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Potash. It just might be the world's best business: a commodity with virtually unlimited demand, no viable substitute and abundant supply controlled by a handful of companies in just a few countries. Three of those companies - Potash Corp. of Saskatchewan, Mosaic Co. and Agrium Inc. - just happen to be based in Saskatchewan, which just happens to hold 75% of the world's potash reserves. More to the point, the Saskatchewan producers jointly market their potash - some 10 million tonnes of it annually - through Canpotex Ltd., an export organization wholly owned by the province's three dominant producers.

Exactly how lucrative is the business of extracting and exporting potash? Lucrative enough that for a brief period last year, Potash Corp. assumed the mantel of Canada's most valuable company. Its share price soared past $211 in April, on its way to a peak of $246, taking its market capitalization to $67 billion and then beyond - No. 1 on the Toronto Stock Exchange.

That a fertilizer producer based in out-of-the-way Saskatoon should overtake Canada's largest chartered banks, tech powerhouses and oil companies - Royal Bank, Research In Motion and EnCana have all led the TSX in market cap in the last couple of years - struck many as bizarre. It shouldn't have, though. Potash is the primary source of potassium, which along with nitrogen and phosphate, is one of three nutrients absolutely essential for plant growth. And while humankind has gotten by in the past without oil, credit and smart phones, it has never done without food.

Part of the global potash industry's remarkable run-up in 2008 was a reflection of this simple fact. Indeed, 2008 saw the convergence of a number of factors that conspired to increase the value of the entire agri-industry: the record 6.7 billion mouths and stomachs that required feeding (growing to an estimated 10 billion by 2050); the fact that the world's most populous countries, China and India, were switching from efficient (albeit occasionally bland) rice and grain-based diets to feed-intensive animal-protein diets; and the general decline in arable land as farms and cropland were paved over to make way for industry. In essence, this meant that the world needed to produce more food from less land. And that, in turn, meant an increased demand for nitrogen, phosphorus and potassium - the core components of industrial fertilizers, which can dramatically increase harvests of everything from wheat to soybean.

Thus, producers of all three fertilizer components could be expected to benefit from increased global demand. If that were the whole story, though, it still wouldn't account for the stellar earnings of companies like Potash Corp., whose profit more than tripled to $3.5 billion in 2008, up from $1.1 billion the year before, or the company's even more remarkable gross margin of almost $5 billion, up from less than $2 billion in 2007.

Nor would it account for the fact that while the price of crops plummeted worldwide in 2009 as the economic recession took hold and intensified, potash producers expect to maintain or even grow their margins this year. Underlying this optimism is the belief that, while the price of nitrogen and phosphate may - and in fact did - plummet as demand dries up, potash prices and margins can be maintained by matching output to demand.

Indeed, earlier this year Potash Corp. chief executive Bill Doyle bitterly lamented the fact that nitrogen and phosphate producers "screwed up their businesses" by slashing prices to spur sales in the face of slumping demand. Margins evaporated practically overnight. He's vowed that won't happen with potash, and thanks to the tightly controlled market and unique dynamics of the global potash industry, he might be right.

It wasn't always like this. As recently as 2004, Saskatchewan potash was being exported for a mere US$100 per tonne, a price that reflected competition with producers in Russia, Belarus, Israel and Jordan. Then, in 2005, Belarusian and Russian producers joined forces to create their own export organization, the Belarusian Potash Co. (BPC). When combined with Canpotex, which has been selling Saskatchewan potash overseas since 1972, the two organizations share control of more than 70% of the global potash export market.

By 2007, potash prices had jumped to almost US$200 per tonne. A year later, China, the world's largest importer of potash, was being asked to pay a whopping US$576 per tonne for its annual consignment of potash - an increase of $400 per tonne from 2007. Spot prices for potash, meanwhile, spiked to an unheard-of US$1,000 per tonne in Brazil, Malaysia and Indonesia.

