Farmers Rattled By $39-Billion Bid For Potash Corp. – for Aug. 26, 2010

The possible creation of a fertilizer giant between BHP Billiton’s and Potash Corp. has rattled U. S. and Canadian farmers who fear higher input costs if the $38.6-billion deal goes through.

BHP Billiton’s acquisition offer was rejected by Canada’s Potash Corp. but the world’s largest fertilizer company said it might consider a more attractive proposition.

“We’re pretty concerned,” said Ian Wishart , president of Keystone Agricultural Producers.

Less competition could mean higher fertilizer prices for farmers. Wishart said competition is already lacking in the North American fertilizer business. This is demonstrated by the fact that the price of fertilizer in North America is the price of fertilizer, plus the freight cost of getting it from places like India back to North America, even though the fertilizer was made here.

“If we’re manufacturing fertilizer here it should be cost plus freight to them (offshore customers), not what they’re willing to pay, plus the freight cost back from offshore, which is how they price it. If you look it up in the economics manuals, it’s a sign of a lack of competition.”

“They already got us right now, by the throat,” said Wes Exelby, a farmer from Saline, Michigan. “They control the markets and put the price where they want.”

MEGA DEAL

Canada’s Potash Corp. has been in contact with China’s Sinochem and other possible counter-bidders as it fights off an unwanted $39-billion takeover offer from BHP Billiton.

Potash, the world’s largest fertilizer supplier, said it expected an alternative to emerge after BHP formally launched its $130-per-share hostile bid last week.

Potash chief executive Bill Doyle, who stands to make a half-billion-dollar payday from any deal, told Reuters “all sorts of different players” had approached his company and that BHP’s offer had “no traction whatsoever” with shareholders.

“Potash Corp. has been approached by, and has initiated contact with, a number of third parties who have expressed an interest in considering alternative transactions,” the company said in a statement Aug. 23.

But while the high-stakes bidding war unfolds, farmers quietly worry what implications consolidations will have for their operating budgets.

Exelby got word of the proposed mega deal – the largest of the year in any industry – while on the week-long Midwest corn and soybean crop tour that kicked off Aug. 16 and was widely expected to see record production of both crops.

Potash accounts for about four per cent of the total fixed cost in running an average 500- acre (202-hectare) corn farm in Iowa that will yield an average 180 bushels per acre.

The total fixed cost for such a farm is $612.50 to produce an acre of corn, according to Iowa State University agricultural economist Mike Duffy.

The total fertilizer cost is $100.64 per acre and potash would account for $23.22 of that total. The balance is nitrogen $41.91, phosphate $25.84 and lime $9.67, Duffy said.

Fertilizer costs surged in 2008 amid tight supplies and in tandem with a surge in grain prices, but collapsed in subsequent months as the world fell into recession and a credit crunch led to a slump in fertilizer demand.

PASSING ON COSTS

“We don’t have the option to control our input costs beyond the current crop year. The suppliers just pass them on,” said Kurt Line, a farmer from Momence, Illinois.

“There is concentration on the retail side, but not on the wholesale side,” said Line, who’s also on the crop tour. “Unless you can take delivery of your inputs, there is no way to control those costs.”

Chip Flory, editor of the ProFarmer newsletter, which organizes the yearly crop tour, said farmers benefit from competition not industry consolidation.

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