A winning formula? China invests in Canadian dairy to help feed its baby boom

Donald Trump called Canada's supply-managed dairy sector a "disgrace."

Indeed,Canada's strict system of production quotas, import restrictions and price and quality controls is a perennial target for free traders.

But guess who likes it? The biggest market Canadais wooing right now: China.

Supply management is a big reason why aChinesecorporation is investing an unprecedented $225 million in eastern Ontario. Feihe International, Inc. wantscows. Goats, too. Lots of them.

That's because as China's one-child policy phasesout, it's going to need a lot of baby formula.

"It's one of the largest economic development projects in our city's history," said Kingston, Ont., mayor Bryan Paterson, callingCanada's largest-ever foreign investment in agri-food"off the charts."

"It might be out of the ordinary, but I think that's what was most exciting."

The first concrete trucks are already pouring at the future site of a28,000-square-metre infant formula plant. When the state-of-the-art facility opens in 2019, it will employ over 200 people in manufacturing and research jobs. Over a thousand more could come from its construction and eventual supply chains.

A small team of Chinese managers have moved to Kingston. Everyone else will be local.

Last winter,Feihebrought the mayor and a delegation from Kingston over to northeasternChinafora tour of its factories and farms.Paterson was struck by how geographically similar it was to eastern Ontario.

With one big difference: scale.

A "typical rural village" they visitedwas three times the size of Kingston, he said.

"When you have millions and millions of babies, you need to be able to manufacture a lot of infant baby formula."

Bringing formula production back

Canada hasn't made its own baby formula for years.The Canadian Dairy Commission tried for a couple of yearsto find adomestic processor.Demand for butter was up, andbaby formula usesthe non-butterfat part of milk. But no Canadian processors were interested in expanding into formula.

The CDC broadened its search internationally, to European and Asian companies.

In Feihe, the CDC found its fit: a manufacturer with over 50 years of experience and keen to expandto North America.

Promotional materials describe Feiheas the top domestic manufacturer of cow's milk formula in China in 2016, with brands inover 100,000 retail outlets across that country mostlyin medium-sized cities where urbanization is expanding and the number ofmiddle-classconsumers is rising fast.

Business proposals obtained by CBC News under the Access to Information Act anticipatestrong growth for China'sformula market. Only one in four Chinese mothers breastfeed exclusively for their baby's first six months. The gradual phase-out of China's one-child policy is poised to spark a baby boom.

Roughly 85 per cent of the powderedformula made in Kingston couldbe shippedback to China.

But that'san awfully long boat ride. Why come all the way to Canada for milk?

Quality concerns

It's all about reputation.

In 2008, Chinese dairy products such asbaby formula were discovered tainted with melamine. Hundreds of thousands became sick, and at least sixchildren died.Since then, many Chinese distrust domestic milk and prefer foreign brands.

The world's top dairy producershave eyedChina for years.But New Zealand's dominant dairy cooperative was a minority shareholder in Sanlu, thecompany at the heart of themelamine scandal.

Sagging global prices for milk are now forcingfarms around the world out of business. Not so in Canada.

"I know that might sound silly for some people, but this is a good side ofsupply management," saidCanadianDairy Commission spokespersonChantalPaul. "[The Chinese]know that they're going to have their supply."

Feihe construction site Kingston

7 years ago

Duration 0:35

Construction workers lay the foundation for Feihe's baby formula factory in Kingston, Ontario.

Canada enjoys a lot of goodwill right now, and Justin Trudeauhas a relatively high profilein China.

"New Zealand doesn't have [Norman] Bethune," quippedCarey Bidtnes from the Kingston Economic Development Corporation,a referenceto the Canadian doctor who became famous in China in the late '30s.

Not enough goats

Feihe planstwo production lines in Kingston, starting in2019: one mixing and drying formula from cow's milk, a second withgoat's milk.

Canada's marketing boardsmakesupplying the cow's milk straightforward demand in Eastern Canada's pool is expected to rise by about one per cent.

Supplying enough goat's milk is another story.But there's no supply management for goats. You could milk everyonein Ontario and it still wouldn't fill Feihe's order.

Ontario's goat industry produces about 52 million litres annually. But that milk is alreadyspoken for.

IfFeihewants 75 million litres, the industry must double or triple its size.In the short term, goat milk may be trucked in from Quebec or the U.S. Over time,Feihe wants to build up alocal industry.

'Lots would love to expand'

It all spells opportunity for anyone frustrated by how expensive it is to getinto thecattle business milk goats instead.

That's Andy Jackson's strategy.

The young farmer from Winchester, Ont., said Ontario's goat industry today is where the cattle business was three or four decades ago. It needs to improve breeding and nutrition to boost production.

Surveying aconverted barnfull of Saanen and Nubian goats milking breeds popular in Europe Jacksondescribed how he's reducing kid mortality and improving the quality of his milk.

Some Chinese investment has flopped, he knows. But his research suggestsFeiheisn't a fly-by-night company.

"Hey, at the end of the day, whoever buys the product," he said.

He and his partner used to joke aboutwanting to expand from300to more than 2,000 goats within five years.

"With this plant coming into effect, that'll make that joke actually be able to happen," he said.

• TOMORROW: Why Feihe's new plant could spark trade controversy for Canada