Monday, October 4, 2010

The Future of Food isn't What it Seems

Another wrinkle in the global intrigue of potash.  It turns out that a single marketing organization called Canpotex markets 100% of the potash produced in Saskatchewan.  It’s made up of 3 of the largest producers of potash  - the Potash corp., Mosaic (i.e. Cargill), and Agrium.  That makes Canpotex the OPEC of Potash.  When food prices rose in 2007 and 2008, prompting mass protests in the developing world and a recurrence of talk of a Malthusian dilemma, Canpotex resisted production increases and allowed the world price of potash to go from $200 per ton to $1000/ton.  In 2009, farmers across the world cut back on their use of potash to save money, depleting their soil in the process.  The price of Potash fell to $350/ton.  This year it is rising again as farmers cannot continue to mine their soil indefinitely.

Free markets can be volatile, but they clear quickly and don’t produce huge boom and bust cycles.  However, where market consolidation creates pricing power in the hands of a few players, it magnifies volatility.  This has happened in all our global food commodity markets.   Worse in the case of Potash, market consolidation and power led to the mining of one of humanity’s most valuable long term assets: soil. 

In most cartels, there is an incentive for a member of a cartel like Canpotex to cheat.  When prices get high enough, one of the players can sell for a little less and lure customers away from the other members.  Or, one can increase production and sell more than their quota.  It turns out that one of the companies bidding to buy the Potash Corp, BHP, has already indicated its intention to leave the cartel. China’s Sinochem Corp. is also working on acquiring sufficient ownership to block a change in ownership if it means it will go to BHP Billiton, an Anglo-Australian mining company. This has prompted the Canadian government to indicate that it could block the transaction, saying that the cartel has provided beneficial royalties and jobs for Canadians. 

So here we have a situation where government, the one stakeholder that is usually viewed as intervening in cases of extraordinary market power, is actively supporting it.  All of which means that it may actually be the case that farmers and people around the world would be better off if The Potash Group was purchased by an Australian Company or a Chinese company instead of being a public Canadian company.

How many times these days are we faced with choices that are nothing more than the lesser of two evils?  This is what happens when we view the world within the box of how it currently exists.  The only way we can extract ourselves from this prisoner’s dilemma approach to economic activity in general and our food system in particular is innovation, disruptive innovation that creates meaningful and viable alternatives to a status quo that’s locked up by a few enormously powerful stakeholders.

Seaweed.  The solution to the potash dilemma is actually not more potash, or changing who owns the companies or how it is marketed, it’s seaweed. 

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