The decision by Prime Minister Stephen Harper's government to block the acquisition of Potash Corp. by BHP Billiton is the latest signpost in the global dynamic around who controls energy, agriculture and other strategic natural resources.
Potash, a previously obscure potassium compound that is a key input to fertilizer production, was seldom thought of as a strategic resource, at least not by the public. As the Harper government moves to update the Investment Canada Act and offer more detail on why the BHP bid was blocked, greater insight will likely be offered on why Canada's agricultural sector in particular is strategic.
But the focus on food production is emerging as a major trend in global politics, with both producer and consumer governments becoming more activist in a bid to bolster food security. Such policy measures include:
Protection of local interests. Canadians bumped up against political opposition to a fertilizer investment from the opposite side back in 2008, when Calgary-based Agrium Inc. entered into a deal with Egyptian state-owned chemical company Echem to build a nitrogen-fertilizer plant in Egypt. With project construction well under way, environmental opposition prompted a parliamentary inquiry that temporarily derailed the project. Eventually, Agrium had to settle for a buyout of its venture by Egyptian state-owned MISR Oil Processing Co., under which Agrium retained a 26-per-cent stake in the new joint entity.
Price controls. In China, given the extreme political sensitivities around food prices triggering social unrest, the government is finding that food inflation bumps up against other economic priorities. Alarm bells were raised in Beijing after a surprise October consumer price inflation jump of 4.4 per cent - in large part due to surging food prices. In response, it now appears that China will impose price controls to tame runaway food prices.
Restrictions on land acquisition. Private investors and foreign governments alike have rushed in to negotiate large land leases across Africa, where governments have been offering extremely favourable investment terms to attract much-needed capital. But such investments have been subject to backlash over unfavourable terms for local populations. In the most extreme example, Daewoo's involvement in a land deal in Madagascar contributed to the toppling of the government in early 2009. There has also been a dramatic uptick in foreign land acquisitions in Brazil; president-elect Dilma Rousseff's new administration is likely to impose greater restrictions on foreign land ownership in response.
Export restrictions. This summer, after a poor harvest, Russia imposed a grain export ban. And during the 2008 "agflation" scare, a whole range of countries, including Russia, Ukraine, China, India and Vietnam, erected export controls on grains. Although these policies tend to hurt domestic farmers by cutting off access to export markets, they highlight the special strategic role of agriculture and food in the domestic political landscape and the immense potential of policies undertaken by one government to rattle global commodities markets.
Returning to the logic behind the decision to block the BHP-Potash Corp. deal: It may be that if other major producers and consumers are moving to a more national-interests-based approach to agriculture, the Harper government has decided that Canada must respond by keeping its most important agricultural multinational in domestic hands. But the reasons why, and the policy implications of such an approach, have not yet been fully articulated. This is the basis from which investor unease rises.
Moreover, the growing trend toward policy activism in the agricultural sector may also manipulate or distort global food markets, constraining trade and limiting access to investment capital. If the Canadian decision on Potash Corp. drives other governments to escalate their own strategic approach to food and agriculture, market efficiencies (already constrained by protectionism and subsidies) in food production could worsen.
The Potash Corp. decision may be smart politics for Mr. Harper, and, in and of itself, not a major driver of new political risk in the global resources sector. But it is nonetheless unsettling that one of the most free-market-oriented resource producers has been forced to a more nationalist approach, in large part because everyone else is already doing it.
Robert Johnston is director of energy & natural resources for Eurasia Group. Divya Reddy is analyst, global commodities.