The following is a list of major risks that management believes may have a material impact on the company's consolidated financial position, operating results, and cash flows, among other matters related to business and accounting conditions described in the Annual Securities Report. Note that the forward-looking statements in this document were determined by the Lacto Japan Group (“the Group”) as of February 28, 2024.


Having recognized the possibility of the occurrence of these risks, the Group intends to strive to avoid their occurrence and to respond in the event of their occurrence. However, the following information does not cover all risks and it is possible that the Group will be affected in the future by risks that cannot be predicted at present or risks that are not currently regarded as significant.


The Company has established the Risk Management Committee, which is composed of the Managing Director, directors, executive officers, the heads of business divisions, the head of the Corporate Staff Division, the head of the Accounting Department, the head of the Corporate Strategy & Planning Department, the head of the Internal Audit Office and the head of the Human Resources and General Affairs Department. The Committee reports to or provides advice to the Board of Directors regarding evaluation of risks faced by the Group, the determination of policies on risk countermeasures and the results of discussion.

Impact of political and economic developments and climate change in major markets, and geopolitical risks

(Impact of political and economic developments in major markets)

Political and economic developments in countries and regions such as Japan, Asia, North America, Europe, and Oceania, which are the key markets where the Group operates, may change the supply and demand balance of the products handled by the Group. If political and economic trends change the supply-demand balance of products handled, the Group's business performance may be affected through purchasing prices and sales prices.


(Impact of climate change)

The products handled by the Group, such as dairy ingredients, cheese and processed meat products, are derived from animals. Unlike industrial products, production volume is highly dependent on the climate and the environment, and the supply-demand balance for these products may be easily disrupted. In the dairy farming industry, climate change has a particularly large impact because rising temperatures lead to a decrease in milk production, and the quality of the feed crop resulting from drought and heavy rainfall also affects the volume of milk production. If supply-demand conditions ease internationally, due to such factors as an increase in production volume, the price competitiveness of imports versus domestic products will increase, and volume handled will tend to increase. Conversely, however, if production volume decreases due to abnormal weather or other factors and the supply-demand balance becomes tight, prices may rise steeply and volume handled may decrease. Moreover, in the event of extreme global warming, milk production in the dairy farming industry may decrease, which may affect the procurement of dairy raw materials and cheese. The above factors could adversely affect the Group’s business performance.


(Impact of environmental regulations)

The dairy farming and livestock industry is considered to be an environmentally burdensome industry, with high greenhouse gas emissions, including methane gas emissions from cattle, water and soil pollution from manure disposal, and deforestation caused by pasture development. In our business activities, where suppliers of the products we handle include the dairy farming and livestock industry, if various regulations are tightened to reduce environmental impact, such as further tightening of greenhouse gas emission regulations in line with the transition to a low-carbon society, the costs required to comply with the regulations may increase. Furthermore, an insufficient or delayed response to these issues in the dairy farming and livestock industry may impede the smooth business activities of the Group.


(Geopolitical risk)

The Group is expanding its business globally with a focus on Japan and Asia. In recent years however, international conflicts have broken out in various parts of the world, such as with the Russia-Ukraine and the Israeli-Palestinian conflicts, and in Asia too there are fears about the situation over Taiwan and North Korea. In the event of an emergency in a region where we operate, the Group's supply chain, including the procurement, transportation, and sales of products, may be disrupted, which in turn may affect the Group's business performance.


Such fluctuations in the business environment as described above may make it difficult to procure and sell the products we handle or may cause significant fluctuations in purchasing prices and sales prices, which may affect the Group's business performance. The Group will work to mitigate these risks by diversifying supply sources, promoting the development and procurement of alternative raw materials, working to build a sustainable dairy farming and livestock industry, and diversifying its business with food as its core.

Trade liberalization

Trade liberalization is progressing in Japan, with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) coming into force in December 2018, the EU-Japan Economic Partnership Agreement (Japan-EU EPA) coming into force in February 2019, and the US-Japan Trade Agreement coming into force in January 2020. For the Group, the progress of trade liberalization makes it difficult to utilize the overseas networks and know-how that we have built to deal with the high tariff barriers in Japan. On the other hand, factors such as the lowering or elimination of tariffs are likely to boost demand for imported products and increase the volume of products handled by the Group. Therefore, if trade agreements are revised or similar events occur, this could affect the Group’s business performance.

Legal and regulatory information

In carrying out business activities, the Group is subject to legal regulations in Japan, including the Food Sanitation Law and the Consumer Safety Act, as well as legal regulations in other countries in which we conduct business. Going forward, any revision or abolition of these regulations or the introduction of new legal regulations may result in additional costs to address them and may affect the business and business performance of the Group.


