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Agricore United urges rejection of SaskPool offer; buys two crop input retailers; increases dividend

The Agricore United Board of Directors has unanimously recommended that securityholders reject the hostile takeover bid by Saskatchewan Wheat Pool Inc. (SaskPool). The recommendation is contained in a Directors’ Circular that was filed with regulatory authorities Dec. 13.

“The offers are financially inadequate and significantly undervalue Agricore United,” said Jon Grant, chair of the AU special committee that assessed the offer. “Further, under the offers, holders of Agricore United’s limited voting common shares and convertible debentures can only receive SaskPool shares, not cash. As such, the value they receive is highly uncertain and subject to a number of significant risks.”

To emphasize the last point, AU said that a $100 investment in SaskPool shares made on April 2, 1996 (the day it became public) would have declined 95.8 percent to Nov. 7, 2006, whereas the same investment in AU’s limited voting common shares would have appreciated by 46.4 percent (assuming the reinvestment of dividends).

AU also says it is not getting a premium for a change in control. It says SaskPool is only giving holders of common shares a 13 percent increase over the Nov. 7 price, whereas the average premium for deals occurring between 2000-2006 is 53 percent.

Another reason for not accepting the offer was the likelihood that another offer may emerge. The company said that it has been receiving interest from other parties. Plus, AU said it is content to continue as is. As of Dec. 11, AU common shares on the Toronto Stock Exchange have gone up 36 percent, to $11.24 from $8.24, the price on the last trading day prior to the SaskPool offer.

AU was also not buying the argument that the deal would bring $60 million per year of synergy savings, suggesting that it is already an efficient company. As for any rail synergies, it says it already maximizes rail incentives by shipping 80 percent of its export grains in multi-car blocks, compared to the industry average of 68 percent in 2005.

AU also noted that there are significant regulatory risks. AU said that it has been informed by the Canadian Competition Bureau that the SaskPool/AU proposal has been labeled “very complex,” which may lead to a significant sell-off of assets if the deal proceeds. According to AU, SaskPool has refused to suggest possible assets to be sold off, and it is uncertain a company would be as viable once any sell-offs occur. AU also fears that any assets to be sold would have to be done in a short timeframe and would be sold under value. The Bureau may seek to block the deal altogether, AU added.

According to the Competition Bureau, only about five percent of merger transactions are labeled “very complex.” They are typically characterized by indications early in the examination that the transaction is likely to create or enhance market power, according to the Bureau’s enforcement policies. As a result of this designation, the Bureau will have five months to perform the standard review, which would end on May 4, 2007.

AU noted that it had to sell off assets after the 2001 merger between Agricore Cooperative Ltd. and United Grain Growers Ltd. It also noted that Canadian authorities are currently weighing whether SaskPool and James Richardson International Ltd. need to disband their grain handling joint venture at the Port of Vancouver. The only other competitor at Vancouver is AU. A SaskPool/AU deal could exacerbate concerns at Vancouver.

AU said the SaskPool bid does not adequately reflect AU’s strong momentum, superior asset base, attractive long-term growth prospects, and steady debt reduction. AU also said it would contribute 59 percent of the cash flow to the new company. AU just recently reported record results (GM Dec. 4, p. 1). On Dec. 14, AU increased its quarterly dividend to $0.04 per share on limited voting shares, payable on Feb. 15, 2007, to shareholders of record on close of business Dec. 29, 2006.

Archer Daniels Midland Co. is ultimately sitting in the catbird’s seat – as of January 2007, it will own 28 percent of AU’s stock. Some 75 percent of AU’s stock must be tendered for SaskPool’s bid to be successful. ADM is currently against the deal, so the deal cannot go through even if the rest of the shareholders consent.

SaskPool has suggested that institutional investors and ADM combined form approximately 75 percent of AU shareholders. AU would not confirm these numbers, but did concede that the number of farmers as owners has declined since its 2001 merger. It added that it has not seen any groundswell of support from farmers for the SaskPool proposal, noting that the deal could reduce available facilities and competition.

