Canada Royal Milk ready to appeal to mainstream moms

Canada Royal Milk is ramping up production at its new processing facility on the outskirts of Kingston with an aim to supply baby formula across North America. The processing plant has capacity to produce five times the Canadian market for baby formula.

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Why it matters: If Canada Royal Milk even partially achieves its processing capacity goals, it will represent significant growth in marketing potential for Ontario dairy farmers.

Canada Royal Milk recently had an official opening ceremony and offered tours of the plant.

It has been an area of interest for the Canadian agriculture sector since Chinese company Feihe International, the parent company of Canada Royal Milk, arrived in Kingston eight years ago and promised to build a large dairy production plant. The destination for infant formula powder produced at the plant has been tied up by North American trade talks, Canada’s management of excess skim milk powder and pandemic-related delays.

For the past 30 months, the company has been processing goat’s milk, but will soon also process cow milk. It sees a future in the North American infant formula market because many existing plants on the continent are aging and are less efficient. There are also opportunities for powdered milk for adults.

Canada Royal Milk received approval to produce infant formula powder for Canada in March.

State-of-the-art technology is a point of pride for the company’s leadership team. General manager Chenggang Han cited the 2023 shutdown by the United States Food and Drug Administration of the Abbott Nutrition manufacturing facility in Sturgis, Michigan, following a bacterial infection outbreak among infants.

An investigation revealed problems with bacterial contamination, a leaky roof and lax safety protocols.

“I think (the shortage of baby formula in Canada that resulted from that shutdown) is much better but it’s still happening,” Han said. “Most of the U.S. factories are between 50 and 80 years old so I believe there is an opportunity for us to have a lot more of our products in the North American market.”

Supplying moms across North America with baby formula made from cow’s milk was not the company’s top priority when it first explored the possibility of baby formula processing capacity in Canada almost a decade ago, Han admitted.

The company, founded in 1954, arose in 2008 as an untainted source of baby formula following a devastating and fatal Chinese food safety scandal involving melamine.

When the company’s plans were announced under the Canada Royal Milk banner, the Kingston plant was its only international property. Han said part of the appeal of Canada at the time was the effort by this country’s dairy cow stakeholders to tackle a surplus of non-fat components, including creation of special pricing for what were called Class 7 ingredients.

The strategy was subsequently challenged and overturned by global trade rulings.

“When we started this project eight years ago, the purpose was to help Canada solve their surplus skim milk problem,” said Han. “We never expected to be the only solution.”

Hopping on board to facilitate Chinese adaptation to the Canadian food processing sector was New Brunswick dairy producer Jacques Laforge. At the time, he was CEO of the Canadian Dairy Commission, an arms-length federal government agency. Laforge was required to maintain an objective presence with respect to a foreign company aiming to establish a factory in Canada.

After his resignation in May 2018, Laforge threw his support behind Feihe’s efforts and was named one of the company’s three independent non-executive directors.

He said the company was required to name independent directors when it went public on the Hong Kong stock exchange and his role is to serve as a non-voting representative of Feihe’s public shareholders.

Evolving vision of the market

Part of the company’s initial vision was to create a premium line of baby formulas for consumers who were worried about food additives, environmental impact and other social issues, said Han. All of that changed due to the combined effects of Canada’s 2023 shortage of baby formula and a post-pandemic rise in grocery prices.

The recipe now rolling off the processing lines is more appealing to conventional moms, with ingredients that allow the finished product to remain price-competitive. That’s where the company now believes the greatest demand exists in Canada.

Infant formula made from goat’s milk was also high on the initial priority list, with export to China as the goal.

At the entrance to the observation hallway, upstairs from Canada Royal Milk’s spacious reception lobby, a large mezzanine sat empty during the Sept. 16 tour — except for a brightly-coloured banner depicting dairy goats and the logo of the Ontario Dairy Goat Cooperative.

That banner was left from an event hosted by Canada Royal Milk in April 2022 to announce joint agreements with the cooperative and the Producteurs de lait de chèvre du Québec for supplying goat’s milk to the plant.

Goat’s milk was the first to be pumped through the company’s pasteurizers and processing vats beginning in March 2022.

“Goat milk is the most common milk consumed worldwide and it is becoming recognized as an important part of nutrition and health. It is anticipated that demand for goat milk products will increase rapidly in China and across Asia,” the company said at the time of the agreements.

However, the company learned that the rapidly evolving nature of global dairy trade can make it difficult to plan ahead. So, too, can a worldwide pandemic.

