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In a large bowl, sift the powdered sugar to remove any lumps and set aside a small amount for dusting your work surface.
Add the sweetened condensed milk and peppermint extract to the powdered sugar, mixing until a dough forms. The mixture should be sticky but manageable; if it’s too wet, gradually add more powdered sugar.
Divide the dough into three portions. Leave one portion plain, and color the other two with red and green food coloring respectively. Knead each portion well until the color is evenly distributed.
Dust your work surface lightly with powdered sugar. Roll each colored dough into thin ropes, about ½ inch thick.
Twist the red, green, and plain ropes together gently to create a candy cane effect.
Cut the twisted dough into 2-inch segments and shape into small rounds or discs.
Roll each peppermint piece in granulated sugar to coat them completely.
Place the coated candies on a baking sheet lined with parchment paper and allow to dry at room temperature for several hours or overnight to firm up.