Cooperative data

Cooperative year 2021: Calm before the storm... but 2021 turned out better than feared

Growth and profitability generally improved to a record level in 2021. Strong demand, good investment returns, and new investments supported the success of many cooperative companies. On the other hand, Covid still affected many cooperatives, especially in the service industries.

A year ago, we predicted cloudy or at most partly cloudy conditions for almost all industries - we only placed the forest sector “under the sun”.

We expected the rise in interest rates, the continuation of the pandemic and international developments to weaken the economic outlook. This did not happen. Companies got an extension time to strengthen themselves. The biggest reason for the good results of 2021 for financial and investment cooperatives and mutual companies was the rise in stock market prices.

Our forest industry companies enjoy an exceptionally good supply-demand situation, the end of which is not even in sight. But food producers and their cooperatives have challenges.

Growth also for cooperatives – Metsä, Valio, Tradeka, SEO, BLC

Growth has traditionally been a secondary goal for cooperative companies compared to profitability and low debt. For Metsäliitto/Metsä Group forest cooperative, the cooperative banks and the S group consumer co-op, growth has been an openly declared goal and the investments are in line with that goal. But for various reasons, the growth goals have not been met in recent years.

Metsä Group is most certainly relieved when the net sales turned to a rapid increase (+19%) after three consecutive years of decline, and profitability also rose to be the best among all the Finnish forest companies. In the Finnish TE500 publication, however, Metsä's turnover growth still does not place the company into the top 100 best-growing companies list, which SEO energy coop (+42%) and Tradeka investment coop (+30%) reached among the cooperatives.

Fast growth organically, gradually increasing your own strength and investments is an almost impossible task for companies other than those that have just started. Growth by buying other companies in the industry is a more likely path - but at the same time more dangerous. More cooperatives than before have now made acquisitions, which indicates changes in risk-taking and strategy.

Tradeka as an investment cooperative has been making majority investments in companies for years. Valio dairy coop as a large company and BLC investment coop from Savonlinna as small cooperative company, were last year's surprise buyers. BLC more than doubled its turnover with the acquisition of a security business.

Valio made a big leap by buying Heinon Tukku wholesale and made a letter of intent for a manure biogas production with energy company St1, and also managed to get a minority investment from Mandatum for the Oddly Good™ vegetarian food business it incorporated. Growth and profitability remained at a level that guaranteed almost 50 percent equity ratio.

Emphasis on acquisitions in the cooperative's growth path requires not only careful risk assessment and monitoring, but also a clear ownership strategy. The BLC Group now says in its annual report that it aims to "ensure its equity level and improve it in the future". That's fine, as long as it is achieved through profitable growth. The group's equity ratio was 70 percent before the acquisitions, and 43 percent at the end of 2021. No need to panic.

Funding for cooperatives from the stock exchange - KPY, Arvo

Until now, cooperatives have not been able to get direct risk financing in the same way as joint-stock companies. Distribution-share investments from members have been one way to get additional funding for e.g. OP Financial Group and Tradeka. In recent years, forest coop Metsäliitto has also received approximately 100 million more per year in equity financing from its members, when they leave part of their forest trade money as an interest-bearing investment in the cooperative.

From the members' point of view, such investments have been interest-bearing, can be canceled and are comparable to a deposit, not risky investments that the cooperative could use to finance investments. In practice, the cooperative has only been able to finance investments by making a profit or by taking on debt.

The method used by the meat industry cooperatives in the 1990’s to take advantage of the stock exchange was to list Atria and HKScan as limited companies, which received new minority shareholders and with them financing. Convenient, but as a result, we have a meat industry chain with limited or poorly profitable joint-stock companies and solvent producer cooperatives, but meat producers in dire straits.

An option raised by investment cooperatives KPY and Arvo, it seems that if it wishes, the cooperative can, in the future, get a quotation on the stock exchange for the cooperative's share. According to Timo Rothovius, professor of accounting and finance at the University of Vaasa, listed cooperatives can be interesting from an investor's point of view, because "cooperatives are really wealthy compared to the value of one share".

