CPPIB Disrupting the Dairy Industry?

Today, pioneering animal-free dairy maker, Perfect Day, announced the expansion of its Series C to $300 million through a new tranche led by Canada Pension Plan Investment Board (CPP Investments). This follows an initial $140 million C round shared late last year, which was met with excitement and additional inbound interest after production breakthroughs in the company’s proprietary flora-made dairy proteins:

Over the past several months, the company has doubled its ability to produce its hallmark protein, while substantially reducing costs several years ahead of expectations. These production milestones — coupled with an enlarged Series C round led by $50 million from CPP Investments’ Thematic Investing group, and bolstered by long-time supporters Temasek and Horizons Ventures — mark the beginning of a new chapter for the Bay Area startup. Perfect Day’s flora-made protein also recently achieved a major regulatory milestone in the successful completion of FDA’s review of its Generally Recognized As Safe (GRAS) status.

“We never doubted we’d reach this point, we just didn’t expect to get here so quickly,” said Ryan Pandya, co-founder and CEO of Perfect Day. “And, thanks to our world-class team and investors, we’re not planning to take our foot off the pedal anytime soon. The coronavirus pandemic has shown just how fragile our food system is. We’re committed to building real change that prioritizes diversity, agility, and resilience.”

While the dairy industry has experienced a supply glut in the face of COVID-19, driven by long production cycles, centralized manufacturing, and limited processing facilities, Perfect Day holds a unique advantage. By producing dairy proteins through fermentation in microflora instead of cows, the company and its partners can quickly increase or decrease production depending on demand, and can allocate a stable protein supply to where it is needed most. Perfect Day also plans to build a turnkey network of localized animal-free dairy protein producers and processors to avoid unnecessary supply chain bottlenecks.

“This marks the first investment into Thematic Investing’s new Climate Change Opportunities strategy, which will focus on innovative companies that are well positioned to respond to the challenges posed by climate change,” said Leon Pedersen, Managing Director, Head of Thematic Investing, CPP Investments. “Sustainable technologies like Perfect Day are poised to capture structural shifts in industrial practices, physical resources and consumer preferences for environmentally conscious options, which are well-suited to our long-term investing approach. We look forward to building our partnership with the company and its management team.”

“We’re grateful for the continued support of our investors from all over the world,” said Perumal Gandhi, co-founder of Perfect Day. “But, of course, our mission is about much more than money. We continue to believe the next generation of protein will be driven by production speed, price, and taste, and we’ll have several exciting updates to share in the months ahead as our commercial partners start to build momentum.”

About Perfect Day

Founded in 2014 by CEO and co-founder, Ryan Pandya, and co-founder, Perumal Gandhi — Perfect Day is on a mission to revolutionize how dairy products are made to create a kinder, greener world. Instead of relying on cows, the Bay Area startup utilizes fermentation in microflora to create proprietary ‘flora-made’ dairy protein. Perfect Day’s ingenious animal-free protein can be used across a range of products — from ice cream and milk to cheese and butter — to deliver the same taste and texture of dairy with none of the environmental, animal welfare or food safety concerns. Foods made with Perfect Day protein can be labeled as vegan and lactose-free and are coming soon to a fridge near you as the company expands its network of food and dairy manufacturing partners. For more information, visit perfectdayfoods.com or follow along on Facebook, Twitter, Instagram and LinkedIn.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that invests around the world in the best interests of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments in public equities, private equities, real estate, infrastructure and fixed income are made by CPP Investments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At March 31, 2020, the Fund totalled $409.6 billion. For more information, please visit cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

I must admit, when I first saw this announcement on LinkedIn, it seemed a bit cheesy (pun intended).

Then I took the time to watch a presentation where Perumal Gandhi (Co-founder) and Ryan Pandya (Co-founder and CEO) from Perfect Day talked about non-dairy dairy products at Slush 2017.

I embedded it below and think you should all take the time to watch it.

There's a huge alternative meat industry taking hold right now and you see it in the performance of stocks like Beyond Meat (BYND) which has been soaring lately:

No doubt, some of this is related to the Fed-tech-ESG bubble going on right now and the fact that millennials will invest in anything which is beyond meat and dairy and friendly to the environment and animals.

It goes something like this. Meat? Bad. Dairy? Bad. Oil and coal? Bad. Vegetarian? Good. Solar and wind power? Good.

I'm not trying to be facetious (well maybe a little) but that's the world we now live in.

And I'll be the first to say I've managed to cut my meat and dairy intake as I grow older but there's no way I'll ever convert to being a full vegetarian.