As for the 2005 negotiations between the two companies, AU said last week that after being approached by SaskPool for talks and the offer of a confidentiality agreement, SaskPool withdrew the promise of a confidentiality agreement and the talks collapsed.

In the meantime, AU continues to grow, announcing last week that it is buying two crop input dealers in Saskatchewan. AU is buying key assets of Green Acres Fertilizer Service (Major) Inc. and Green Acres Chemical Ltd. and Kerrobert Agro Services Ltd., two full-service crop production businesses in western Saskatchewan, effective Dec. 18. AU says the deal complements its existing grain operations at Kindersley, Provost, and Wilke, Sask. Financial terms of the transaction were not disclosed.

“Having recently released record year end earnings, Agricore United continues to execute on its commitment to grow for the benefit of Agricore United’s stakeholders,” says Brian Hayward, AU CEO. “This acquisition aligns with our strategic intent to enhance Agricore United’s grain handling and crop input retail position.”

Green Acres and Kerrobert offer dry bulk fertilizers, liquid fertilizer, a full line of crop protection products and custom spraying services, a full line of bagged and bulk seed products, and agronomic consulting services. AU will be retaining key staff with strong agronomic backgrounds and experience in grain and agro sales and services.

“Green Acres and Kerrobert have been leaders in their marketplace, with a tradition of providing superior customer service and agronomic advice,” says Ron Enns, AU senior vice president. “That’s a tradition consistent with our own corporate philosophy, as Agricore United continues to deliver on adding value to agricultural production.”

Also last week, AU announced plans to invest US$4.0 million in a new 100,000 ton dairy mineral manufacturing plant at Hi-Pro Feeds located in Friona, Texas, and $5.2 million in a new 60,000 mt specialty oat processing plant at its existing seed cleaning plant in Camrose, Alberta.

Congress passes landmark OCS drilling bill

The Gulf of Mexico Energy Security Act (S. 3711), an industry-supported bill that would allow drilling for natural gas in about 8.3 million acres of the Outer Continental Shelf (OCS) in the Gulf of Mexico, was passed by Congress on Dec. 9. According to The Fertilizer Institute, President Bush has indicated he will sign the bill into law.

The bi-partisan legislation, which was attached to a large tax-extender bill called the “Tax Relief and Health Care Act of 2006,” was passed by the House of Representatives with a vote of 367 to 45, and by the Senate with a vote of 79 to 9. The bill lifts a 25-year old statutory ban on natural gas exploration, including certain areas in the OCS that are currently under federal moratoria.

“Members of Congress have sent a strong sign of their desire to provide relief to the agribusiness community, which has been hit hard by volatile and skyrocketing natural gas prices,” said Ford West, president of The Fertilizer Institute. “As an industry, we have been telling our elected officials that we need relief, and with this bill’s approval they signaled that they have heard us. This legislation is a first step to ensuring that future generations have a source of domestically produced food and fuel.”

Specifically, the bill authorizes drilling in about 8.3 million acres of the eastern Gulf of Mexico, including 2.5 million acres within a section known as “Lease Area 181.” The bill protects much of Florida’s coast and secures a share of drilling revenues for coastal restoration in Gulf States. “The bill would allow access to 5.8 trillion cubic feet of natural gas, which could be enough natural gas to sustain 1,000 chemical plants for 40 years,” said West.

President Bush on Dec. 9 expressed his support for the measure. “I commend Congress for passing the Outer Continental Shelf legislation, which will help to reduce our dependence on imported sources of energy by increasing access to domestic sources of oil and gas,” Bush said. “Developing these reliable domestic resources in an environmentally sound manner will help address high energy prices, strengthen our energy security and protect manufacturing jobs. The bill also provides the producing States of Texas, Louisiana, Mississippi, and Alabama a share in the royalty revenues from OCS leases. I appreciate the commitment by the State of Louisiana to use revenues from these leases to restore coastal wetlands.”