Producers like Potash Corp. defended the escalating prices, arguing that global production simply couldn't keep up with demand - especially in 2008 when, with the economies and appetites of China an India booming, potash prices hit their peak, topping US$1,000. Critics complained that the Canpotex and BPC were intentionally keeping supply tight in order to support gross margins that were, in some cases, running at 80% - all but unheard of for commodity producers.

Buyers, meanwhile, grumbled that potash companies should have increased production to tame price increases. Producers could only shrug. That would require expanding their mines, they said, a process that would take years to complete and provide no immediate relief.

When the global economy crashed in the third quarter of 2008, demand for potash fell sharply. Rather than flood the market with cheap product - as nitrogen and phosphate producers had - potash companies immediately began scaling back production. In December, Potash Corp. announced it was laying off 940 workers at three of its mines to reduce production by 20%. Mosaic laid off another thousand workers and Agrium served layoff notices to 380 workers at its Vanscoy mine. The same thing, meanwhile, was taking place in Russia and Belarus - in all, six million tonnes of potash was taken out of the global pipeline in an effort to stabilize prices. While investors might call this good business practice, some potash customers have taken to calling it collusion. Indeed, since September of last year eight lawsuits have been filed in the U.S. on behalf of farmers' co-ops and fertilizer manufacturers, alleging illegal price-fixing practices by Canadian and Russian potash companies.

One suit, launched in federal courts in Chicago and Minneapolis by Gage's Fertilizer & Grain Inc. of Montana, is typical. In its statement of claim, Gage's alleges that potash producers, including members of Canpotex and BPC, conspired to divvy up market share and sales volumes in order to keep prices artificially high, and that furthermore, "Potash suppliers repeatedly attributed dramatic price increases to a ‘tight supply/demand balance' when in fact a number of defendants had excess potash capacity."

The defendants all maintain the cases have no merit, and none seem overly concerned by the challenges - with good reason, says one analyst, speaking on condition of anonymity. "The lawsuits aren't going to go anywhere," he predicts. "North American farmers are still very healthy, and it's difficult to prove price-fixing when there isn't any harm. They have to show pain, and in terms of income and availability of credit, they're fine."

A potentially more serious challenge to the status quo could come from regulatory reform, specifically with changes to the Canadian Competition Act now being discussed, which could alter the operating environment for export organizations. But it's an open question as to whether such changes will be adopted, or whether they will be drafted in a way that will affect potash producers. After all, Saskatchewan is massively dependent on the potash industry. The province anticipates raking in $1.9 billion in potash royalties, taxes and surcharges in fiscal 2009-2010. That's about $1 in every $5 the province takes in - more than the provincial

income tax, and more than all other natural resource revenues combined. "Why would Canada fight its own tax base when domestic farmers aren't suffering?" asks the analyst. "Canpotex, after all, is aimed offshore."

Of course, regulatory reform of the Canadian Competition Act would be a federal matter, rather than a provincial one, and the federal government could take a broader view of the benefits of organizations like Canpotex in a global economy that's desperately trying to get back on its feet. Moreover, Saskatchewan premier Brad Wall is rapidly emerging as a Conservative star and possible successor to Prime Minister Stephen Harper: Would it really make sense to alienate him at this point?

If the current regulatory regime is not amended and legal challenges to Canpotex and BPC don't bear fruit, a more cogent question might be, does potash have a ceiling? Bill Doyle at Potash Corp. has already gone on record predicting that the potash market will tighten back up in the second half of 2009, and will be "supply-challenged" for years to come. To that end, Potash Corp. has announced plans to increase its operational capacity to 18 million tonnes by 2012, up from just over 10 million tonnes today. Doyle says that could result in gross annual margins of $25 billion, up from the $3.1 billion the company grossed from potash in 2008.

As to whether, or how far, prices will continue to trend upwards, Potash Corp. claims that its namesake mineral - even at contract prices above US$700 and spot prices pushing US$1,000 - is still a relative bargain, given the economic benefits it confers. The company claims, for example, that each $100-per-tonne increase in the price of potash adds a mere three cents to the cost of a bushel of corn, and that each dollar spent on fertilizer returns $3 worth of improved crop yields.

