Unwelcome Consequences if Gold Dust of Global Food Supply in Chinese Hands
Consider that topsoil loss, drought, and climate change pose grave risks to putting fruit, vegetables, and basic grains on the world's tables, your own table included.
In this context, perhaps the most crucial -- and potentially devastating -- agribusiness deal in North American history is under negotiation in Saskatoon, Saskatchewan, on the flat Canadian prairie.
The deal, it turns out, may pose a grave risk to maintaining a resilient global food supply system.
Background: Global hunger drives deal appetite
Canada's PotashCorp, the world's largest potash supplier with approximately 20% of world capacity, is in play to potential buyers from Australia, China, and Brazil.
These possible acquisitors aim to serve the insatiable demand for increased agricultural output when growth in world population and meat consumption requires the feeding of increasing numbers of humans and livestock.
Potash is integral to the world's food system because it's the gold dust of agriculture: Potash literally jumpstarts food growth, thus helping to feed empty bellies the world over -- whether those bellies are being satiated at a Michelin-starred restaurant or a common school cafeteria.
At last count, one confirmed and two potential suitors are reportedly considering an acquisition of PotashCorp as a way to dominate potash, the most important ingredient in fertilizer. The confirmed suitor is Australian resource giant BHP Billiton, whose unsolicited $38.9 billion bid for the company was rejected by its directors.
Two potential suitors are state-controlled Chinese mega-conglomerate Sinochem Corp., which PotashCorp has pursued as a white knight, and Brazilian mining and metals powerhouse Vale S.A., which has been strategically expanding its fertilizer business to serve the projected need for growth in global food output.
From a Canadian perspective, a few issues are at stake: Canada's sovereignty in managing its natural resources and its multibillion-dollar agribusiness and agricultural sectors.
From an international point of view, this deal is about global food security as Canada is the most stable and politically neutral of the world's potash suppliers.
Here's my analysis of the worst- and best- case deal scenarios:
Worst-case scenario: Sinochem wins PotashCorp
The worst possible outcome for Canada -- and the world -- is for state-controlled Sinochem Corp. to sweeten BHP Billiton's offer by just enough to win PotashCorp.
The Chinese would gain unmanageable leverage over the Canadian food supply, since potash is integral to fertilization of crops -- barley, corn, sorgum, soybean, wheat, and the like -- and thus the feeding of livestock on feedlots and the production of fruits and vegetables.
Additionally, Chinese ownership would mean that potash supplies could be allocated to unsustainable Chinese agricultural expansion, prompting a global shortfall of this agricultural lifeblood.
Countries lacking adequate access to potash would be driven to import grains and produce from China. Unfortunately, those agricultural products would be at risk of contamination by dangerous levels of environmental pollutants and toxins because of the Chinese government's disastrously lax, sometimes non-existent, oversight of industrial and agricultural chemical pollution.
A February 2010 article in the Guardian reports on a groundbreaking Chinese agriculture ministry report which describes the effects of profligate chemical use in Chinese farming:
At the launch of the paper, Wang Yangliang of the ministry of agriculture recognised the fall-out from intensive farming methods.
"Fertilisers and pesticides have played an important role in enhancing productivity but in certain areas improper use has had a grave impact on the environment," he said. "The fast development of livestock breeding and aquaculture has produced a lot of food but they are also major sources of pollution in our lives."
Nonetheless, Chinese industry players, which include the likes of Sinochem Corp., wish to press on with unsustainable and disastrous practices:
An industrial lobby is pushing for even greater use of chemicals. It includes the huge power company CNOOC, which runs the country's largest nitrogen fertiliser factory in Hainan's Dongfang City.
Some might argue that doesn't matter. The booming population of China needs to eat, after all.
So, why am I proposing that shareholders and Canadian regulators move against a potential Sinochem bid -- and nullify any proposed deal?
Among the major world economies, the Chinese have among the most destructive land use and agricultural practices in the world.
From the same Guardian article:
"Agricultural pollution has become one of China's gravest environmental crises," said Greenpeace campaign director Sze Pangcheung. "China needs to step up the fight against the overuse of fertilisers and pesticides...."
But Chinese aren't stepping up.
That's why a Chinese acquisition of PotashCorp could encourage China to overuse potash, a resource that should be managed with utmost care, particularly as topsoil loss, drought, floods, and longer-term impacts of climate change start limiting how much food can be grown for an exploding population base.
Wanton use of potash would put at risk Canada's food security, agribusiness, and national sovereignty.
Needless to say, the world's food resilience would also be reduced.