TFI said 19 U.S. ammonia plants have closed permanently since fiscal year 1998/99 primarily as a result of the rise in natural gas prices, and an additional five plants are currently idled. Natural gas accounts for between 70-90 percent of the total production cost of one ton of ammonia, TFI added, noting as well that farmers depend on significant amounts of natural gas for food processing, irrigation, crop drying, and heating farm buildings and homes.

“Passage of this legislation was achieved through a targeted effort by a broad base of organizations and industries representing agriculture, manufacturing, labor unions, the chemical sector and many others,” said West. “We thank Reps. Adam Putnam (R-Fla.), Bobby Jindal (R-La.), John Peterson (R-Pa.) and Charlie Melancon (D-La.), and Sens. Mary Landrieu (D-La.) and Pete Domenici (R-N.M.) for their steadfast leadership to move this bill forward. Also, we thank those TFI member company employees who personally wrote to their elected members in support of the bill.”

Other trade organizations also expressed support for the bill, but added that more is necessary to boost the nation’s natural gas supplies. The Agricultural Retailers Association’s Richard Gupton said ARA will be advocating additional measures in future offshore energy legislation that will be submitted during the new Congress.

American Gas Association President and CEO David Parker said Congress has taken “an important step in the right direction, but there is still much work to be done as we move forward in our effort to enhance our national security by making America less reliant on unreliable foreign sources of energy.” American Chemistry Council President and CEO Jack Gerard noted that the American chemical sector has already lost approximately 100,000 jobs largely due to U.S. natural gas prices tripling in five years, and applauded Congress for sending an “important signal that the U.S. remains open for business.”

While hailing the go-ahead for expanded offshore exploration and development, the National Corn Growers Association and more than 100 growers and agribusinesses of the Agriculture Energy Alliance petitioned the Department of the Interior to allow more OCS gas exploration in the Gulf of Mexico and off the coasts of Virginia and Alaska. “As the U.S. agriculture industry becomes increasingly dependent on foreign fertilizer production, a real threat to our food security has been created,” AEA advised the DOI’s Mineral Management Service. “American farmers suffer every day the natural gas supply/demand situation remains unbalanced through lack of substantive policy changes.”

Rosenort Agro joins forces with Agrico

Rosenort, Manitoba-Rosenort Agro Ltd. has entered into a joint venture agreement with Agrico Canada Ltd./Ltée, Mississauga, Ont., one of its fertilizer suppliers. Agrico has purchased 50 percent of Rosenort’s shares from owners Chuck and Rudy Brandt. Joining in the share purchase agreement is Dennis Benjamin, current general manager. Benjamin will remain as general manager, and the Brandts will continue as active consultants. “Our customers will not see any differences in the way the business is run,” said Chuck Brandt. “All the services and products we have always offered will still be available, but Agrico is bringing some enhancements to the business that will benefit our customers now and in to the future. When Rudy and I were considering the future of Rosenort Agro, we placed a high value on the future of local ownership. The partnership with Agrico accommodates this very well. Agrico is a company committed to partnership with local management.” The Brandts’ father, Levi, started the business selling petroleum products in the 1940s, and eventually became an Esso agent, selling fertilizer and crop protection products. It was incorporated in 1978 and became an independent dealer supported by suppliers Agrico and J.R. Simplot Co. Chuck and Rudy eventually assumed responsibility for the entire business. Agrico, which just celebrated its 75th anniversary, runs a network of warehouses and offers fertilizer products via company-owned retail locations and joint venture partners.

Troubled Florida phosphate plant coming down

Plant City, Fla.-A phosphate processing plant in Plant City, Fla., that has been the subject of lawsuits from its neighbors and investigations from state regulators was in the process of being torn down last week. The main smokestack of the Coronet Industries phosphate plant was destroyed on Dec. 13, with its fall to the ground widely documented by television news programs. Nearby residents of the plant said air emissions and ground water contamination from it were causing abnormally high levels of cancer and other health problems. The plant ceased operations in March 2004.

