Jennifer Wells: How baby formula may end up as collateral damage in Trump's NAFTA war
Two words: baby formula.
We can talk ourselves senseless about President Donald Trump’s fury over alleged trade imbalances and Canadian dairy specifically, and Canada’s supply management system, and the relatively small weight of the dairy industry measured against, say, steel and aluminium.
But a quick peek into the world of baby formula ties together a number of these strands and maybe makes it easier to find a through line, a thread.
Start with Feihe International Inc. Never heard of it? The Beijing-based company’s primary product is formula made from milk powder. Yes, infant formula, but in filings with the U.S. Securities and Exchange Commission, the company notes that it makes formula for young children, expectant mothers, students, the middle aged and the elderly too. (The company went public in the United States in 2003 and reverted to private status in 2013.)
An essential piece of history: China’s melamine baby formula tragedy is a decade old, but its reverberations are still being felt. Melamine had been added to watered-down formula to lend the appearance of boosted protein content. We think of melamine as a chemical used in plastics. (Remember Melmac?) Ingested, the chemical can cause kidney stones and kidney failure. Hundreds of thousands of infants fell ill. At least six children died. The Sanlu Group was at the centre of the scandal. Its chairwoman was sentenced to life in prison. Two men directly involved were executed. Twenty-two other companies were swept up in the ensuing investigation.
Ever since, the fear of tainted formula has hung over the Chinese market. And with good reason. Stricter regulations by national health and safety authorities were introduced in 2016 after repeated revelations of expired, tainted and improperly labelled product. Formula makers have until the end of this year to register each product with the CFDA, the China Food and Drug Administration. The expectation is that many makers won’t meet the standard.
In the midst of all this Feihe, with half a dozen processing facilities in China, has been at pains to point out that it was one of the few formula producers not involved in the crisis, and now faces increased competition from international companies eager to increase their share of the Chinese baby market as local producers are pushed out.
Consumers seek safe, quality product. These are precisely the attributes conveyed by Feihe’s new Canadian subsidiary, Canada Royal Milk, words that evoke purity and brand quality.
Why would Feihe create a Canadian subsidiary? Because the federal government, and the Ontario government, were desperate for them to do so.
We want to grow agri-food. We want to create new jobs. And so Feihe is fast at work building a 282,000-square-foot facility in Kingston, with a $24-million boost from the provincial government through its Jobs and Prosperity Fund and a corporate promise to staff the facility with as many as 250 full-time direct jobs. According to the Kingston Economic Development Corp., the facility is expected to be completed by the middle of next year. Production start up for the $225-million project is slated for 2020. A story in the China Daily last August stated that 80 per cent of production will be exported to China. Feihe Chairman Leng You Bin was quoted saying the Kingston operation will manufacture up to 60,000 metric tons of infant food annually.
Which brings us to NAFTA.
Furious American dairy farmers see the capital investment as yet another example of Canadian dairy farmers taking advantage of an unfair pricing system. Specifically, the Class 7 pricing program which came into effect last year and which, as I have previously written, introduced a favourable pricing category covering such skim milk components as skim milk powder. Butter lovers might define these as the leftovers.
Democratic Senator Chuck Schumer has been on the warpath about this since Class 7 came into effect, noting that Canadian exports of skim milk powder, rich in protein and ideal for baby formula, more than tripled in the first year of its existence, while dairy farmers in Cayuga County saw the export potential for their skim milk powders, to Canada and Mexico, shrink dramatically. “Canada’s Class 7 pricing program, a market-distorting supply management system, has caused severe pain to New York dairy producers since it came into force,” Schumer wrote in a letter to U.S. trade representative Robert Lighthizer. “This Class 7 system should be dismantled through new NAFTA commitments.”
In the first two months of this year, skim milk powder exports by volume were 95 per cent higher than the same period last year.
Class 7 has aided the production of more milk, more butter, with farmers seeing less of a downside for the skim milk after-products.
The Feihe facility, or rather the Canada Royal Milk facility, aims to go into production first with infant formula derived from cow’s milk, with goat dairy production in a second phase.
The conditions, as there are now, are set for success.
That’s bound to change if Donald Trump decides to focus on Class 7 as a winnable concession in the NAFTA wars.