Barry Senft's Saskatchewan roots run deep. For four generations, his family has tilled the land near Lipton, Sask., a little more than an hour's drive northeast of Regina.
Mr. Senft knows quite a bit, too, about the long Saskatchewan tradition of co-operation in the agriculture business, having served in a senior role in the 1990s with the Saskatchewan Wheat Pool, the farmer-controlled co-operative that has since been transformed into a global-straddling company named Viterra Inc.
So it's not a surprise that the protracted takeover fight for Potash Corp. that is playing out in far away in places like Melbourne, London and Chicago, and that faces a critical decision next week by the federal government in Ottawa, has grabbed Mr. Senft's attention.
But Mr. Senft's rooting interest in the Potash fight isn't what you might think. Rather than bemoaning the possible loss of the company to Australia's BHP Billiton Ltd. (as Premier Brad Wall is), he is hoping it will lead to the destruction of a different Saskatchewan institution - one that played a central role in making Potash Corp. a $40-billion company in the first place.
Canpotex Ltd., the company that handles overseas sales of Saskatchewan's three major potash producers, Potash Corp., Mosaic and Agrium, has conspired to keep global fertilizer prices too high, Mr. Senft believes; the impact, he says, is felt by Canadian farmers, even though the group doesn't operate here.
"Cartels are good for the shareholders," Mr. Senft says from his office in Guelph, Ont., where he runs Grain Farmers of Ontario, a lobby group, while still helping to manage the family farm back in his home province. "They aren't good for our farmers."
This little cartel on the prairie, though, has existed in relative obscurity and with little opposition for the past four decades, despite its control of about 40 per cent of the global trade in potash, a key ingredient in fertilizer used to increase the yields of corn, fruit and other staples. (OPEC, by comparison, controls about a roughly equal proportion of the world's oil trade - but that is spread among 12 members, not just three.)
Canpotex is arguably one of most important global companies Canada has, a business that this year will ship about $3-billion worth of potash to dozens of offshore markets. In places like South Korea and Japan (and yes, even Australia), it holds something close to a monopoly on potash sales. In four of the world's five most populous countries - China, India, Indonesia and Brazil - Canpotex is a critical, and sometimes controversial, supplier of a product that helps feed the masses. Yet most Canadians know little about it, if they have even heard of it.
That lack of scrutiny is over. Whatever the final ending of the Potash Corp. takeover story, BHP's hostile offer has unleashed a fierce debate about Canpotex's future - one that will rage on even if the Australian company doesn't win the day. Early on, Marius Kloppers, the chief executive of the world's largest mining company, suggested the agency had outlived his usefulness and said BHP would eventually remove itself from it, if were to win Potash Corp. That got the company on the wrong foot with the Saskatchewan government, which sees Canpotex as vital to keep prices for the commodity and government revenues aloft.
But Mr. Kloppers' position is supported by many others. Some follow his business line of logic that such export monopolies are out of date and not needed in a world of rising fertilizer demand - not to mention that competition watchdogs tend to frown on them. "Regulatory tolerance of selling arrangements is different now from what it was 15 years ago," says Mr. Kloppers. Others make humanitarian arguments, suggesting food production is too important to allow producer organizations control fertilizer prices by managing supply.
Global food demand is expected to increase by up to 80 per cent in the next 40 years as the world's population reaches 10 billion people. That means food production must rise by nearly 2 per cent annually, about double the current production rate, and fertilizer will be needed in abundance. BHP's bid has "really triggered a series of questions," says Sylvain Charlebois, a professor at the University of Guelph's College of Management. "A lot of people are asking themselves: Is Canpotex still relevant?"
Even staunch supporters of Canpotex, like former Saskatchewan premier Allan Blakeney, the man who created Potash Corp. in the 1970s, isn't sure the export body can survive in the long term. He says Mr. Wall is wrong to insist that any takeover of Potash Corp. must be conditional on the new owner keeping it in Canpotex. "I think it's very difficult to persuade the government of Canada to include in any requirement under the [Investment Canada Act]that they belong to Canpotex, which is a voluntary producers' organization," Mr. Blakeney said. In an era of freer trade and tougher international trade rules, he says, that will only open Canada up to attack.
How did a private company that has fewer than 100 employees become so powerful, such a lightning rod for critics today? The story begins not in Saskatchewan, but in New Mexico, with a young politician nicknamed "Lonesome Dave".
A Republican in a loyal Democratic state, David Cargo was handed a stunning election victory in the late 1960s and became governor at the age of 37. His first big challenge was potash. The mineral had been a key part of the state's economy for decades, employing thousands of workers and generating hefty royalties. But when Mr. Cargo took office, the industry was being threatened by massive potash discoveries in Saskatchewan.
Potash had been found in Saskatchewan as early as 1943, but it was buried deep down in tricky deposits and it took almost 20 years to perfect the technology to mine it. The first mine opened in Esterhazy in 1962 near the Manitoba border; soon, six mines were in production with four more on the horizon. By the end of the 1960s, Saskatchewan potash was flooding the market.
