New Chinese baby formula plant to buy Canadian milk but at what price?

A $225-million investment from a leading Chinese dairy processor is set to launchCanada back into the export game at a time when several of its majorcompetitors are threatening a trade challenge over Canadian dairy prices.

FeiheInternational's infant formula plant, now under construction in Kingston, Ont., plans to manufacture up to 60,000tonnesofdry infant food annually, usingmilk fromCanadian farms.

• China invests in Canadian dairy to help feed its baby boom

About 85 per cent of the baby formula will be shippedback to China to feed an anticipated baby boom,as the country's one-child policy phases out.

"Itwas a signal thatthe Canadian dairy industry is open for business, that other countries want to come to do business in ourindustry,"saidGraham Lloyd, thegeneral manager of the Dairy Farmers of Ontario.

Open for business, but not everyone agrees the price they're going to charge is fair.

The stakes are high. Canada's dairy industry is bracing for more competition whenthe EU trade deal takes hold thisSeptember. Canada is under pressure from the U.S.and others to open its tightly regulated market even morein upcoming trade negotiations.

The new plant creates jobs. The demand for milk will rise.But it's good news for another reason.

Feihe will separate cream from the skim milk it uses for formula. Other processors needit.

"Right now we have an overwhelming demand for cream and butterfat, in fact an unprecedented demand for it," Lloyd said.

That's thewin-win situation the Canadian Dairy Commission envisioned when it set out to attract a newformula maker.

'Hand-holding'

It's been several decades since Canadacourted new export markets for dairy. World Trade Organization changes in the early '90s dramatically limitedwhat supply-managed agriculture sectors could ship.

But asconsumers rediscovered a taste forreal butter and cream, Canada neededmore usesfornon-fat milk.

Selling skim milk powder internationally is "not a great market," said CDC spokesperson Chantal Paul. "It was alsoclear, given what was happening at the WTO,that eventually we would not be able to do subsidized exports of skim milk powder."

Documents obtained by CBC News under Access to Information lay out the CDC's Chinese courtship, dating back to April 2016. CEO JacquesLaforgeand his teamtravelledto China. They also hosted multiple Chinese visitors, touring potential sites in Quebec and Ontario.

The CDCopened doors for Feihe, connecting it withfood inspection and health regulatorsas well as provincial counterparts.

"We did a lot of hand-holding," Paul said.

'We're satisfied it complies'

In today's precarious global dairy market, anycountry would envy a foreigninvestment like this.But it's the pricing offered tothis new business that may prove controversial.

Canada is already under fire internationally for "class seven,"a new dairypricecategory rolling out withwhat the industry calls its"ingredient strategy."

The stable, often higherprices maintainedfor Canada's farmers were problematic for processors competinginternationally.

Canada's industry wanted to killthe incentive to uselower-cost diafiltered or ultrafilteredmilk from the U.S.Because diafiltered milk is a new product notcovered under currenttrade rules, it comes induty-free.

Facts on the ground suggest the strategy isworking. Imports ofU.S. ingredients dropped. Donald Trump wasn't amused.

When U.S. agriculture secretary Sonny Perduevisited Toronto in June, he called class seven a "very unfair, underhanded circumvention" of WTO rules. Other major dairy producers New Zealand, Australia and the European Unionagree and threateneda trade challenge last fall.

So, what price will the Chinese plant pay for its milk?Lloyd from the Dairy Farmers of Ontario told CBC Newsthat "class seven" pricing applies.

"They had a choice to go to any country in the world and they chose Canada because of the ability for us to supply the milk andit's known to be of the highest-quality safe, reliable milk," he said."We're always surprised at how other countries are concerned about our system."

Far from floodingmarkets, Canada is actually a net importer of dairy, he said.The U.S. has a half-billion dollar trade surplus with Canada.

"I don't anticipate a challenge," Lloyd said. "We're satisfied that it complies with all of our trading obligations."

Lowprofile

There hasn't been a lot of publicity about this deal.Feihedeclined an invitation to be interviewed byCBC News. While a CDC spokesperson answered questions over the telephone, its CEO declined to beinterviewed.

A documentobtained by CBC News under Accessto Information shows that a confidentiality agreement was signed between the company and CDC in Ottawa last September thesame week Chinese Premier LiKeqiangmetPrime MinisterJustin Trudeauand announced exploratory trade talks. A later document doesn't mention this signing.

Another letter from CEO Laforge to Ontario government ministers ahead of Li's visit suggested theFeiheplant would be among theCanada-China partnerships highlighted by the two leaders. But when the day came, theFeiheplant wasn't on the list of agreementsthe Canadian government publicized.

The documents shed some light on how much taxpayers are contributing to the deal.

Feihe International is a corporation registered in the Cayman Islands. Its new Canadian subsidiary isincorporated as Canada Royal Milk, so it canaccess the same government fundingavailable to domestic processors.

Feihehas been approved for two federal programs: the milk access for growth program, which allows it to buy milk, and a matching investment fund, which offers non-repayable contributions to companies that innovate. The dollar amountwasn't specified in thenon-redacted portions of the documents.

The city of Kingston isn't allowed to offer financial incentives to attract manufacturing. But large-scale food processinginvestments in Ontario can receive grantsaveraging between 10 and 15 per cent of the eligible costs of the totalinvestment ($225 million in this case).

Another letter in the Access to Informationreleaseflagsa discrepancy between what the Ontario government offered as a grant, $13.4 million, and what theChinese expectedto receive, which is nearly double that amount. The documents don't showif or how this was resolved.