Last week CF shareholders ignored Agrium's plea to withhold votes; re-electing three nominated directors. This was a painful setback for Agrium, their anxiety apparent in the subsequent spin.
Whining aside, 80% plus of CF's shareholders clearly indicated with their vote that they weren't even closely interested in Agrium's entreaties. It is also important to note that ~88% of CF is owned by institutions; in other words presumably sophisticated investors.
In our view, this victory offers CF and Terra a brief window of opportunity to get about closing a deal. Both sides have to get out of the trenches and engage. Time is of the essence as other fundamental factors loom large on their horizon.
There is a level of anxiety in rural America about the continuing consolidation in agriculture and the fundamental impact that it is having on rural life. Considerable and vocal grassroots resistance has especially been developing towards the ongoing consolidation in the fertilizer industry. The proposed fertilizer mergers will be amongst the first confronted by the Obama administration. At this point we think that CF - Terra will be approved, after some meaningful surgery.
The compelling argument that needs to be made to the administration is that American nitrogen production has been under attack for the last decade. We have lost a large percentage of our production capacity, and more is at risk. Over 50% of our consumption is now imported. World market conditions will insure that the American farmer has competitive nitrogen. What is of concern is the viability of our remaining production capacity.
The news for the foreseeable future is even more difficult. Cap and Trade legislation, now inevitable, will be a triple whammy for North American nitrogen producers. Not only will they have to pay a significant carbon "tax" estimated to be $30 per ton, but they will also have to compete with imported product which will, for the most part, not be carrying this burden. Furthermore, they will have to compete even more aggressively for feedstock, as other industries switch to natural gas, to reduce their own carbon tax exposure.
Therefore for the shareholders (and stakeholders), CF and Terra need to make peace and circle the wagons. The Trinidadians are coming...as well as the Venezuelans, Chinese, Indonesians, Russians, Ukrainians, Kuwaitis, Qataris, Egyptians, Saudis...