In addition, the Group has been granted various permits and licenses necessary for its business activities. However, if these permits and licenses are revoked due to a violation of laws and regulations or other factors, the business activities of the Group will be restricted, which may affect the business and business performance of the Group.


To respond to the above risks, we have established the Quality Assessment Office as a company organization to respond to and gather information on quality-related laws and regulations and we have a system in place to respond appropriately and promptly to new legal regulations.

Risks from the spread of infectious diseases

There are a number of different risks associated with a prolonged outbreak or spread of an infectious disease that has a significant impact on social and economic activities. These risks include stagnated food demand due to contracted economic activity and movement of people, price fluctuations in imported products due to changes in the balance of supply and demand of food ingredients including overseas, and stagnation in the supply of goods due to logistics disruptions.

Food safety

The products that the Group handles comprise food ingredients and food products. The Group manufactures its own brand of commercial cheeses in Asia. In the unlikely event that a foreign material has been mixed in by our negligence or a malicious third party, if there is an error in the labeling of a raw material, or if a flavor or taste defect occurs due to the transportation or storage method, there is a possibility of receiving claims for a product recall or claims for compensation for damages respectively from the standpoint of a trading company that handles raw materials or the standpoint of a manufacturer. This may affect the business and business performance of the Group.


In manufacturing products, the Group makes its utmost efforts to ensure quality, including carrying out thorough safety management such as food defense.

Business strategies of competitors and corporate group organization of business partners

The Group's competitors include major general trading companies that purchase and sell dairy ingredients and processed meat products and major food manufacturers. If these major companies take equity stakes in our suppliers or business partners or incorporate them in their corporate group, this may affect the business and business performance of the Group.

Foreign exchange fluctuation risk

As a trading company, the Group conducts import and export transactions mainly in the United States, Europe and Asia. In addition, the financial statements of overseas consolidated subsidiaries are denominated in local currency, and there is a risk that net assets in the consolidated financial statements will fluctuate through foreign currency translation adjustments depending on the foreign exchange rate at the time of conversion into yen.


Moreover, most of the business transactions conducted by the Group conclude a purchase contract and a sales contract at the same time, and in principle, the selling price in yen to Japanese customers in import transactions is determined based on the exchange rate at the time of concluding the purchase contract. As a general rule, purchase contracts for import transactions are denominated in foreign currencies, but when concluding a purchase contract, we enter into a foreign exchange contract with a financial institution to avoid foreign exchange fluctuation risk. However, if the yen depreciates, the purchase amount converted into Japanese currency will increase, and the selling price will increase accordingly (increase in sales). If the yen appreciates, the reverse impact will occur (decrease in sales). In addition, if the exchange rate fluctuates sharply toward the end of the financial period, the cost of goods sold in the next financial period may be affected if the goods are held as inventory and sold in the following financial period after the purchase price is settled. Therefore, large foreign exchange fluctuations may affect the Group’s financial position, operating results and cash flow.

Interest-bearing liabilities

The Group’s main businesses, the Dairy Ingredients and Cheese Division, the Meat Products Division and the wholesale business in the Asian Business and Others segment, are structured as a trading company. As the business flow proceeds from purchasing to inventory to sales and to cash recovery, an increase in the scope of business operations is equivalent to an increase in working capital, and this may result in negative operating cash flows. Going forward, we will strive to secure profits by reforming our profit structure and generate our own funds by such means as improving the efficiency of working capital.


Under these circumstances, if it becomes difficult to procure funds due to such factors as a change in financial conditions and the Group is no longer able to execute investment plans or if funding costs increase due to a rise in market interest rates, this may affect the business performance and financial position of the Group. Note that the Company has signed a syndicated loan agreement with a commitment line with major financial institutions, and the agreement imposes financial covenants. If these covenants are infringed, the repayment of these borrowings could be demanded, which could affect the Group’s financial position.

Human resources

The Group is focusing on acquiring and developing excellent human resources through new graduates and mid-career recruitment, as the most important management resource. However, in the event of the retirement of these human resources or if excellent human resources cannot be acquired in a timely manner due to the conditions in the human resources market, this may affect the business performance of the Group.

Information security

The Group handles various types of diverse information when conducting business activities. Under these circumstances, unexpected system failures or unauthorized access could result in the leakage, falsification, or loss of information, resulting in a loss of public trust and restrictions on a wide range of business activities, which could have a significant impact on the financial position, operating results, and cash flow of the Group.


To address the above risks, we have established an information security policy to protect information assets and comply with laws and regulations related to information security, and have implemented information security measures such as security training mainly in the Business Accounting Department. As regards the use of social networking services (SNS) by employees, we have clearly documented social media guidelines and thoroughly ensured that employees are familiar with them. Furthermore, owing to an increase in telework such as telecommuting, we have established regulations on methods of handling information and developed a secure network environment to accommodate this.