“Everything here got very slowed down by COVID,” said process engineer Justin Yanosik, during a Farmtario tour of the facility in September.

Not all of the equipment was in place in March 2020. With supply chains disrupted for months in the pandemic’s wake, it took much longer than expected to fully install it and launch production.

Given the current trade and consumer environment, Han said priorities shifted for Canada Royal Milk.

Baby formula using goat’s milk remains a niche category. Infant formula typically uses skimmed goat’s milk, leaving a surplus of goat cream that is difficult to market without taking a financial loss.

Goat’s milk powder for adult consumption uses full cream milk. So for now, the company continues its goat’s milk business only in the form of its Capriss branded line of powders, which are promoted on its website as a “digestive-friendly nutrition” option that is “enriched with Vitamin D” and sourced from local farms in Ontario and Québec.

Viewed from the observation hallway, the skimming, evaporating and drying elements of the 320,000 square-foot factory sat idle on Sept. 16. Yanosik said it was only running an afternoon shift, Monday to Friday.

“As we have more demand, we’re going to be increasing that to get up to a 24-7 schedule, as well as having more people for cleaning and other work.”

Crews in other locations cleaned the canning lines and packaged cans of Niuriss brand cow’s milk baby formula. Each can features a bar code allowing consumers to find information about the production, ingredients and proof that it meets standards. Bar codes will also be helpful for communication in the event of a food safety recall.

Yanosik’s current focus is securing FDA approval to market Niuriss in the United States. He believes the recipe will either be the same or almost the same as the one approved by Health Canada.

However, high tariff rate quotas on dairy products exported to the United States and other countries are a challenge.

Agriculture and Agri-Food Canada staff said in an email that under the Canada-United States-Mexico trade agreement, Canada has to monitor global exports of some dairy products, including “certain infant formula” and charge an export duty on those products when a threshold has been reached.

For the U.S. specifically, AAFC says CUSMA stipulates a U.S.-only tariff rate quota for infant formula crossing its borders.

U.S. or global infant formula sales (Han identified South America and other parts of Asia, but not China, as future export priorities) are in the future. Niuriss is now only available in Canada and only through online sales directly on the company website.

Han said the company is in the final stages of negotiations to have the cow’s milk baby formula available on grocery store shelves in three of the four major food retail chains in Canada, which he hopes can be achieved by the end of October.

Managing rumours

Recent developments will hopefully dispel some of the rumours that have swirled around the company since it announced its Kingston construction plans, added Han.

There have been stories about Chinese people buying farmland to establish goat farms to supply the plant, rumours that an exclusively Chinese workforce was being housed in unacceptable conditions in Kingston suburban homes, and accusations that all products would be exported to China.

Two years ago, Han heard from an employee that the staff member’s neighbour believed the plant had Chinese military backing.

“Immediately, I realized that we need to let the local community know what we’re all about.”

A degree of public scrutiny is unavoidable when public money is involved, and that has been the case with Canada Royal Milk.

Construction on the facility began in 2016 and, with cost increases, the final price tag came in around $380 million, the company said. The Ontario government pledged $24 million to the project. Canada Royal Milk has also worked with the Government of Canada through the Milk Access for Growth program and the Matching Investment Allocation program.

Han said one federal government program is related to hiring. The company has not received the full amount of that grant because it has not yet reached the level of hiring identified in the grant agreement. It is still working toward that and expects to receive the remainder when the goal is met.

The other funding is aimed at investments in Canada’s food processing sector.

“Our part is done … In fact by now, we’ve invested more than double,” partly because of a $20-million cost overrun due to additional blasting needed to build foundations in the Kingston area’s limestone bedrock, and partly due to the decision to expand from one to two dryers in the finished facility.

In the years since construction wrapped up, depreciation on the capital investment almost equals the yet-to-be-completed federal government contribution, Han says. And the company has sustained an average annual loss of approximately $20 million due to the slower-than-anticipated ramping up of production.

“It’s reasonable to assume we can’t keep up that level of annual loss,” Han noted, adding the federal funding will be money well spent when it is fully allocated.

The Sept. 27 official opening came 30 months after the first reports that goat’s milk was being processed at Canada Royal Milk. It was celebrated by some in attendance as the true beginning of the Chinese company’s goal to operate a profitable and high-quality dairy processing facility in Canada.

According to local media reports, Dairy Farmers of Ontario chair Mark Hamel called it “a great day for our dairy industry” and “industry-changing” as he addressed the gathering.