In August 1969, New Mexico potash producers gave Mr. Cargo a blunt message. "They said, 'We're going to have to give notice to all our employees, we're going to lay everybody off,'
Mr. Cargo called Saskatchewan Premier Ross Thatcher. The two knew each other well. They'd met at a governors' convention in Wyoming a few years earlier and struck up a friendship, even going on fishing trips together.
Now Mr. Cargo needed help. As it turned out, Mr. Thatcher was just as worried about potash, but for different reasons. Politicians in Washington were pushing for retaliation against Canada. "Thatcher was beside himself," Mr. Cargo recalled, adding that Mr. Thatcher felt federal officials in Ottawa would cave into the pressure and abandon the province. Mr. Cargo didn't want a trade war either, convinced the U.S. would lose out too.
He suggested another approach. Why not control production from the province's mines to boost the price and keep it stable? He even had a target price in mind - $18.50 a ton. That was the break even point for New Mexico producers, and was about $6 a ton higher than the existing price at the time. Intrigued, Mr. Thatcher invited Mr. Cargo to Regina to discuss the details.
During three days of meetings, Mr. Cargo proposed a "pro-rationing" system for Saskatchewan to regulate potash production from each mine, based on a similar program New Mexico used to regulate its oil and gas industry. He also suggested that producers join together through a provincial agency to sell potash abroad. While collusion is prohibited inside the U.S. under anti-trust law, there is an old exemption for export associations that permitted U.S. companies to collude internationally in order to build export markets. Canada had similar exemptions to its competition laws.
Soon after, Mr. Thatcher announced strict limits on how much the province's potash mines could produce and created Canpotex as an "association of Saskatchewan potash producers" to market potash outside North America. All producers had to join Canpotex or risk losing their production quota. To stay onside U.S. law, Canpotex would sell to overseas markets only.
Within weeks, talk of a trade war ended and the price of potash shot up to $18.75 a ton, just above Mr. Cargo's threshold. "It saved the industry in New Mexico," Mr. Cargo said of Canpotex. "And I think likewise it saved it up in Saskatchewan."
So the precedent was set. By restricting how much potash they supplied, and by co-operating instead of competing in foreign
A new Crown corporation
Even with pro-rationing in place, potash producers continued to face headwinds. Throughout the 1970s they battled the Saskatchewan government over taxes, royalties, production limits and the role of Canpotex. Finally, in 1975, Premier Blakeney introduced measures to nationalize the industry and put up to 50 per cent of production under the control of a Crown corporation called Potash Corp.
By the early 1980s, though, the new company had already become a tarnished asset. A global recession had slashed potash prices and sales. When he swept to power with a massive majority in 1982, new premier Grant Devine, a Progressive Conservative, vowed to privatize several Crown corporations created under the NDP, including Potash Corp.
Canpotex, meanwhile, was also facing a new challenge. Saskterra Fertilizers Ltd., a division of Calgary's Canterra Energy, pulled out of the association and started undercutting the other members. To end the unwanted competition and maintain its pricing power, Potash Corp. stepped in and bought the company.
Mr. Devine's scheme to privatize Potash Corp. proved controversial. Critics worried the company would fall into foreign hands and - in echoes of today - were particularly concerned that China, which had become a major potash buyer, would make a play for it.
On Nov. 2, 1989, the company went public on the Toronto Stock Exchange at the equivalent of about $2.50 a share (adjusted for subsequent stock splits). Those early years as a public company held little hint of the powerful agricultural play it would become. The new team at Potash Corp., led by American mining executive Chuck Childers and a sales executive named Bill Doyle, had its hands full; and the potash market was in the doldrums.
"The reason why I came to Potash Corp. was because they were losing their fanny," Mr. Doyle recalled in a recent interview. "They were really in trouble. The government said, 'We are going broke, the taxpayers can't afford this problem'."
But, slowly, the fundamentals began to change, and it was Canpotex that took what would be a fateful step for Potash Corp. and for Saskatchewan: it launched a massive campaign to convince Chinese officials to buy more potash. Officials fanned out across the country, educating farmers and government bureaucrats about the benefits of potash. Mr. Blakeney recalls spending years in the 1970s visiting China with Canpotex officials to pursue the campaign. "It took us three years to get an order, but hey, it worked," he recalled.
By the late 1980s, China had become Canpotex's biggest customer, buying around 550,000 tonnes of potash annually, up from 60,000 a decade earlier. That helped push Canpotex's annual sales to $500-million in 1988.
The decision by Canpotex to target the Chinese market was a deliberate one. But it was an event completely beyond its control - the collapse of the Soviet Union in 1991 - that changed the potash market for good. Russia, like Canada, has huge potash deposits, but under Soviet control little of that potash hit the export market. Once Communism ended, the mines were sold to private entrepreneurs and Russian potash poured out. Soon two former Soviet producers, Uralkali and Belaruskali, formed an export association called Belarusian Potash Corp., or BPC, to match Canpotex.
