China recovery boosts Valio 2020 financials

The coronavirus pandemic affected domestic consumption and was visible in the growth in retail sales and the decrease in HoReCa (hotel, restaurant, catering) sales. However, in the challenging year Valio was able to slightly improve the milk return.

The pandemic affected operations in all markets. People stayed at home and cooked for themselves, boosting retail sales. Eating in restaurants and staff canteens fell away, so HoReCa sales decreased.

“Despite the coronavirus pandemic, Valio recorded a good financial performance and the milk return continued to grow. One of our strengths is flexible production capacity, so we were able to shift production quickly from large package sizes designed for restaurants to consumer packages. Additionally, demand in our export markets grew, despite the pandemic,”​ said Valio CEO Annikka Hurme. 

The impacts of the pandemic were visible in domestic consumption, as it shifted from eating in restaurants to home cooking. Consumer buying power weakened during the pandemic, leading to the company launching more items under the Valio Hyvä suomalainen Arki brand.

The market for plant-based products also continued to grow. Valio Oddlygood Barista did well in Finland, and Valio launched Valio Oddlygood Veggie grated, which is used like cheese.

Net sales from international operations totalled €746m ($908m). Growth was strongest in China, where demand recovered quickly after the coronavirus shock in early 2020, and net sales increased by more than 40% on the previous year.

“Despite the growth, Valio is a small actor in China. Our most important task is to further improve the profitability of exports and to build recognition of our products and brand,”​ Hurme said.

Growth in net sales in the nearby markets of Sweden, Estonia, and Russia was moderate. In the US, the pandemic caused steep price fluctuations, which weakened financial performance, but net sales remained at a reasonable level, the company said. After a slump early in the year, the global market price of milk powders began to rise towards the end of the year.

Valio is owned by 4,300 Finnish milk producers, and Valio pays its operating profit to the dairy farms through the cooperatives. Valio’s financial success is measured with a milk margin and a milk return.

The milk margin amounted to €861m ($1.05bn), and the milk return was 41.5 cents per liter.

Valio’s board of directors, which is comprised of milk producers, determines the raw milk price based on the market situation and Valio’s financial standing. In 2020, the average price Valio paid for milk was 40.9 cents per liter. The sustainability bonus to encourage the continuous improvement of animal welfare remained at two cents per liter.

Throughout the 2000s, Valio said it has been able to pay Finnish milk producers a higher price for milk than the European average.

Valio’s strategy was updated in 2020. Valio said it will focus on four areas to pursue future growth.

“Business operations focusing on milk in the domestic market continue to be the strongest of these, and we will continue its further development. Raw materials and solutions that generate added value especially for our industrial customers is an important new focus area, whereby we are seeking growth globally, for example in Asia. We also see potential for growth in plant-based products, where we are further developing our offering as well as looking to export markets. In addition, we are continuously evaluating various new business opportunities and new partnerships,”​ Hurme said.

Valio said its goal is to cut the carbon footprint of the entire milk chain – from farm to grocery store – to zero by 2035.

Valio set Science Based Targets on climate in 2020. According to the targets, greenhouse gas emissions from milk production per liter of raw milk taken in will be halved by 2030, compared to 2019. 

Valio continued training dairy farmers in carbon farming. Due to the coronavirus pandemic, Valio invested in an electronic learning platform, in collaboration with the environmental foundation Baltic Sea Action Group. The platform went live in early 2021.

In October, Valio launched an environmental calculator for all Valio dairy farms, enabling them to calculate the carbon footprint of the milk produced at their farm. Valio also initiated training in the use of the calculator.

Valio continued studies on using cattle manure in biogas production to reduce climate impacts. The first milk truck using biogas produced at a farm commenced milk collection at the beginning of 2021.

In late 2020, a biogas station was opened at the Vuorenmaa dairy farm in Haapavesi; vehicles can fill up with biogas made from cow manure. There is enough to supply the milk truck as well as other gas-powered vehicles, and it can be purchased from a normal gas pump.

Valio started a three-year project with the Natural Resources Institute Finland, which will focus on studying cultivation methods that reduce emissions from peatlands. In addition, 10 measurement chambers were installed at four Valio dairy farms to measure soil carbon balance.

Valio’s goals in 2020 were to increase net sales and improve profitability. The three-year program introduced in 2018 to improve cost efficiency, profitability, and competitiveness will continue to the end of 2021. The pandemic raised costs, and some projects had to be postponed. The pandemic also meant some jobs were temporarily discontinued, which resulted in lay-offs in head office functions.

Valio and the milk procurement cooperatives switched to contract production at the beginning of 2021. Contract production means the milk procurement cooperatives supply a pre-agreed volume of raw milk to Valio. The goal is to secure the future of dairy farms in both the medium and long term and to maximize the price paid for raw milk to the co-operatives and, consequently, to the dairy farmers. Better predictability of the total milk volume is necessary so Valio can adjust its production capacity to market demand.

Contract production secures the sufficiency of powder manufacturing capacity, and in 2020 sales of value-added powders grew by 10%. The use of value-added powders enables, for instance, a chocolate manufacturer to reduce a product’s sugar content without changing the taste, or the powders offer some other advantage for customers. In Finland, a new packaging plant for consumer powders was built in Lapinlahti, and the Seinäjoki powder drying tower’s production capacity was increased. These investments are preparing Valio to grow its exports of value-added powders.

Year 2021

In line with strategic focus areas, Valio said it will continue to invest in new growth, operational efficiency, and improved profitability in 2021. As a result of contract production, there has been a moderate decrease in raw milk volumes since the beginning of the year.

The pandemic continues to make operations difficult for restaurant, hotel and industrial kitchen customers, however, Valio said retail demand is good. The market situation for butter and milk powders seems positive globally, and the cooperative sees growth potential especially in the value-added powder business in China and elsewhere in Asia, for example.

“A key issue regarding product exports, as well as importing ingredients and supplies, is whether international borders will remain open. Valio’s strength is that milk, the most important ingredient of our products manufactured in Finland, is produced locally, at Valio owners’ dairy farms. Products are manufactured at 12 plants, which helps to ensure security of supply. Valio plays an important role in Finland also in ensuring food security, and in all our operations we aim to serve customers and consumers in the best possible way,”​ Hurme said.