The bid for Potash Corp. of Saskatchewan Inc. is focusing attention on an obscure corner of the fertilizer market that holds the key to global food output growth.

Potash itself is a potassium-rich salt that serves as the food, along with nitrogen and phosphates, for wheat, corn and other crops. Crop producers need to use it in specific amounts to glean the biggest possible yields.

"There is no substitute for it," said Stephen Jasinski, the mineral commodity specialist for the U.S. Geological Survey.Supplies of potash--the remnants of ancient seas that are mined by fertilizer makers--are of growing importance to developing nations like China and India, which put a high priority on food security for their large populations.

While the fertilizer is widely used, two regions account for 80% of reserves and two-thirds of production: Canada and the former Soviet Union.

There's little active trade in the commodity. Contracts for potash deliveries aren't listed on an exchange and there isn't a big community of "spot" traders that could provide it on short notice.

Benchmark prices are set by a consortium of Canadian potash producers called Canpotex. Potash prices at the port of Vancouver hit a high of $900 a metric ton in 2008 but then plunged during the global recession.

As the commodity is available from only a few suppliers, they maintain a significant amount of pricing power. But farmers can suspend their use of potash if prices are too high in the hope that prices fall before the lower potassium level reduces crop yields.

Canpotex sells 8 million-9 million metric tons of potash a year, according to its website. In 2008, world potash production totaled 32 million metric tons, according to the International Fertilizer Association, an industry group.

Meanwhile, only 12 countries have the potential for significant production, resulting in a massive export market.

"The theory here is that demand for all three nutrients should increase over time, but there is a potential for potash, particularly in the two largest countries, China and India, to grow even faster," said Harry Vroomen, an economist with The Fertilizer Institute, an industry trade group.

Throughout human history, farmers supplied crops with potassium by scattering ash or using animal waste, but only potash provides enough of the nutrient on a large enough scale to support the global food industry.

That's the main reason for the interest of mining giants in acquiring reserves. On Tuesday, Potash rejected BHP Billiton's unsolicited $38.56 billion takeover bid and adopted a shareholder rights plan to prevent an unwanted acquisition.

Vroomen said the ratio of potash to nitrogen and phosphates in developed countries such as the U.S. is much higher than in developing regions. China and India in particular, which account for more than a third of the world's population, use a significantly lower amount of potash relative to other nutrients, and are now looking to increase their use as they run into plateauing crop yields.

BHP's interest in Potash Corp. comes amid a push to consolidate the fertilizer industry to take advantage of growing demand for wheat. Monday, Agrium Inc. (AGU), Canada's second-biggest fertilizer producer behind Potash Corp., made an unsolicited bid for Australian wheat exporter AWB Ltd. (AWB.AU), as it seeks to make Australia its launch pad to service the growing Asian markets.

-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155, jerry.dicolo@dowjones.com
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