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.
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