Never going to happen, I love my burgers with real meat, preferably hormone, antibiotic and steroid free triple AAA Angus beef, no plant-based substitute for me.

The same thing with cheese, plant-based cheese is gross so give me the real thing or don't give me anything at all.

Now, enough about my dietary preferences, let's go back to the press release above and this passage:

While the dairy industry has experienced a supply glut in the face of COVID-19, driven by long production cycles, centralized manufacturing, and limited processing facilities, Perfect Day holds a unique advantage. By producing dairy proteins through fermentation in microflora instead of cows, the company and its partners can quickly increase or decrease production depending on demand, and can allocate a stable protein supply to where it is needed most. Perfect Day also plans to build a turnkey network of localized animal-free dairy protein producers and processors to avoid unnecessary supply chain bottlenecks.

If you ask me, that's pretty cool and definitely something which can revolutionize the global food distribution of dairy products.

Why are CPPIB and its partners investing $300 million in a Series C tranche to expand Perfect Day's operations?

Well, Leon Pedersen, Managing Director, Head of Thematic Investing, CPP Investments, shares the main reason:

“This marks the first investment into Thematic Investing’s new Climate Change Opportunities strategy, which will focus on innovative companies that are well positioned to respond to the challenges posed by climate change,” said Leon Pedersen, Managing Director, Head of Thematic Investing, CPP Investments. “Sustainable technologies like Perfect Day are poised to capture structural shifts in industrial practices, physical resources and consumer preferences for environmentally conscious options, which are well-suited to our long-term investing approach. We look forward to building our partnership with the company and its management team.”

Not only is this a secular trend still in its infancy, if Perfect Day is really successful, it will scale its operations all over the world, and that $300 million series C financing CPPIB, Temasek and Horizons Ventures are putting up will be worth ten, twenty or thirty times that amount (or more) over the next decade.

The key here is their technology scalable? Yes, it is. Can they offer a delicious, healthy, low cost alternative to real dairy?

That remains to be seen but I find it hard to believe Leon Pedersen and his partners didn't do an extensive due diligence to answer these and other concerns prior to committing to the $300 million Series C financing.

If successful, CPPIB, Temasek and Horizons Ventures won't only be reaping huge gains, they will be doing their part to make this a much more sustainable planet.

In fact, don’t have a cow, but Big Dairy’s climate footprint is as big as the UK’s:

If dairy cows were a country, they would have the same climate impact as the entire United Kingdom. That’s according to a new analysis from the Institute for Agriculture and Trade Policy (IATP), which considered the combined annual emissions from the world’s 13 largest dairy operations in 2017, the most recent year for which data was available.

The institute’s report follows up on a similar analysis the organization undertook for 2015. That year, the IATP found that the five largest meat and dairy companies combined had emissions portfolios greater than those of some of the world’s largest oil companies, like ExxonMobil and Shell. Most of the emissions were from meat, but this latest report finds that dairy remains a significant and growing source of emissions: In the two years between reports, the 13 top dairy companies’ emissions grew 11 percent — a 32.3 million metric ton increase in greenhouse gases equivalent to the emissions that would be released by adding an extra 6.9 million cars to the road for a year.

Dairy emissions come mostly from the cows themselves — specifically, from their notorious burps. Fermentation processes in cows’ stomachs produce the byproduct methane, which doesn’t stick around in the atmosphere as long as carbon dioxide but absorbs more heat. The Intergovernmental Panel on Climate Change says methane from ruminants like cows are an important contributor to the increase of atmospheric methane levels.

Shefali Sharma, director of IATP Europe and author of the new study, said it was staggering to see dairy’s increase in emissions, especially since it occurred in the two years after the Paris Agreement was negotiated. “We’re supposed to be going in the opposite direction,” she told Grist.

The report points to consolidation and rising production as the main culprits for the increased emissions. From 2015 to 2017, the 13 companies used mergers and acquisitions to expand geographically and subsume smaller farms. As the companies got bigger, their production increased by 8 percent, which led to the emissions hike.

The dairy industry takes issue with the report’s framing, chalking the emissions increase up to an “accounting change.” As smaller farms were absorbed by the big companies, the industry argued, their production and greenhouse gas emissions got wrapped into the 13 largest producers’ emissions numbers.

“These are not new emissions,” the International Dairy Federation and the Global Dairy Platform said in a joint statement responding to the IATP report.

At the same time, the companies haven’t done much to help researchers figure out their net greenhouse gas output; none are required to disclose their climate impacts, and only five of the 13 publicly report their emissions. Zero of them have committed to reducing the overall emissions footprint of their dairy supply chains.

