November 18, 2010
Future of the potash industry
The resounding “maybe” Minister Clement gave to BHP Billiton and other foreign investors, with little solid justification, should make many realize that Investment Canada’s approval process is flawed. In this deal, politics clearly overshadowed economic rationality, as it often does in a democracy. As though sensing a lost opportunity, Prime Minister Harper quickly called for a review on the matter. If the deal doesn’t go through in December, it would only be Ottawa’s second refusal in over 1,600 deals since the foreign investment law took effect in the mid-1980s.
Stakes are high for world agriculture. Potash is a crucial component for many countries around the world coping with food insecurity and anaemic agricultural production. Potash Corporation of Saskatchewan (PCS) controls more than one-fifth of the world's reserves of potash; its home province of Saskatchewan sits on roughly half of that amount. As we move forward, an assessment of our agricultural policies and marketing practices in the context of the rapidly changing world of agricultural commodities is long overdue.
When the story broke back in August, PCS claimed there was a “universe” of buyers for the company. But after a campaign for new buyers, BHP’s bid remained the only one which limited the amount of options shareholders and Investment Canada had, thus making the decision process and the political debate which followed suit seem binary. As a result, the Provinces, led by Saskatchewan, and interest groups rallied against the bid.
In the end, BHP failed to convince governments and citizens that it would be a good steward and would secure the potash industry’s future. BHP completely misjudged Canadian regulators, but since the decision made very little economic sense, so did many Canadians, let alone other foreign investors. Well, perhaps. Because of the present currency war, Minister Clement may have been tempted to downplay the Canadian economy as an attractive place to invest, in order to diminish the Loonie’s lustre.
Nonetheless, Canadians should be aware that this is just a start of a new era. BHP’s blocked deal may very well open the door to more consolidation among smaller players, a trend that already started years before BHP’s bid. The potash industry in North America will inevitably change and will count fewer players within the next few years, regardless of BHP’s setback.
As a country, we need to be ready. Reviewing the industry’s architecture is a decent start. Canpotex’s role as North American marketer for potash producers may one day be disputed by other governments around the world. Because of the new world order in food, the practice of artificially inflating potash prices and laying off workers when inventories are too high is becoming increasingly obsolete. BHP Billiton’s prediction of Canpotex’s short future is likely dead on.
But BHP slipped by taking a more active role in Canpotex’s fate. Though less known, Canpotex is as important as PCS to Saskatchewanians because of its economic contributions. Canpotex’s logistical capacity to move products cheaply and efficiently to borders and beyond cannot be underestimated. Therefore BHP Billiton’s peremptory call for the end of Canpotex during the campaign was politically ill-advised and should not be repeated.
As well, the BHP-Potash bid allowed both investors and consumers to understand better what potash is. As a result, public awareness for the precious resource will likely increase. Taxpayers will then want governments to ensure generation of more revenue while shipping more potash abroad, goals that conflict more often than some realize. On the one side, industry should focus on cost effectiveness, while on the other, policymakers should look at models in which industry is encouraged to invest in R&D, market development, and increase production capacity while providing more royalties to governments. Governments will be required to review their royalties, which are currently based more on market prices than volume.
What is ultimately at stake is the welfare of farmers and consumers. Potash is integrally linked to hopes for global food security. Since we export more than 99% of our potash, it is hardly a food security issue for us but is very much for the developing world. Food security offers ample opportunities for the future of the potash industry. Instead of being content to say “maybe” to foreign investors, we ought to find ways to generate more revenues with potash, ship more affordably priced potash to increase yields around the world, and grow the industry. In the end, the strategy should make sense to all Canadians, both politically and economically.
is Associate Dean and Professor in the College of Management and Economics at the University of Guelph in Ontario, Canada. From 2004 to 2010, he was a member of the Faculty of Business Administration of the University of Regina in Regina, Canada. He also served as the Director of the Johnson-Shoyama Graduate School of Public Policy (Regina Campus). He is the author of two books, one of which is Pas dans mon assiette: Manger est-il devenu risqué?, an essay on food security and safety. He is also co-author of Real People, Real Decisions published by Pearson Education Canada. He is the project lead of the World Ranking Food Safety Performance Report (2008, 2010). His current research interest lies in the broad area of food distribution and safety, and has published many articles in several academic journals.
Click for a high-res photo