A new play on food security

With the grim outlook for future world food shortages, BHP Billiton’s hostile takeover bid for major fertiliser producers, Canada-based Potash Corporation, shows the extent to which food security is having an impact on strategies in the corporate world.
The BHP bid has been followed by the news of a potential merger of Russian potash rivals Silvinit and Uralkali which would result in tightening of the ownership of the producers of a key crop nutrient.
Chinese chemical groups fear the BHP move would lead to too much concentration in the fertilizer market and put at risk the future supply of product at reasonable prices to its food producers. The Chinese reckon BHP and one or two others will lock up the market and milk the fruits of a capacity shortage. The Chinese concern reflects the fears of its government in being able to feed its bourgeoning population with affordable food as it watches pressures on its dwindling land and water resources.
Potash production is running at about 90% capacity at present, but Potash Corp has the bulk of new global capacity coming on stream in the next 3 years which makes it a compelling play for BHP to establish a major new line of business. China buys about a third of Russian potash output, and is staring into the future of needing more of the product from the Canadians. Demand for potash imports into China is growing at 5 to 8% per annum.
The target in this contest isn’t a dominant player across the fertiliser spectrum of “N, P and K”, as it is ranked just third but well behind others in the production of nitrogen and phosphates.
The long term challenge is feeding the world with less water and minimal increases in arable land. BHP’s pitch to its investors recognises the need for the world to lift crop yields by using more “balanced” fertilisers. This investment is positioning the group to benefit from that necessary trend.
BHP isn’t yet a potash producer, but it is sitting on future reserves, and has eyes on a long-term prize. The barriers to BHP’s move to become a major force in the sector are tricky with a play like this across the globe, and they aren’t limited to the target’s ability to find a rival white-knight bidder. There isn’t a global equivalent of the ACCC, but that doesn’t mean this will be a quickly played-out deal. BHP has to get competition policy clearance in several countries – US, Brazil and Canada - the before it gets across the line. US anti-trust commissioners don’t exactly move at the speed of herd of startled gazelles, and it could be anywhere between 3 to 7 months for a verdict to come out. The Chinese government have also been looking into the ways it can block the deal but it isn’t clear how they could.
Meanwhile the prospects of rival bidders emerging to thwart BHP’s $40bn bid are weak. Potash hasn’t come up with a Plan B despite rising potash prices making the target look more valuable, and the strong Chinese interest in finding other investors to stump up the money. The irony is that the local Canadian provincial government has said it would have greater fears in a Chinese takeover of its local company, than one by the Australian giant!