“There’s no transparency, not even basic production numbers,” Sharma told Grist. To calculate the companies’ emissions for the IATP report, Sharma used production estimates calculated by the IFCN, a dairy research network, and calculated each firm’s associated carbon emissions using an accounting method established by the U.N.’s Food and Agriculture Organization (FAO).

Instead of focusing on total emissions, the biggest dairy producers have tried to paint a different picture of their climate impact. The IATP report says companies like Danone have drawn attention to something they call “emissions intensity”: the greenhouse gas emissions associated with each liter of milk.

According to Sharma, focusing on emissions intensity allows dairy producers to make more milk, more efficiently, and then say they’re reducing their climate impacts. Even if the total number of cows increases (which it has), and even if cumulative emissions go up (which they have), the industry can mask these planet-warming effects by emphasizing greater greenhouse gas efficiency per unit of milk produced. For example, a 2019 report from the FAO — which was co-authored by the Global Dairy Platform — says the dairy industry’s emissions intensity, measured in greenhouse gas per kilogram of milk, declined by nearly 11 percent from 2005 to 2015.

However, the same section of the report also says that “increased production efficiency is typically associated with a higher level of absolute emissions (unless animal numbers are decreasing).” The Global Dairy Platform acknowledged this in its statement responding to the IATP report, saying that as the industry increased its production by 30 percent globally between 2005 and 2015, it could have increased its absolute emissions by 38 percent. But because of “improvements” to increase efficiency, absolute emissions only rose by 18 percent.

Sharma says it’s a distraction to focus on emissions intensity. “You’ve got to reduce your overall emissions, it doesn’t matter about your ‘per unit,’” she told Grist. To her, that means producing less milk — with fewer cows.

On top of the climate change impacts, the IATP report also highlights the impacts of big dairy operations on small- and medium-sized farms. In each of the world’s four main dairy-producing regions — North America, Europe, India, and New Zealand — bankruptcy and farm losses increased between 2015 and 2017.

In the United States, 94 percent of family farms in dairy have closed since the 1970s. Between 2014 and 2019, Wisconsin — America’s self-proclaimed “Dairyland” — lost more than a quarter of its 10,000 dairy farms.

In the absence of governmental supply management policies, the mega-dairies that incorporate these small farms are able to flood the market with milk, often for export, driving down dairy prices and crowding out small holders or reducing their income. They are also often unaccountable for environmental pollution, from manure runoff from fields to spills from manure storage lagoons to air pollution.

To remediate the situation, Sharma doesn’t think people need to give up milk; she just wants the dairy industry to radically change its business model. “You could totally still have farms with livestock on them,” she told Grist. “It just wouldn’t be the vast quantity of livestock that we see today.”

According to the IATP report, a comprehensive set of government regulations to decrease dairy production would come with all sorts of co-benefits — for farmers and the climate. A supply management system to lower dairy output could allow companies to pay farmers better wages and allow the government to reinvest in less emissions-intensive systems of small-scale farming. These reforms could help strengthen rural economies and protect ecological systems. And ending subsidies to the largest dairy operations could free up funds that could go toward support and job training for out-of-work dairy workers.

To enact these policies, Sharma suggests consumers think beyond switching to locally produced dairy or almond milk. “In terms of individual demand, that’s just not going to move the needle,” she said. But calling federal elected officials about agriculture policy might. Holding global dairy corporations accountable is a political challenge, but Sharma is hopeful: “Political change is possible, it’s achievable,” she said. “We just have to create it.”

Very interesting article which gives you a glimpse into Big Dairy’s climate footprint.

And it also gives you an idea why we need more disruptive technologies in our food chain to make this a much more sustainable planet.

So, I do hope this venture with Perfect Day is a long-term success, it won't only help Canadians collecting their CPP benefits, it will also help our planet address climate change in a meaningful way.

Below, Perumal Gandhi (Co-founder) and Ryan Pandya (Co-founder and CEO) from Perfect Day talk about non-dairy dairy products at Slush 2017. Take the time to watch this, it's very interesting.

Also, Perfect Day is made by taking cow’s milk DNA and adding it, like adding yeast, to a micro-organism to create dairy proteins, whey and casein, through fermentation. Those dairy proteins are then combined with water and plant-based ingredients, forming a dairy substitute that can be used to make ice cream, cheese, yogurt and other dairy products. The start of the process uses genetic modification to create the dairy genes, which are added to the micro-flora and the modified flora is filtered out in the final product.

I must admit, whenever I read "the process uses genetic modification to create the dairy genes," it makes me nervous but if this turns out to be a revolutionary technology which lowers Big Dairy’s climate footprint in a meaningful way, then I'm all for it. Just make sure it doesn't taste awful!