Dec. 9 (Bloomberg) -- Guests clinked flutes of Taittinger in Vienna’s Hofburg Imperial Palace, toasting Russian fertilizer company OAO Uralkali after eight price increases in 18 months.

“I would like to raise this glass of champagne and propose a toast to the success of the whole fertilizer industry and to the prosperity of all of us,” Chief Executive Officer Vladislav Baumgertner said at the May 19 Rebirth the Earth party. Later, Joe Cocker sang “With a Little Help From My Friends.”

Half a world away, in southern Brazil, an almost threefold increase in fertilizer prices since January 2007 may cost Martim Mordaski Klemba his farm. The onions he’ll harvest this month don’t look so good, he said. Last month, he began using chicken dung to nourish his 13 hectares (32 acres) of soybeans. He gave up on corn. It needs nutrients “I can’t afford,” he said.

Uralkali and rivals such as OAO Silvinit of Solikamsk, Russia, are vowing not to cut potash prices, a stance that may help reignite the food crisis that gripped the globe this year. High nutrient costs, the credit crunch and a drop of about 50 percent in staple-food prices from record highs may prompt farmers to reduce plantings for 2009, said Remi Haquin, board president of the French national grains office.

“Last year it was the frying pan,” Jacques Diouf, director general of the United Nations Food and Agriculture Organization, said during a conference in Rome on Oct. 15. “Next year it could be the fire.”

Collusion Alleged

Manmade causes helped spur the food shortages that the World Bank says left 967 million of the world’s 6.7 billion people undernourished this year. The recipe for famine included government policies, speculation in commodities markets and a failure to invest in agriculture. Now the cost of potash may help bring the world a fresh bumper crop of hunger.

In eight federal lawsuits since September, six potash producers that do business in the U.S. have been accused of colluding to raise prices and limit supply. Four of the defendants -- Potash Corp. of Saskatchewan Inc., Mosaic Co., Agrium Inc., and Uralkali -- say the cases have no merit. Silvinit said it is waiting to see which courts will hear the cases before it comments while Belaruskali said that Anatoly Makhlai, deputy director for ideology, wasn’t available to comment.

Fourfold Increase

The cases all involve class-action claims. Plaintiffs include Minn-Chem, Inc., a farm chemicals supplier based in Sanborn, Minnesota; Gage’s Fertilizer & Grain Inc. of Stanberry, Missouri; Kraft Chemical Co. of Melrose Park, Illinois; Westside Forestry Service Inc. in Novi, Michigan; Wabaunsee County, Kansas-based Feyh Farm Co.; William Coaker Jr., a farmer in Leakesville, Mississippi; Gordon Tillman, a farmer in Wildwood, Florida; Shannon Flinn, a farmer in Santa Rosa County, Florida; and Kevin Gillespie, who was described by his lawyer, Craig Essenmacher, as an “end user” based in Grand Traverse County, Michigan.

Earnings for Uralkali, based in Berezniki in central Russia, will climb fourfold this year on the higher prices and 9.3 percent in 2009, according to Merrill Lynch & Co. estimates. Competitors including Potash Corp. and Israel Chemicals Ltd. of Tel Aviv have followed suit on prices.

Producers raised fees in 2007 and 2008 as demand grew from farms in developed countries, which were trying to elevate crop yields after grain prices climbed. The cost of both food and potash kept rising, putting the nutrient out of reach for some family operators and cooperatives in developing nations.

Brazil, India, China

Farmers in Brazil, India and China had under-applied potash and depleted the soil for years by then -- further fueling demand, said Bernard Brentnall of Fertilizer & Chemical Consultancy, an advisory firm in Hampton Hill, England. Global potash production from 2005 through 2007 rose 6.1 percent, according to the U.S. Geological Survey.

“There are no substitutes for potash,” said Stephen Jasinski, a commodity specialist at the U.S. Geological Survey, the science agency for the Interior Department, in a Nov. 24 e- mail. Alternatives don’t provide the nutrient in the quantities needed “for intensive farming,” he wrote.

Price jumps for potash, a source of potassium, outstripped those for nitrogen or phosphate fertilizers this year. The nutrient helps plants absorb nitrogen, use water and sunlight more efficiently and fight disease, Brentnall said. It also improves fruit and protein production. Nitrogen-based additives make plants grow faster and taller; phosphate-based products enhance root growth and stalk strength.

