Concerns over market power | Agrium says it will have a 30 percent share of the fertilizer market
Agrium Inc. offers up plenty of reasons why it won’t abuse its newfound market power in Western Canada, the most compelling being the fear factor.
“We would be scared to death to get the reputation that we are not charging anything but a competitive price for fertilizer,” said Kevin Helash, Canada and Pacific Northwest manager for Agrium’s Crop Production Services.
“Because along with the fertilizer goes the seed and the chemical business and all of a sudden, we’d be sitting there like the Maytag repair man.”
The company has come under fire by farm groups for its pending takeover of 232 of Viterra’s 258 crop input retail outlets and its 34 percent stake in Canadian Fertilizer’s Medicine Hat manufacturing plant.
The Saskatchewan Canola Development Commission has sent a letter to the provincial and federal agriculture ministers and the Competition Bureau asking that Agrium’s market power be kept to a “reasonable level.”
An Informa Economics review of the Glencore takeover of Viterra commissioned by the Saskatchewan government also raised red flags about Agrium’s involvement.
Informa wasn’t concerned about the transfer of the retail outlets because Agrium will end up with only 39 more stores than Viterra had when the 232 Viterra outlets are added to its existing 65 stores.
What it found worrisome was the combination of Agrium’s retail and manufacturing clout in the fertilizer business.
According to Informa, Agrium would own 42 percent of Saskatchewan’s retail outlets and about half of the country’s ammonia and urea fertilizer production capacity if the deal with Glencore were approved.
Informa said there is no indication that Agrium would use its newfound market power to raise nitrogen fertilizer prices.
The company’s retail and wholesale units operate independently, there are competing retailers in most regions of Saskatchewan and prices could be kept in check by imported product and minimal barriers to entry for new retailers.
But the potential still exists for Agrium to exert its market power.
Helash said their analysis has uncovered 1,000 crop input retailers in Western Canada, so Agrium’s share of the stores would be closer to 30 percent than the 42 percent number used by Informa.
“Roughly two-thirds of market by locations will still be served by our competition,” he said.
Helash noted that fertilizer is a global commodity that flows freely across borders. The U.S. imported more than 7.5 million tonnes of nitrogen fertilizer from offshore producers last year, some of which made its way to Canada.
While Agrium may be a big fish in Canada, it only accounts for three percent of global nitrogen fertilizer production.
SaskCanola chair Brett Halstead said the competition from offshore product is mitigated by the transportation costs of hauling the fertilizer to Saskatchewan from Vancouver or New Orleans.
“If we were 100 miles from a sea port it would be a much more comforting balance for us,” he said.
Helash said the Canadian marketplace is already oversupplied. Canada produces about 4.4 million tonnes of nitrogen fertilizer per year while consuming two million tonnes. Yara’s Belle Plaine plant alone could supply 65 to 75 percent of the Western Canadian market.
He noted that Agrium has been supplying the competition and its own retail outlets with fertilizer in the Pacific Northwest region of the United States for 20 years without incident.
“(Wholesale and retail) are connected at the top by the big “A” in Agrium but we run our businesses completely independently.”
Helash said the damage would be incalculable if word got out that the wholesale side of the business treated Crop Production Services more favourably than other retailers.
“There are lots of options. People don’t have to buy from Agrium.”
As well, he noted it would be easy for a competitor to enter the retail side of the business. All that’s needed is a rail siding and a coated hopper bin. If you want to add chemical to the lineup, a $150,000 investment will buy you a “beautiful warehouse.”
Agrium purposely avoided building assets in Western Canada because it didn’t want to add new competition for the customers it was supplying with fertilizer.
“Of course, with the Viterra deal, that was kind of a dream situation for us,” said Helash.
“We were pleasantly surprised that (Glencore) wasn’t interested in keeping the retail.”
Halstead said entering the crop input business is more complicated than Helash portrays. A new company may be able to obtain offshore fertilizer for a couple years but eventually they’d have to depend on Agrium to supply them.
Helash cited one positive that the change in ownership could deliver to prairie farmers.
Growers would not be forced to bundle input purchases with grain delivery. They will gain access to Agrium’s Loveland brand of pesticides, in addition to the inputs that Viterra offered.
And there will be constant reinvestment in the facilities by a company with deep pockets.
The Competition Bureau review on the Agrium portion of the Glencore deal won’t take place until the sale of Viterra to Glencore is finalized, which is expected in July.
“We’re hopeful it’s done quickly, before year-end. We’re geared up to hit the ground running as soon as the Glencore/Viterra deal is concluded,” said Helash.
Halstead wants the Competition Bureau to take its time.
“We’ve raised our concerns and we hope they’ll do a proper review of it,” he said.
“With other grain (industry) mergers in the past, they have ordered divestitures.”