The very welcome death of the potash cartel: James Saft

August 1, 2013

By James Saft

(Reuters) – The death of the potash cartel is not only a great story, it is a great example of how hard human ingenuity makes it to fix markets.

Uralkali, a key Russian partner in an informal cartel which has helped to keep prices of the fertilizer artificially high, broke ranks this week, sending shares of the main producers crashing and leading to predictions of a fall in the price of potash of up to 30 percent. Uralkali did so after accusing a partner of selling outside an agreement, but also after users proved resourceful in sourcing alternatives and, importantly, before the completion of huge new projects which would bring on new supply in coming years.

While the list of losers in this is short – potash producers, especially higher-cost ones, their competitors and host countries – the winners include just about everyone else. Falling fertilizer prices will be great for China and India, which are heavily dependent on imports, and great for those who own farmland essentially anywhere. If you eat, you will benefit, and in places like emerging markets, where food is a higher percentage of household costs, falling prices could even give central banks more room to keep interest rates low and still control inflation.

Since 2005, sales of potash, a key fertilizer, have been dominated by an informal cartel of the world’s largest producers: Canpotex Ltd., which is controlled by the Saskatchewan producers Potash Corp., Agrium Inc. and Mosaic Co., has operated since the early 1970s.

When Belarusian potash producer Belaruskali joined with Russia’s Uralkali in 2005 to form the Belarus Potash Company (BPC) to market on behalf of both, a rapid rise in prices started, taking the price per metric tons (1.1023 tons) from $200 in 2008 to as much as $875 in 2009.

Uralkali on Tuesday predicted potash prices would fall below $300 a metric ton in the second half of 2013, from $400 now.

Potash, which is mined from deep underground, is expensive to produce and requires massive scale and huge new investment to bring on new mines. That was enough to protect the cartel for a time, but its policies look to have created the conditions for its own undoing.

REACTION TO HIGH PRICES

Asian farmers, especially in China and India, balked at paying high prices, even as demand for food boomed, turning instead to cheaper, if less effective, alternatives. At the same time, the high prices for potash attracted new investment. Miner BHP Billiton plans the world’s largest potash mine in Canada, planning a 2017 expected start for the $14 billion Jansen mine. Other major projects have been proposed, planned or started in England, Argentina and India. Some, inevitably, will now be shelved.

It may well have been that with the prospect of new supply coming on, as well as a legal challenge to the cartel in the U.S. under foreign trade antitrust laws, Uralkali may simply have seen its best play as taking advantage of its lower cost structure to maximize sales volume for as long as possible.

While this will retard investment elsewhere, unlike price fixing, this is fair competition and will have huge benefits for others.

Fertilizer is 25 to 30 percent of the cost of grain production in the U.S., according to 2009 World Bank data. And while fertilizer costs are only about 2 percent of the price of a loaf of bread in the U.S., newly cheap potash could lead to meaningful downward pressure in food cost inflation.

Globally food prices in June were about 5.5 percent higher than a year ago, according to data from the UN’s Food and Agriculture Organisation.

All else being equal, falling fertilizer prices may help to make the booming prices for prime U.S. farmland look a bit more sensible. While a potash slump will drive down the price of corn, cheaper feed may drive marginal demand for meat. Farmers may do quite well in a world with cheaper fertilizer and slightly cheaper grain.

U.S. Midwest farmland prices jumped 15 percent in the first quarter alone, according to data released in May by the Federal Reserve Bank of Chicago, and price increases elsewhere have prompted fears of a bubble.

Central banks and governments should welcome this too. Food prices in China rose nearly 5 percent in the year to June, and anything which takes pressure off of that makes it easier for China to react to its cooling economy with more stimulus.

A cartel extracting extra money from food prices is as good a definition of obscenity as any. Let’s hope this one is gone for good.

(James Saft is a Reuters columnist. The opinions expressed are his own)

(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)

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