Seven Companies

From August to November, the average price for potash rose 20 percent to $765 a ton, according to World Bank data. Urea, a nitrogen fertilizer, slid 68 percent to $245.75 a ton, and diammonium phosphate dropped 48 percent to $612.50 a ton.

Seven companies -- Uralkali, Potash Corp., Israel Chemicals, Mosaic, Silvinit, Belaruskali and K+S AG -- control 85 percent of worldwide potash production, according to a 2007 regulatory filing from Mosaic, based in Plymouth, Minnesota. The 13 members of OPEC, the Organization of Petroleum Exporting Countries, control 38 percent of global oil output, data compiled by Bloomberg show.

The industry’s prices are attracting new entrants. Rio Tinto Ltd. may begin production at its $3.5 billion Potasio Rio Colorado project in Argentina in 2012. BHP Billiton Ltd. in May bought out Anglo Potash Ltd., and in June CEO Marius Kloppers said the company may invest as much as $10 billion in its potash operations.

‘No Point Complaining’

The nutrient is recovered from mines that can be more than 1,000 meters (3,281 feet) deep. Starting a new mine takes at least $2.5 billion and as long as seven years, industry executives have said. A wholesale price of about $750 a ton is needed to justify a new site, according to Dan Chen, CEO of ICL Fertilizers, a unit of Israel Chemicals.

Geology dictates that the bulk of production will be concentrated in a few areas, according to Brentnall.

“There’s no point complaining that it’s nearly all in Russia, Belarus or Canada,” he said. “Other bits and pieces elsewhere don’t add up to a hill of beans.”

Uralkali’s price for a ton of potash is $1,000 in Brazil, up from $190 in January 2007.

The increases brought riches to the company’s chairman and billionaire majority owner, Dmitry Rybolovlev, who through an investment company bought Donald Trump’s Maison de L’Amitie mansion in Palm Beach, Florida, for $95 million in July.

Calendar by Vogue

Uralkali’s wealth was on display at the May 19 party, where six dancers clad in black and white leotards skipped through the crowd to a techno beat, unveiling, month-by-month, photos of fashion models for a 2009 calendar that Vogue Russia produced for the potash miner.

“We hope it is a pleasant and useful present for your office,” Baumgertner, 36, told the partygoers, who were attending the International Fertilizer Industry Association’s annual meeting.

The Russian firm, through its joint-venture trading company, bumped up prices ahead of others in regions from Brazil to Southeast Asia.

“We don’t see any resistance from our customers, from farmers,” Baumgertner said in May, citing the cash that was flowing into agriculture at that point from surging grain prices. He declined repeated requests over the past month to comment on whether potash costs might now hurt farm production.

Last month, the company said it would reduce output because of declining demand and didn’t anticipate any pricing changes. Silvinit in October announced production cuts to prop up the nutrient’s market value, saying it planned no price decreases.

Crop Forecasts Fall

Turmoil in global financial markets “has triggered a drop in demand for crops, thereby hindering farmers’ capacity to purchase planned volumes of fertilizers,” Uralkali said in a Nov. 20 statement. The company is trimming output by half in November and December and will also curtail production in early 2009.

Importers are finding it difficult to get letters of credit for fertilizer shipments, and many farmers can’t get bank financing, said Amit Roy, president of the International Fertilizer Development Center in Muscle Shoals, Alabama. The institution is an outgrowth of the Tennessee Valley Authority’s National Fertilizer Development Center, which began researching, creating and producing nutrients for U.S. farmers in the 1930s.

Soybean harvests in Brazil, the world’s second-biggest producer, may shrink 2 percent in 2009, the first decline in five years because farmers lack credit to buy fertilizer, the country’s crop-forecasting agency, Conab, said yesterday. Brazilian corn yields may drop more than 20 percent, according to Enori Barbieri, vice chairman at the National Corn Producers Association in Brasilia.

‘Barely Breathing’

U.S. production of corn, which requires more fertilizer than soybeans, will probably fall 8.1 percent next year to 12.02 billion bushels, according to November estimates by the U.S. Department of Agriculture. Soybean production is projected to rise 9.2 percent to 2.92 billion bushels.