As Russia's potash production surged, prices weakened, forcing the industry to consolidate. The number of major North American producers shrank from 11 in the 1970s to seven in 1994 and three today - Potash Corp., Agrium and Mosaic, the three members of Canpotex. Today, nearly all potash comes from handful of players - Canpotex (owned by Potash, Mosaic and Agrium), BPC, Russian-based Silvinit, Germany's K and S Group, Israel Chemicals Ltd. and Arab Potash Co. of Jordan.
The new Russian competitors not only came close to matching Canpotex in production volume, they also had an edge in shipping because their mines were closer to China. By contrast, Canpotex had to haul its potash by rail from Saskatchewan to terminals in Vancouver and Portland, Ore., and then ship it across the ocean.
To hold on to its market share, Canpotex built up its infrastructure. It began assembling a fleet of 5,500 specially designed Canadian rail cars in the late 1990s, each capable of handling more potash. It also expanded its shipping terminals and made plans for a $500-million facility at Prince Rupert, B.C.
Today, Canpotex's system can handle 14 million tonnes of potash, far more than it actually exports, which allows the company to ensure that deliveries are never held up. Once an order arrives, rail cars pick up the potash from the mine and deliver it to the ports where it is immediately put on a ship to the customer.
Canpotex also started differentiating its products, devising 20 special grades to suit fertilizers for specific crops such as sugar cane, palm oil and rice. Other industrial grades were developed for Japan, South Korea and Taiwan for products like paint, pharmaceuticals and sports drinks. The company even built a port in Portland dedicated to specialty grades. These products now represent about half of Canpotex's sales and have given the company as much as 90 per cent market share in some countries.
Canpotex in the spotlight
Even as Canpotex built its operation in the late 1990s and into 2000, the company drew scant public attention. That changed almost overnight in 2007, when prices for most agricultural commodities soared, driven in part by booming economic growth in China and India and also by speculation in financial markets.
Farmers suddenly faced runaway prices for fertilizer. All those years of potash producers carefully managing how much capacity they had in their mines, trying to prevent oversupply, finally resulted in a classic squeeze. The spot price for potash jumped from around $200 a tonne to about $1,000. Canpotex kept pushing through higher and higher prices on its contracts. Soon farmers, governments and non-profit groups began calling for investigations into potash pricing.
"The behaviour of Canpotex during that [price]runup really raised the awareness of their power and their ability to be able to sort of set prices," said Murray Fulton, a professor of agricultural economics at the University of Saskatchewan. "It reminds me of this idea: If you have power, make sure that you don't try to use it all, because when you use it all, that's when people really start to get their backs up." At an industry conference in May, 2008, near the height of the food crisis, a representative of the Indian Farmers Fertilizer Co-operative Ltd. made an international plea: "We are appealing to the United Nations to put some fear of God in these cartels".
The fight wasn't only offshore. Canadian politicians asked the Competition Bureau to look into potash pricing, and in the U.S., a group of lawyers filed a class action, alleging Canpotex and its owners colluded with producers from Russia and Belarus to control supplies and fix prices. Documents filed in court include examples of how the companies allegedly made supply and pricing decisions at almost the same time.
Canpotex and the others have been trying to fight back. They vigorously deny the allegations in the lawsuit and insist Canpotex is nothing like a cartel.
"Anybody who thinks that this is the place where prices are set as a cozy group, hasn't been either a buyer or a seller of this product," said Canpotex chairman Jim Prokopanko, who is also CEO of Mosaic Co. "We do not set prices. We take the price that is established in the marketplace."
Yet even some of those with significant ties to the industry aren't afraid to use the word "cartel" - though they quickly point out that Canpotex is a legal one. Chuck Childers, who ran Potash Corp. from 1987 to 1999, scoffs at the idea that BHP would take the company out of Canpotex.
"Not using a cartel when it's legal doesn't make much sense, does it?" he says. Controlling the supply is a necessary evil in the fertilizer business, he suggests. "As long as demand is higher than supply, you don't have a problem. But it doesn't stay that way, if you look at the history of potash. People expand and then supply gets higher than demand and then demand catches up and it's the other way around for a while."
The public attacks against Canpotex cooled last year, as potash prices sank to around $300 a tonne. But prices are moving back up again and BHP's bid has re-invigorated skeptics.
BHP's Mr. Kloppers has said Canpotex does not have a long-term future. "Over time we would like to stand in front of our own customers and market our own product," he has said. Later, under pressure from the Saskatchewan government, the company's position softened, saying it would not make any rash moves to break up Canpotex. But similar arrangements in other commodities, such as iron ore, broke up long ago in part because of concerns about collusion. In a market in which the growth in demand is outpacing growth in supply, a cartel is less necessary to prop up prices. "Our view of the potash market is probably that over time it's going to follow the same pattern as we have seen in our other commodities," Mr. Kloppers said.
Many industry observers agree and believe Canpotex can't survive. A recent report commissioned by the Conference Board of Canada for the Saskatchewan government concluded that Canpotex is "arguably becoming increasingly redundant as the worldwide market moves to fewer and fewer players." Which is the point that Barry Senft keeps making too: "This issue is the industry is consolidated enough as it is [without Canpotex] with basically three players in Canada, one being the largest in the world," says the farmer. Should it be scrapped? He doesn't hesitate. "Absolutely."