A costly decision for consumers and Valio

The Market Court issued its decision on 26 June 2014 concerning the pricing of basic milks in Finland in the years 2010–2012. The Market Court decided to impose on Valio a sanction of 70 million euros for pricing in contradiction with the competition law in Finland during 2010–2012. The Court’s decision will be very expensive both for Finland’s consumers of basic milk and for Valio itself, which is owned by Finnish milk producers. Valio will lodge an appeal against the decision with the Supreme Administrative Court.

Valio’s CEO Pekka Laaksonen:

The decision prevents genuine competition in the milk market and shuts Valio out. The cost will be borne by consumers in an artificially high price for basic milk and by Valio in terms of a hampered ability to invest.”

The decision means that all dairy players in Finland will benefit from the margin generated by Valio’s entire innovative range with no particular contribution of their own to product development. Valio’s price paid to producers includes the profit which is mostly generated by innovative products. According to the decision this producer price has to be considered as ingredient cost for basic milk, which has to be covered in the wholesale price. This means that all dairy players in Finland will benefit from an artificially high wholesale price for the most basic product, packaged milk. The cost will be borne by consumers in the higher price of basic milk and by Valio in terms of a hampered capacity to invest.

The Market Court’s decision forbids Valio to operate a profitable basic milk business, reduces efficient competition in the marketplace, and raises consumer prices.

Valio has consistently reasoned the logic of its co-operative business to the authorities and the Market Court: Valio’s mission is to pay the profit it generates to its owner-producers (via milk procurement co-operatives) through the price paid for the ingredient i.e. raw milk. Therefore, raw milk cannot qualify as Valio’s “ingredient cost”. Valio has also committed itself to process all milk produced by its owner-producers, so raw milk cannot be a variable i.e. avoidable cost for Valio.

The decisions of the Finnish Competition Authority (currently the Finnish Competition and Consumer Authority) and the Market Court indicate that cost calculation and profit distribution in a co-operative business have not been understood. The decision conflicts with the reality, and this conflict has been underscored by a number of professors specialised in the subject. The Supreme Administrative Court will thus set a precedent in issuing a decision that defines e.g. whether the profit generated by a co-operative business is an avoidable cost in terms of competition law.

There are no former cases of legal proceedings on predatory pricing in Finland.

“There has been no similar case in the world where a company has been condemned for pricing too low in an instance where a low price is in the interests of both consumers and the company in the short and long term,” stresses Valio’s CEO Pekka Laaksonen.

The Finnish Competition Authority’s decision has resulted in expensive milk for consumers, who in Finland have paid tens of millions of euros more for basic milk compared with the outcome of an efficiently price competitive milk market.

“We are disappointed that Valio’s profitable alternative for processing milk and competing for customers in the years 2010–2012 is viewed as predatory pricing. The decision conflicts with the need for efficient competition. No such case has ever been brought in Finland and the country is equipped with little expertise in a matter such as this, so we expected that the decision might go against us. I am confident that we acted with sincerity in defending the Finnish dairy industry, jobs and milk producers in the face of fierce international price competition, which also worked in favour of consumers,” says Valio’s CEO Pekka Laaksonen.