Thursday, March 19, 2009

One Egg, One Basket

The Saskatchewan Party has just released it’s provincial budget. There weren’t a lot of surprises, some spending, some tax cuts, nothing too exciting until you look at the revenue projections. Then something really interesting jumps to the fore.

The provincial budget is relying on the production and sale of potash for approximately 20% of revenues. One dollar in five will come from the production of fertilizer! This really is putting all your eggs in one basket. Normally, I wouldn’t be too surprised by governments producing a lot of fertilizer, but this is a little different. So I did a little bit of digging and talking to a few different folks. Some interesting facts are starting to come to light.

The crown corporation in question controls a significant portion of the market. In fact, it may even have more market power than OPEC (one guess put their market share at around 40%, though the best somewhat official data I could find puts them at about 22% of the market at the end of 2007). The current government seems to have decided to engage in price management, reducing production to stabilize the commodity's price. It seems the fiscal health of the province is going to depend on how successful Potash Corp is in this objective.

There are a lot of implications of this strategy, and many don’t relate directly to Saskatchewan.

First, potash is a critical component of most farming around the world, particularly for things like wheat. The attempts to manage the global price of potash will have a couple of interesting effects on the price of food. First, the projected price for potash in the Sask budget is about $1100. This is significantly higher than historical values, which means higher prices for food. This is particularly important as food demand seems to be growing faster than supply. Price management, if successful, will also stabilize potash prices. This will mean a lot less risk for farmers around the world, and may help to stabilize food prices. Higher but more stable food prices are, on balance, a good thing.

There is something else interesting to note. It’s kind of obvious once you consider the impact on food prices. There will be a “knock on” effect for the province of Saskatchewan. What is the province famous for producing? Food! If the price of wheat rises and stays high, the province’s farmers will be able to reap higher economic rents. These rents take the form of profits from the relatively productive farm land. This profit can then potentially be taxed.

This type of vertical integration thinking reminds me of the economy in another province, but that's for another post.

If the current government has thought the logic through this far, I’m impressed. These guys might just be the type we want running the country. If they haven’t thought it through this far, well, even your typical politician can’t screw up all the time.

Of course the whole thing won’t work. Why and how, is for another yet post.

3 comments:

chelet said...

Are you saying they are projecting a cost of $1100 per tonne on potash in the next fiscal year?

I found a prospectus on solution mining and if this is any indication the government already has a projected potential yield of 110 billion short tonnes should mining go ahead in southern Saskatchewan. I would wonder what kind of investment the crown corporation holds in mining companies to put such a astronomical price on potash?

http://www.potash1.ca/i/pdf/2007-10-09_GeoSolPotashSask.pdf

Are you talking about PotashCorp as the crown corporation here? I'm not very familiar with mining in Saskatchewan and would be interested to hear more about it if you find any thing else on this subject considering Saskatchewan is the largest producer in the world.

Peter Loewen said...

Damn you Childs for making me wait for the next post.

economistatlarge said...

Chelet,

PotashCorp is publicly traded, and claims no government involvement. The revenues actually come from taxes on exaction. Sorry about the confusion. The people I talked to still talk about Potash Corp as if it were still a crown.

I'm not an expert on mining, but as I understand it there are a number of potential deposits that are controlled by Sask Potash, both in Saskatchewan and, believe it or not, in New Brunswick. The exact price projection in the budget is $1079. You can find this in the budget "green sheet" at http://www.finance.gov.sk.ca/budget2009-10/Budget200910FinancialHighlightsGreenSheet.pdf