In Pakistan, “the farmer is almost dead from these prices” for fertilizer, said Abdul Rashid Gujjar, who grows wheat on 15 acres in Taxila on the rolling plains in Punjab province, 35 kilometers (22 miles) from the markets of Islamabad and Rawalpindi. “We are barely breathing.”

In July, some of Gujjar’s fields were bright green with young wheat and corn shoots; others bristled with weeds. The overgrown fields were abandoned, he said, “because we can’t afford the costs of farming them.” Fertilizer laced with potash more than doubled to 24 rupees (30 cents) a kilogram in 2007 from 10 rupees a year earlier.

‘Classic Case Study’

Pakistan is importing as much as 2.5 million tons of wheat this year after production fell to 21.8 million tons from the forecast of 24 million.

Cost pressures on farmers may well increase. Potash Corp., the world’s largest producer of crop nutrients, said in its third-quarter earnings statement that it expects to lift prices by $100 a ton. It also reported profit of $1.24 billion in the quarter, more than in all of 2007.

“While some paint this as a picture of capitalism run amok, it is really a classic case study of the law of supply and demand,” Potash CEO William Doyle wrote in a June op-ed piece that the company offered as comment. “High potash prices are not the problem. In fact, the opposite is true: Low prices are behind the tight supply that we have today.”

The nutrient’s average price from 1990 through 2005 was $117 per ton, according to World Bank data. Global production dropped to 26.4 million tons in 2001, from 31.8 million tons of potassium equivalent in 1988, according to the U.S. Geological Survey. In 2007, it was 33 million tons of potassium equivalent.

‘No Champagne’

Rhonda Speiss, a spokeswoman for Potash Corp., said Doyle was traveling and couldn’t be reached for comment. In an interview the day after Uralkali’s Rebirth the Earth party, the CEO had tried to distinguish the Russian company from his.

“There are no champagne corks popping over here,” he said. “I said they were going too far too fast. We need to be reasonable, and go in the proper sequence, give our customers a chance to breathe here without trying to kill them.”

Now, it’s Uralkali’s days that may be numbered. The company said Nov. 10 that its “future existence is in doubt” after the Russian government reopened an investigation into a 2006 mine flood that created a sinkhole, requiring rail lines to be rerouted.

One outcome from that probe might be that “an entity close to the government would seek to gain control over Uralkali’s lucrative business or possibly the entire industry,” Elena Sakhnova, an analyst at Russia’s state-run VTB banking group, wrote in a Nov. 12 report. The matter will likely be decided by the end of the year, Yevgeny Anoshin, a spokesman for Rostechnadzor, the Russian industrial and nuclear safety agency, said on Dec. 1.

‘Scissor Effect’

The leading potash producers’ share prices have all tumbled since June, and none as far as Uralkali’s. The company closed yesterday at 51.53 rubles -- a drop of 86 percent from a June 19 high of 376.13 rubles. The general slump echoes the drop in grain prices.

“In the long term, if grain prices fall, then fertilizer, including potash, has to fall too,” said Haquin, of the French national grains office. “There can be a one- or two-year scissor effect where fertilizer prices stay high even after grain prices fall, and that can kill farmers’ cash flows and make them cut plantings.”

That’s already happened to Klemba, who fears he’ll lose the family farm in southern Brazil that his grandfather bought 80 years ago. He owes 20,000 reais ($7,962 at 4 p.m. yesterday) to Banco do Brasil SA.

‘Like a Snowball’

In June, he sold a planting machine for 15,000 reais to pay for a cheap grade of fertilizer with low concentrations of nitrogen, phosphorus and potassium. It also covered the cost of diesel for his Massey Ferguson tractor and seeds to plant 12 acres of onions.

To support his widowed mother, his wife and their 5-year-old son and 1-year-old daughter, Klemba, 36, needs about 10,000 reais profit from this month’s onion harvest and about 10,000 reais from his soybeans in April. The onions haven’t gotten enough rain; he may get half the crop he’d hoped for.

He’s just as concerned about controlling the growth of his costs -- and his debt.

“It’s like a snowball,” Klemba said. “If you let it grow too much, you’ll never be able to pay back.”

(Recipe for Famine: Part 2 of 7.)

To contact the reporters on this story: Alan Katz in Paris at akatz5@bloomberg.net; Carlos Caminada in Sao Paulo at caminada1@bloomberg.net.

Last Updated: December 9, 2008 00:01 EST