Profits from Potash

In a September article from the New York Times, the editorial board wrote about “Collusion in the Potash Market”. In this article, the editorial board explained the recent drama that has occurred between two mining cartels that provide the world’s supply of potash (an important fertilizer) to farmers. The two cartels, one composed of Canadian producers and the other consisting of a company from Russia and another from Belarus, have been operating collusively until recently. The two cartels had previously agreed on a set price and output of potash to sell to farmers. This has “imposed billions of dollars of extra costs on farmers and consumers, particularly in developing countries like China and India that have to import much of the fertilizer they use, according to a recent paper published by the American Antitrust Institute, a research group”.

In spite of the welfare loss caused by this collusion, the governments of Canada, Russia and Belarus have been supporting the collusion between the two cartels. The governments benefit from the companies’ profits through higher tax collections and mining royalties. In late July, the Russian company exited the collusion in spite of the government’s support, because they wanted to produce and sell more potash than the arrangement had specified. In response, the Belarus government arrested the head of the Russian company claiming abuse of power. Due to the collapse of the collusion, analysts predict that the price of potash will decrease 25%. Analysts are also saying that the collapse of the collusion will not last long, because all companies involved will most likely lose billions of dollars in profits.

In “Industrial Organization in Context”, Stephen Martin provides explanations for the success and demise of collusion. According to Martin, collusion is more likely to occur when there is high seller concentration. Since there were only two cartels that were colluding, the likelihood of sustained success of collusion was high. He also states that it is easier for companies with standardized products to collude. Since potash is a standardized product that is sold in few, if any, variations, collusion in the potash market would be likely to endure.  On the other hand, made to order products are like special examples of vertical differentiation, and it is very hard to collude with these products. Martin also states that effective cartels monitor members’ actions. The actions of the two companies involved were being so closely monitored that the Belarus government arrested the head of the Russian company when he expressed interest in exiting the collusion.

A reason that Martin provides for firms exiting collusions is growth within the market. Since the Russian company stated that they wished to produce and sell more potash, this probably means that they saw room for expansion within the potash market, which could lead to higher profits than remaining in the collusion. Unfortunately, on account of the arrest as well as the predicted loss in profits from economic analysts, this was most likely a poor decision for the Russian company.