eila® products and fruit yoghurts. Exports to Denmark commenced in 2014. Arla is Valio’s biggest competitor in both the Swedish and Danish markets across all product categories.

In the US, Valio sells both Finnish-made and locally contracted cheeses, and consumer butter imported from Finland. Valio is competing with both European importers and US players.

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

In 2016, Valio started exporting consumer milk powder to China, as well as baby food powder to Russia where baby food imports are not covered by the embargo. Valio will further increase consumer product exports e.g. to the UK during 2017.

Valio exports e.g. milk powder and industrial butter, and licenses its innovations worldwide. In 2016, Valio exported products to nearly 60 countries, accounting for around 26% of Finland’s food exports and nearly 100% of the country’s dairy product exports.

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

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. In fact, milk generates over 60% of Finland’s entrepreneurial income in agriculture.

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 dairy 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, the growth of dairy product consumption in the developing countries, and possibly the significant increase of antibiotic-resistant bacterial strains.

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. Grass pastures and forests make Finland’s milk production more carbon neutral than most of the rest of the world, and environmental impacts are further reduced by the extraction of meat and milk from the same animal, virtually soy-free feeding, and grazing. 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 impact Finnish milk production adversely.

Valio takes climate change into account in its operations by developing primary production resource efficiency, and energy efficiency in its own production structure. Milk collection and distribution routes have been optimised in terms of environmental impacts.

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’s milk production chain is GMO free.

Finnish milk production deploys antibiotics in a highly responsible manner in treating animals. Veterinarians prescribe medication for a specific purpose only and antibiotics are not added to animal feed for preventative purposes.

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. Media exposure afforded to vegetarian foods has not affected demand for dairy products or meat to date.

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 sustainable milk production and world-class pioneering in R&D and dairy technology expertise. Innovations include ValSa® milk salt, LGG® lactic acid bacteria, Valio’s lactose free milk drink production technology, and protein technology.

Valio’s sustainability strategy determines for example cattle husbandry requirements, to which the dairy farmer entrepreneurs commit themselves by signing Valio’s quality and production methods agreement.

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.