The potash tug-of-war hurts world

The UN's Food and Agriculture organization estimates unprecedented world hungry and forecasts global population to reach nine billion by 2050. There is plenty of evidence that market traction for fertilizers is crucial to reduce hunger.

But we're not there yet. Potash Corp., the world's largest potash producer and the second and third largest producer of nitrogen and phosphate, three key crop nutrients, presented poor quarterly results this week. For this industry, weak results in Q3 means 2009 is a write-off and most hope fertilizer buyers will come off the sidelines next year.

Farmers can choose not to fertilize for a year and still enjoy strong yields. But with a decent crop this year, they may be inclined to go another season without. Farmers are playing with fire as yields this year have slipped to dangerous levels in vulnerable markets like China, Brazil and Argentina.

But who can entirely blame the farmers? The price of potash remained at very low levels for decades and farmers grew comfortable with affordable, predictable fertilizer prices.

When global demand for nutrients skyrocketed last year, fertilizer producers took full advantage and the price climbed to $1,000 (US) per tonne. As a result, last year's predicament provided exceptional value to investors and shareholders, but little to farmers.

Pure greed never works in the long run, especially in agriculture. Now, fertilizer producers are paying the price.

The current model for fertilizer companies is unbalanced. For decades, fertilizer companies followed the same general business model. They extract, process, and ship resources abroad in hopes of getting the best price to please shareholders.

Considering the interrelations of modern global markets, the status quo is grossly obsolete. Value for farmers needs to be taken into account by fertilizer companies. The financial crisis made this even more obvious.

Credit is still a significant issue and farmers everywhere crave cash. Without it, they cannot buy fertilizers. To move more products downstream, the retail end should be controlled more responsibly by fertilizer companies.

Pricing strategies should also be refined. Current market volatility, among other things, tells us that market price negotiation requires a paradigm shift. The aim is no longer simply to grab the best price possible. It is now about getting the right price to leverage sustainable growth for all components. Over the next decade, potash prices will increase and key players will need to commit to longer-term contracts.

China, the biggest potash buyer in the world, has yet to sign its annual fertilizer deal for 2010.

Fertilizer companies hope the outcome will provide price clarity for markets in 2010, but China continues to wait for production prices to fall. Let's hope that this crucial market sees that world agriculture will be healthier with give-and-take relationships, rather than a war of attrition.

The ongoing tug of war between fertilizer producers and farmers is hurting the world. In 2008, the battle was won by fertilizer companies.

This year, farmers are clearly the winners as fertilizer prices dropped by more than 50 per cent worldwide. The ultimate losers of this war are those dying of hunger and time is running out.

Norman Borlaug, who won the Nobel Peace prize in 1970 for his contribution to agriculture know-how in emerging markets, has repeatedly stated that chemical fertilizers are the only remedy for world hunger.

To provide a balanced model, the fertilizer industry will have to leave greed out of the picture and offer evidence that it can provide as much value to its farmers as it has to investors. Otherwise, world yields in emerging markets will diminish, companies will lay off more employees, and more people will suffer and die from an empty stomach.

Sylvain Charlebois is associate dean of the Johnson-Shoyama Graduate School of Public Policy, University of Regina.

Republished from the Winnipeg Free Press print edition October 29, 2009 A15