Best-case scenario: Vale S.A. steps in, wins PotashCorp
The best possible outcome in the present scenario would be a sale to Vale S.A. of Brazil.
According to a 2009 study of global corporate reputation by the Reputation Institute, Vale S.A. ranks 28 out of the world's 50 top companies in corporate reputation.
In contrast, the study states that Chinese companies' substandard corporate reputations "drag down the BRIC average substantially." In corporate takeovers, the Chinese have proven to be poor managers and disloyal to local workforces, more so than cosmopolitan Brazilian managers who have experience with major international M&A activity. Important for Canada, for the province of Saskatchewan, and for PotashCorp's global customer base, all of which will benefit from more equitable potash distribution to their breadbaskets.
I should disclose too that Brazil's Vale has its own reputation issues; the resource sector is, after all, an ugly business rife with environmental destruction and unethical business practices that undermine sustainability.
In 2009, for example, the AFL-CIO complained about multimillion-dollar fines levied against the company for breaking environmental laws and for antitrust violations. Furthermore, the union alleges that despite 2009 profits of $13.2 billion, Vale has demanded that Vale-Inco steelworkers "give back hard-earned benefits and accept an inferior defined-contribution pension plan and take cuts in profit-sharing."
It could be even worse, unfortunately: It's exceedingly difficult to determine working conditions for Sinochem Group employees with any accuracy.
Australia's BHP Billiton, meanwhile, didn't make it into the Reputation Institute's 2009 top 50. Furthermore, according to the Wall Street Journal, both BHP Billiton and Sinochem Corp. wish to dismantle the cartel through which PotashCorp sells potash to world markets.
But the cartel system has proven benefits: It maps supply to demand, stabilizes potash prices on world markets, and simultaneously makes the province's share of potash revenue more predictable, so that public services, such as education and healthcare, can be more reliably funded and delivered.
My take is that bids from BHP Billiton and Sinochem Corp. should be disqualified.
In this time of scarcity, the resource sector needs the best possible managers, ethically and in the area of sustainability.
Here, Vale S.A. achieves a passing grade, though not without dishonorable mention.
Shareholders and regulators: Demand PotashCorp negotiate with Brazil's Vale S.A.
Potash makes food grow. Without it, agriculture would fail globally and thus potash is the core resource of twenty-first century resilience.
Remember, there's no true free trade. There are times when protectionism is the only answer, which is why global trade negotiations are always fraught with geopolitical and macroeconomic tension.
Food, resources, and the world's future food options should be protected at this pressing time in history. PotashCorp in Brazilian hands would best secure a stable supply of potash and fair and equitable dealing with world markets.
Shareholders of PotashCorp should press the board to explore every opportunity to negotiate with Brazil's Vale, even if at this time Vale is hesitant to enter the fray. In turn, for Canada's sake and the world's, Canadian regulators should disallow a sale of PotashCorp to Sinochem Corp. of China or any other emerging Chinese interests.
What's more, Canada would benefit from greater hemispheric trade stability as a result of a deal with a Brazilian acquisitor, particularly during times of increasing global economic volatility.
Canada should encourage acquisition of PotashCorp by the company with the best independently verifiable reputation among available suitors.
Right now, that potential suitor is Vale S.A.
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Sanjay Khanna is a writer, journalist, futurist, and the director of Resilient People, which provides guidance on preparing for economic and climate shifts. His writing has appeared in Nature, The Huffington Post, and Grist.
Follow Resilient People on Twitter: www.twitter.com/resilientpeople
Follow Sanjay Khanna on Twitter: www.twitter.com/Sanjay1
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And, why were America’s purchases of foreign resources over the past six decades not even mentioned?
Could it be that someone just doesn’t like the Chinese, or is it that old chestnut about “communists†with the world’s fastest growing capitalist economy?
Gotta be one or the other, and from what I read above, the author hasn’t figured out the capitalist part. Which, very sadly, leads me to worry that it might actually be racism.
The alternative - more efficient utilization of the the available resources - will likely remain ignored by the policy-makers and industry moguls. They will claim their places at the top of whatever dwindling mountains are remaining.
Witness the anemic development of alternative energy and continuing limits on industrial hemp.
First of all, while it may be true that Canada as a relatively benign power is best fitted to manage an essential resource such as Potash, if we sell PotashCorp to anybody, Canada itself will not be beholden to that somebody. Large as PotashCorp is, it is not the end of Canada's potash deposits, and other Canadian companies produce far more potash than Canada itself uses already... we are a real powerhouse in this commodity, PotashCorp is the largest miner, not the only miner...