Minnesota to get hydrogen from wind for NH3

Morris, Minn.-Skeptics who doubt the economics of converting wind energy into hydrogen to produce anhydrous ammonia for fertilizer aren’t seeing the whole picture, according to researchers at the University of Minnesota’s West Central Research and Outreach Center. “There are other dynamics at work here that the critics may not be taking into consideration,” Mike Reese, a spokesman for the center, told Green Markets. “A system in which farmers can join together in an LLC or co-op to produce their own fertilizer at a moderate price for a 20-30 year period while developing a profitable wind enterprise certainly has potential.” Reese said the wind-to-hydrogen-to-ammonia project is in the pre-design stage, but could be producing ammonia in fall 2007. Greg Cuomo, another official with the center, said the project got a boost with a $2.5 million bonding bill approved this year by the state legislature and funding from the Renewable Energy and the Environment initiative. Reese explained that hydrogen is produced through electrolysis. Hydrogen and oxygen will be separated from water and wind electrical energy in an electrolyzer by a series of cells with special membranes under charge. In a different process, nitrogen will be separated from air via a molecular sieve. Then, under the appropriate pressure and temperature, hydrogen and nitrogen will be introduced together into a reactor and passed through a catalyst bed. A portion of the hydrogen and nitrogen will form NH3 in a modified Haber Bosch high pressure process.

Deer repellent added to Gold’nGro line

Reno, Nev.-Itronics Metallurgical Inc. announced that it will begin the process of registering its new GOLD’n GRO Guardian deer repellent fertilizer with the U.S. Environmental Protection Agency (EPA). The product may be on the market as early as 2008. GOLD’n GRO Guardian will be registered as a biopesticide for use on ornamental landscape plants and shrubs, lawns, flower gardens, golf courses, non-bearing trees, and vines, and by nursery growers of non-food plants. Field trials in cooperation with the North American Deer Management Network have shown the product effective as both a fertilizer and a repellent, lasting up to three months after being sprayed on plants. The national annual market for deer repellent products is growing rapidly and is estimated to exceed $50 million.

Anglo report identifies 460 million mt of potash

Calgary-Anglo Minerals Ltd. reports that it has received a second technical report prepared in respect of its potash resources, which estimates potash reserves of 480 million mt. The new report presents inferred potash mineral resources for the Upper Belle Plaine Sub-member for Saskatchewan Subsurface Mineral Permits 285, 286, and 290. The earlier report identified inferred and indicated potash resources for the Patience Lake Member of the Prairie Evaporite encompassed by Saskatchewan Subsurface Mineral Permit KP-286 only. The earlier report indicated potash reserves of 300 million mt (GM Archives). Resources included in the second report are held by Anglo as to 25 percent and by BHP Billiton Diamonds Inc. as to 75 percent, with BHP Billiton being the operator of the project. Anglo says the report estimates the site has some 460 million gross mt of sylvnite, with average thickness of 2.80 meters grading a weighted average 24.11 percent K2O (over 110,000,000 mt of K2O) 2.68 percent insolubles, and less than one percent carnallite. This amount is net of a 25 percent deduction for unidentified mining-level anomalies and the application of a 40 percent extraction ratio. “We are very pleased with the results that we are achieving from our ongoing efforts to define the size and quality of Anglo’s potash resource,” said Todd Montgomery, Anglo president. “The results continue to meet or exceed our expectations.”

