Potash — the reddish mineral that’s one of three main components of fertilizer (along with phosphate and nitrogen) — was supposed to be the new oil, or “pink gold.”

Last year, Saskatchewan’s potash industry was riding a wave of success, with billions of dollars in expansion plans and new mines in the works, skyrocketing prices and seemingly insatiable demand from developing countries such as China and India.

From US$200 per tonne only a few years ago, potash prices had jumped to US$700-US$800 per tonne by late 2008, and were expected to reach US$1,000 per tonne.

As a measure of the importance of potash to Saskatchewan, the provincial government budgeted almost $2 billion from potash royalties and taxes for this year — more than oil and roughly one-fifth of the province’s annual revenue.

Well, it appears the experts and analysts who made the price forecasts, and the bureaucrats and politicians who based their revenue projections on them, were looking at the world through rose-coloured glasses.

The potash industry bet that India and China would willingly pay much higher prices than the US$500 per tonne levels of a year earlier. The industry’s logic seemed inescapable: a bumper harvest in the developing world in 2008 had robbed the soil of its nutrients, requiring even greater quantities of potash, which improves water retention, yield, nutrient value and the disease resistance of crops.

The Saskatchewan potash industry — three big companies that produce about 30% of the world’s supply — was prepared to wait for buyers to awaken to the new potash price reality.

For much of the first half of 2009, Saskatchewan’s main potash-producing mines were on layoff or maintenance shutdown, as producers sought to reduce inventories and wait for production to support higher prices.

But the industry failed to calculate the full damage done to the world economy, especially to the developing countries that are the industry’s biggest customers.

Compounding the industry’s miscalculation on prices, it made a large agronomic error as well. Apparently, producers may skip a year or even two of potash application on their fields and not suffer any long-term ill effects. That’s why one potash analyst believes prices may not recover until 2010 or 2011.

The combination of customer resistance to substantial price hikes, the global recession and overconfidence in the global demand for potash has thrown the Saskatchewan government’s financial projections for a loop.

Far from the $1.9 billion projected in the spring budget, potash revenue is expected to be a much more modest $600 million — a $1.3-billion shortfall. Although partially offset by better than expected oil prices, the potash revenue deficit has left a $700-million hole in Finance Minister Rod Gantefoer’s budget.

Accordingly, $132 million in capital projects have been deferred, Crown corporations have been raided for a “special dividend” of $185 million, and the province’s rainy-day fund tapped for another $400 million. The result is a razor-thin $50-million surplus — a rounding error on a $10-billion budget. But, more important, the downturn in the potash industry has stalled provincial economic growth.

From being touted as the only province to avoid an economic contraction this year, most economic forecasters say Saskatchewan will probably see negative economic growth in 2009.

There is a recent precedent for such a dramatic reversal of fortune. In 2006, Saskatchewan’s economy contracted slightly, thanks to — you guessed it — protracted potash contract negotiations with the Chinese.

It just goes to show that in a commodities-based economy, things can change quickly, for good or ill.

The good news is that Saskatchewan has other things going for it — conventional light oil production from the Bakken formation, for one — that should keep the province’s economy from contracting significantly in 2009. And most forecasters agree that Saskatchewan will once again lead the provinces in economic growth in 2010. But, like all forecasts, this one should be taken with a large grain of a well-known potash byproduct — salt. IE