An Urban's Rural View

It was an obscure piece of news but the implications seemed clear.

A marketing partnership between two companies few American farmers had heard of -- the Russian potash producer Uralkali and the Belarusian potash producer Belaruskali -- had collapsed. The Russian company, the world's low-cost producer, said it would increase production and handle its own sales.

The two companies between them account for 40% of world potash production, so this was big news, indeed: It was as if Saudi Arabia had pulled out of OPEC. In announcing its withdrawal from the partnership, Uralkali predicted wholesale potash prices would fall 25% by year's end to $300 a metric ton.

A Russian analyst quoted by Bloomberg predicted a 33% drop. The Wall Street Journal said lower prices would benefit American corn farmers as much as $10 an acre (http://tiny.cc/…).

I am no potash expert. I have no inside information. But I wonder if Uralkali's announcement really marks the end of the marketing partnership. Could it not be a negotiating ploy, Uralkali's way of ordering Belaruskali to agree to Uralkali's demands?

Stock-market traders, I concede, are taking the announcement at face value. They've hammered potash company stocks, not only Uralkali's but the shares of producers and distributors in Canada, the U.S., Germany, China and Israel.

Both the Russian-Belarusian arrangement and another potash- marketing partnership between Potash Corp., Agrium Inc. and Mosaic deny being cartels. According to Bloomberg, a lawsuit filed by fertilizer buyers against a number of the potash companies under the Foreign Trade Antitrust Improvement Act was recently settled (http://tiny.cc/…).

Cartels, economists say, carry within them the seeds of their own destruction. To maintain the artificially high price they've agreed on, the cartel's members must cut production. But success in elevating the price tempts partners to cheat and produce more than their quota. If there's enough extra production the price comes down again despite the price-fixing agreement.

The oil-producing countries' cartel, OPEC, has ridden this seesaw more than once, going through waves of smaller oil-producing countries busting quota and offering discounts to take market share. Saudi Arabia, the biggest producer, never withdrew from OPEC but in 1985 it flooded the market to punish the cheaters and take back share. Oil prices fell 50%.

By threatening to use all of its production capacity in the second half of this year, up from 70% in the first half, Uralkali may not really intend to end the marketing partnership. It may be doing something similar to what Saudi Arabia did in 1985, with the added measure of threatening to end the arrangement.

Overcapacity in the potash industry is said to be enormous and producers have new mines on the drawing boards, including a big one in Canada by Australia's BHP Billiton. If nothing else, Uralkali's move could put some of these plans on hold.

But as long as there's overcapacity, potash prices will remain under pressure, regardless of what happens between Uralkali and Belaruskali. American corn farmers may not get a $10 an acre break, but barring local distribution problems the odds are they won't see big increases. For the bottom-line implication of this piece of news is that there's trouble in potash-land.

urbanity@hotmail.com

(CZ)

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