Memo links fertilizers to red tide outbreaks

Tallahassee, Fla.-A memo from Florida Department of Environmental Protection (FDEP) Secretary Colleen Castile to Florida Gov. Jeb Bush appeared to link fertilizer runoff with outbreaks of red tide, an algae that kills fish and other marine life in the Gulf of Mexico. During recent years, red tide outbreaks have become increasingly common. The memo also appeared to support allegations made by several environmental groups that there was a link between the two. The memo said it was known there was a link between the runoffs, particularly nitrogens and phosphates, but the amount necessary for it to become toxic was not known. FDEP was successfully sued over the issues in federal court in 2004, and the court ruled against the state’s claim there was no connection. It ordered the state to provide an updated list of the condition of the state’s 700 waterways. Environmentalists also charged the state had changed the definition of pollution in order to remove many of the waterways from the list of the contaminated.

TFI opposes AAR tank car proposal

Washington, D.C.-At a Dec. 14 public hearing, The Fertilizer Institute told the Pipeline and Hazardous Materials Safety Administration and the Federal Railroad Administration that it supports efforts to improve safety, but opposed the Association of American Railroads (AAR) Tank Car Committee proposal for changes to tank car design and railroad operation involving hazardous materials transportation. The AAR committee has recommended that the current anhydrous fleet be replaced with heavier cars to prevent a release of ammonia in the event of an accident. “TFI supports efforts to improve safety, but we have opposed the Tank Car Committee proposal for several reasons,” TFI said in a statement “Most notably, TFI feels that any tank car redesign should be postponed until physical test and analysis techniques are defined utilizing input from the Volpe Center study currently underway. We have questioned the validity of AAR’s historical performance-based statistical analysis as the basis for imposing a new tank car standard when a majority of the current anhydrous ammonia fleet is less than 11 years old.” TFI said no data has been presented to date that corroborates any inadequacies in the types of tank cars in ammonia service. Following the January 2003 Minot, N.D., train derailment that caused a deadly anhydrous spill, the industry has focused on improving non-accidental releases through improved valving, reduced intervals between safety valve requalification, enhanced loading and release, and enhanced training on the safe handling and security of ammonia to customers and first responders, TFI said. Specifically, TFI said any effort to improve top fittings must take into consideration operator access, weather conditions, personal protective equipment required, and access by emergency responders. As for tank car pressure, the use of double shelf couplers on hazardous material tank cars has improved the survivability of cars in a derailment, TFI said, recommending that PHMSA and FRA consider the requirement that all cars have double shelf couplers. Lastly, bearing sensors and on-board tracking would have to be equipped on all cars in a train to have a positive impact on safety, TFI said, arguing that on-board monitoring would not prevent an incident from happening. “TFI members have shown for many years a willingness to improve overall safety as demonstrated by our support for adoption of head shields, jacketing and double shelf couplers,” TFI said.

EPA signs SPCC rule with industry support

Washington, D.C.-EPA Administrator Stephen L. Johnson this week signed the Spill Prevention Control and Countermeasure (SPCC) rule, which includes measures requested by The Fertilizer Institute. Specifically, the rule raised the above-ground storage capacity limits to 10,000-gallon or less, which exempts the majority of TFI members’ facilities, TFI said. In addition, EPA amended the rule to define and exempt motive power containers, which include trucks, automobiles, and the fertilizer industry’s large mining equipment. Additional amendments made by EPA include providing an alternative to the general secondary containment requirement without requiring a determination of impracticability for qualified oil-filled operational equipment; exempting mobile refuelers from the sized secondary containment requirements for bulk storage containers; removing SPCC requirements for animal fats and vegetable oils; and extending the SPCC compliance dates for farms. “TFI has worked with EPA and other organizations to improve this regulation for its members since the 2002 rule was announced,” said TFI President Ford B. West. “EPA’s decision to modify the rule to include these important measures is a victory for our industry. Collectively, these amendments could save our industry thousands of dollars per facility.” Facilities have until Oct. 31, 2007, to amend existing plans or to implement a plan under the new rule. TFI said it was joined by more than 130 other agricultural organizations as part of the Agriculture Coalition on the Spill Prevention, Control and Countermeasure in working with EPA to secure the amendments.