From Russia with Love

The July 30 news that Uralkali, the huge Russian potash producer, was pulling out of the global fertilizer cartel might be that nation’s richest gift to American farmers since the Great Grain Robbery in 1972.

Unlike the grain-buying deal that carried grain prices to 125-year highs 41 Julys ago, this July’s move will drain potash prices to levels not seen in the U.S. for almost a decade.

In fact, most analysts now foresee potash selling for $300 a metric ton in the coming year, a drop of more than $600 per ton since 2008. The decline will clobber the windfall profits grabbed by the few firms that run the $22 billion-per-year global potash market.

And it couldn’t happen to a nicer bunch of market manipulators, explains, C. Robert Taylor, Alfa Eminent Scholar of Agricultural Policy at Auburn University.

For more than a half decade Taylor has been charting production, prices and profits of the world’s few mammoth fertilizer firms. His view of the Uralkali defection is both clear-eyed and worrisome.

“The loss of one player in the cartel,” Taylor explains in a, Aug. 6 telephone interview, “will bring lower prices. Uralkali’s leaving the Belarusian Potash partnership means about one-third of global potash production is no longer in the cartel. That makes it hard for other players, like Agrium, Mosaic and Potash Corp. of Saskatchewan, to discipline the market.”

Taylor means manipulate the market; in short, it’s now more difficult for the cartel to control global production to boost global prices. That’s the good news.

The bad news?

“Uralkali’s reasons to leave are more complex than just selling more potash outside the cartel,” suggests Taylor.

For example, Uralkali and Belaruskali, two companies that worked together to control 35 percent of world potash production, have a long-running feud tied to local politics—Belarus was part of the old U.S.S.R.—as much as global fertilizer profits.

“It very well could be that Vladimir Putin,” Russia’s he-man president, “is teaching Belarus a tough lesson in hard-nosed politics,” Taylor suggests, “because there’s no question that Belarus will be hurt more by falling potash prices than resource-rich Russia.”

Another crucial aspect of the cartel’s apparent split is what today’s lower potash prices will do to new entrants into the fabulously lucrative fertilizer business: it puts a big hurt on any newcomer’s plan to get into the business.

The biggest loser in that area would be BHP Billiton, the massive, global mining firm now pouring an estimated $14 billion into a new Saskatchewan potash mine. With potash prices headed south, BHP’s big, fat investment up north now looks to be a big, fat loser, figures Taylor.

That very real consequence, he continues, could be reason enough for Uralkali’s leap out of the potash cabal.

“Uralkali’s production cost is around $60 per metric ton,” relates the Auburn professor. “So, if potash prices fall from $500 per ton to $300 because of the split, current potash producers still make a windfall while discouraging, even killing, any new entrants into their business. That’s a smart long-term move for the Uralkali and the cartel.”

According to Taylor’s research—which will be highlighted Aug. 9 at the Organization for Competitive Markets annual meeting in Kansas City and soon published by the American Antitrust Institute in Washington, D.C.—the potash shake-up points to how contrived the global fertilizer market remains despite Uralkali’s action.

“Every sector of the fertilizer business is run by firms and cartels with incredible market power,” he says. These “textbook monopolists” make windfall profits off farmers from India to Indiana and no government anywhere shows any interest in taking ‘em on.

That’s reason enough to suspect Uralkali’s time out of the potash cartel might be short, Taylor reckons; it’s simply too lucrative to “cooperate” than to go it alone.

But the cartel’s bickering is your opportunity.