All of which should give Canpotex and BPC confidence to keep pushing prices - provided they can maintain the steely discipline that characterized negotiations with potash importers during the boom years. That discipline was on full display in 2008, when China dragged contract negotiations out for six months, and still couldn't force either BPC or Canpotex to break ranks: In the end, China was forced to sign a deal that saw it pay almost three times as much for potash as it paid in 2007.

This year, with demand much reduced, cracks in the Canadian-Belarusian axis have started to appear, the first taking place when BPC agreed to sell Brazil potash at US$750 per tonne - a 25% discount from last year's price. "The Russians broke first because they desperately need the money," opines John Costigan, vice-president of corporate development with Vancouver-based mining junior Western Potash Corp. "Potash Corp. and Canpotex have tons of money. They could have held the line on price indefinitely."

Once BPC started selling discounted potash, of course, Canpotex was forced to follow suit, offering similar discounts to buyers in Indonesia and Malaysia. As of April, the contract with China - the de facto proxy for the potash export market - still hadn't been signed, but most observers believe it too will be sharply discounted from last year's price.

The real challenge to both Canpotex and BPC in the near term may stem from political pressure being brought to bear on the Russian and Belarusian producers. "Over there the governments are in bed with business a lot more than they are over here in North America," says one analyst. "The potash industry is a major employer, and the governments are pressuring producers to stop cutting production and ramp the mines back up so people can get back to work. They're arguing that even at US$500 per tonne the producers are still making good money, especially now that the ruble has fallen so far against the U.S. dollar. So why not get the mines running full tilt?"

Doing so would, of course, constitute a serious blow to Saskatchewan's ongoing strategy of sacrificing volume for price, and possibly depress margins for years to come. "Canpotex is afraid that if Russia caves and makes significant price concessions now, both export organizations will lose their leverage and momentum," says the analyst. "China will hold their feet to the fire during the next round of negotiations, and it could take a long time to make up that lost ground on pricing."

Terence Ortslan of Montreal-based mines, metals and fertilizer research firm TSO and Associates agrees that political pressure on the Russian potash oligarchs is the biggest threat to the stability of potash prices. "I don't think they'll be able to hold the line on potash prices, but I don't see them collapsing the fort, either. I think they'll make some price concessions, perhaps more than they should, but I don't see them going back to the bad old days of cost-plus commodity pricing for potash."

There's also the possibility that new entrants into the potash market will have a dampening effect on the influence of Canpotex and BPC on potash pricing. A number of little exploration companies and mining juniors have been clamouring to get into the game, even though goliaths like Potash Corp. contend that, at a cost of up to $3 billion to get a new mine up and running, it's prohibitively expensive for them to do so. "The gold rush in Saskatchewan is over. All those little guys that are hanging around the edges hoping for a dream, [hoping that] someone will come in to make their day, that's not happening," Doyle told investors in a January conference call.

Costigan at Western Potash isn't convinced, though. "Bill Doyle seems to think you need $3.5 billion to get into the game. But you don't have to start out extracting two million tonnes a year. You can start smaller." That being said, at least one new entrant is not planning to start small. Australian's BHP Billiton is planning a potash mine near Jansen, Sask., 150 kilometres east of Saskatoon, that would be the world's largest. If approved by the Saskatchewan government, it would begin extracting potash in 2015 and reach full production of eight million tonnes annually a decade later.

Given that Canpotex members have already announced plans to add 17.1 million tonnes of capacity to their annual output by 2020, one could wonder if there's room for another major Saskatchewan player. Most analysts say the planned extra capacity is far enough in the future that it should be easily absorbed by escalating demand.

As to whether BHP Billiton becomes Canpotex's fourth member, or opts to market its own product, Terrence Ortslan says he expects the Canadian export organization to retain a powerful pull on all new entrants in the Saskatchewan potash industry.

Potash prices may moderate over the short term, he adds, but in the longer run, as the world's soils become increasingly reliant on fertilizer to replace depleted nutrients, demand will hold sway. "Potash can't be priced like a commodity," he says. "It isn't a commodity. It's a necessity."