Second, Canada has experience with allowing Vale to takeover management of Canadian strategic resources, such as nickel, and we are very not amused with their performance so far.
Third, why isn't the best result that PotashCorp remain Canadian? Why is the best result that we sell to Vale?
How insulting can you get...
Thanks for your response. I don't think Canada would look wholly protectionist to deny Vale specifically authority to purchase anything in Canada; for Vale to buy anything they must prove that the purchase produces a net benefit for Canada; Vale made such commitments when allowed to purchased Inco and has broken them.
Canada is absolutely famous as the most open market in the world; the US is far more protectionist that Canada is when it comes to foreigners purchasing strategic assets. Denying Vale or anyone opportunity to purchase a strategic asset would not make Canada seem wholly protectionist, at the very most, it would make us seem normal.
It is clear that Canada intervenes to make sure that sovereign funds (like Chinese state controlled companies) do not control strategic assets in Canada, we intervene to protect certain strategic assets (like our space industry) from foreign ownership, and we intervene to stop private companies (like Vale) who have a proven track record of breaking their commitments with previous purchases.
The good thing is, if anybody purchases PotashCorp, the potash itself cannot be relocated. If it doesn't work out, we can always expropriate it back (and none of BHP, China, or Vale, is a member of NAFTA with expropriation protections).
And why is Vale, from Brazil, a better purchaser than BHP, from Australia, in your opinion? Australia is a first world nation, a member of the commonwealth, with laws very similar to ours. Brazil is none of these things.
Controlling the energy, rare and other raw materials will create tensions among nations that give an excuse to place hundreds of millions of idled citizens to use as soldiers and cannon fodder. if we fail, as we are presently in finding work, esteem, confidence and capability for our untold millions of superfluous humanity, new leaders will arise to provide them a place under the sun. That place may uinhinge the human race.
Put it in perspective - what has INDIA done for America in those same 20 years? It truly baffles as to why America ought to be hostile to China, a nation that most helped America, and which presents the most opportunities to Americans, including American farmers.
In fact if anything, the world ought to be really concerned about INDIA, which with its uncontrolled population growth, nukes, instability, high illiteracy, and rigidly divisive class structure, could easily devolve into a failed state.
Why would any western country, in their right mind, want or even allow China, India, or Brazil to have a corporation sell one of the countries most precious and necessary resources. Is it really theirs to sell? This isn't gold, this is food.
Ah the corporate line to justify this, it's inevitable
For example, there is a group call "Those Affected by Vale" (comprised of community leaders, environmentalists, fishermen, etc) that released a report earlier this year (see http://www.usw.org/media_center/releases_advisories?id=0275 and http://www.minesandcommunities.org/article.php?a=10075).
The USW has conducted a major global campaign against Vale after they purchased Inco in Canada (see “Vale’s Unsustainable Approach to Mining†at http://virtual.thesudburystar.com/doc/The-Sudbury-Star/usw-report/2010032501/ or http://www.fairdealnow.ca).
Finally, there are a number of African unions that are currently opposed to Vale expansion plans (for example http://www.postzambia.com/post-read_article.php?articleId=11715).
"PotashCorp has strong links with China, the world’s biggest fertiliser importer. The Canadian company owns a 22 per cent stake of Sinochem’s listed subsidiary Sinofert, China’s biggest fertiliser maker and distributor and the country’s biggest importer of Potash. PotashCorp is a leading member of Canpotex, a cartel system that Chinese buyers favour because it ensures reliable annual prices….
… China considers agricultural self-sufficiency a matter of national security, but only produces enough potash to cover about half of its fertilising needs. The country also favours the current system of annual price contracts for potash. BHP has suggested it would shake up the nearly 40-years-old potash pricing system…
… Sinochem is China’s largest fertilizer distributor, and until 1998 held a government monopoly on fertilizer imports. Sinofert on Friday handles all of Sinochem’s fertilizer business, running 2,000 distribution centers throughout China. The subsidiary was listed on the Hong Kong stock exchange in 2005, and now has a market cap of HK$30bn."
I'd be happy if people just settled for facts.
The US, a nation whose inhabitants consume more resources per capita than practically any other; which has k!lled more people in the name of oil and other 'national interests' than any other industrialized nation in the latter half of the 20th century - we're supposed to think of it as a lamb.
Meanwhile, a second world country with 600 million people living in poverty wants to buy fertilizer in order to feed its people, that's supposed to scare the cr@p outta me?
I would say our own government ought to be concerned,but I am sure they aren't. Thank you for bringing this to my attention. I might need to think about stockpiling a little K for future use.