Frankly speaking, cooperatives have hidden values that Arvo wants to bring out more openly. Fair play. It will be great to see what the communication practice of a listed cooperative will be like.

The background of the KPY Group's stock market plan is, on the other hand, the need to get channeled risk financing through the cooperative for various minority investments, which, according to its announcement, KPY will make in a value-based, responsible and sustainable manner. Even before the listing, minority shares have been acquired in medium-sized companies in various industries, such as Enersense and Gebwell - mutual insurance company LähiTapiola also became an owner of the latter. It doesn't need anything from the stock exchange, but 2021 was a time for new strategic alignments for the mutual group under the leadership of a new CEO. Growth and profitability improved especially thanks to investment returns and a particularly large investment was made in asset management.

Help for food producers and their companies from inflation?

Food producers and the dairy and meat companies they own seem to have been the first to be hit when the prices of energy and other production inputs suddenly rose from the end of 2021.

Dairy coop Valio and meat companies Atria and HKScan survived last year reasonably well, but for this year uncertainty factors have piled up. In inflationary conditions, all prices - including those for long-haul imports - will rise. The improved productivity due to investments, the rise in appreciation of domestic food during the crisis and the inevitable price increases together can more than restore the lost profitability. However, leaving Russia will temporarily hamper growth and profitability.

Atria knew how to anticipate and stopped industrial production in Russia already in May 2021 and for natural reasons: the operation was unprofitable.

Eyes are now turning to the consumer coop S Group. Inflation and discounting do not go well together. On the other hand, price will remain one of the key competitive factors.

Hotels and restaurants plagued by covid ruined SOK's results for the second year as well. Regional cooperatives had varying degrees of success. In inflationary conditions, the challenges and opportunities of pricing grow.

Sustainability of forest and food is tested

Domestic meat and dairy companies and forest processors are becoming providers of sustainable drink, food and wood-based experiences under the pressure of the market, investors and the EU. In the 2021 annual reports, the sections related to sustainability, corporate responsibility, and environmental protection have gained a much higher value than before.

Food producers strive to reduce the environmental burden of production, and forest processors to replace traditional products with wood-based solutions that have less impact on nature. The task of the forest industry seems easier now. Metsä Group has got its bioproduct factory in Äänekoski up and running, and Kemi's similar but even bigger one will be completed again at the right time.

On the other hand, forest processors are threatened by the EU's pressure to limit the use of forests. How much and for what use forests can be felled is a question on which very different scientific and less scientific assessments are presented. Metsä Group's competitors already make a large part of their pulp in South America. Will Finland be enough for Metsä in the future?

Energy production is now a hot industry for many reasons. It's a pity that, in addition to energy coop SEO, there are no decent growers in Finnish cooperatives in the energy sector. There would be a need and a market. Just look at the Åland Energy Cooperative, which made a top result with wind power. I guess we will hear later from Jylhä electricity coop and Haukiputaa electricity coop.

Risks of banks and insurance

 The cooperative banks' merger development continues, but not without discord. The tightening solvency and other requirements of the European Central Bank collide with the needs of members of cooperative banks to keep the bank traditionally local.

In addition to cooperative banks, mergers are also done elsewhere, for example, Oma Savings Bank, the stock market riser, recently bought Lieto Savings Bank. Joroisten Oma Cooperative already understood years ago to sell the banking business and take a large part of the purchase price in the form of shares in Oma Savings Bank.

OP Financial Group's growth and profitability improved in 2021, but CET1 solvency still fell slightly to 18.4% and the goal (22%) is still further away. OP Financial Group's return on equity was 6.6 percent, but without OP bonuses it would have been 7.8 percent, which is very close to the target level.

Jukka Suvitie
Consultant, Master of Laws with court training
Pellervo Institute