Competition Bureau statement regarding sale of Agri-Products business to Agrium

OTTAWA, September 5, 2013 — The Competition Bureau announced today that, following a review of Agrium Inc.’s (Agrium) proposed acquisition of approximately 210 of Viterra Inc.'s (Viterra) crop input retail stores from Glencore International plc (Glencore), it has reached an agreement with Agrium that preserves competition for the sale of nitrogen fertilizers in Alberta and Saskatchewan. The Consent Agreement has been filed with the Competition Tribunal.

Agrium (under the CPS banner) and Viterra operate retail stores in Western Canada that sell crop inputs to farmers, including urea and anhydrous ammonia (two forms of nitrogen fertilizer), as well as seed, pesticides and other fertilizers.

Under the terms of the Consent Agreement, Agrium must divest the following retail stores:

  • CPS Bow Island, AB
  • CPS Eaglesham, AB
  • CPS Lacombe, AB
  • Viterra Alix, AB
  • Viterra Alliance, AB
  • Viterra Edenwold, SK
  • Viterra Vauxhall, AB

In addition, Agrium must divest the anhydrous ammonia businesses associated with the following locations:

  • CPS Canora, SK
  • CPS Kinistino, SK
  • CPS North Battleford, SK
  • CPS Prince Albert, SK
  • CPS Yorkton, SK
  • Viterra Camrose, AB
  • Viterra Craddock, AB
  • Viterra Cudworth, SK
  • Viterra Medicine Hat, AB

As Agrium is the largest manufacturer of urea and anhydrous ammonia in Western Canada, the Bureau also considered potential vertical issues stemming from the proposed transaction. The Bureau had concerns about the ability of retailers to source anhydrous ammonia from a concentrated manufacturing industry. For this reason, Agrium has also agreed to supply anhydrous ammonia to any purchaser of the divested assets for up to four years at prices not to exceed those charged to its retail outlets in Alberta and Saskatchewan.

In reaching its conclusions in this matter, the Bureau considered information provided by hundreds of market participants, provincial and federal government departments, industry experts and associations; conducted in-person interviews and facility tours in markets of potential concern; reviewed documents provided by the parties and third parties; and analyzed large volumes of industry financial and transaction level data.

This statement summarizes the approach taken by the Bureau in its review of the proposed transaction.Footnote 1

Proposed transaction

On December 17, 2012, Glencore acquired Viterra, before which time Glencore had no significant assets in Canada. Viterra was a Canadian business engaged in the handling, processing and marketing of grain, as well as the sale of crop inputs. This transaction was reviewed by the Bureau and the Commissioner issued a No Action Letter on May 3, 2012, indicating that he did not, at that time, intend to make an application under section 92 of the Competition Act.Footnote 2

The proposed transaction involves the sale of the majority of Viterra’s retail network in Western Canada to Agrium, including:

  1. approximately 210 of 253 retail stores;
  2. three dry fertilizer storage facilities;
  3. a seed research and development unit;
  4. an interest in a crop protection manufacturing business; and
  5. a farm fuel business.

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Competitive effects analysis

The Bureau’s review focused on whether the proposed transaction would provide Agrium (or CPS) with enhanced market power in the retail supply of crop inputs, in particular, urea and anhydrous ammonia, to farmers. The Bureau's review focused on the retail supply of urea and anhydrous ammonia given the few remaining competitors, the barriers to entry and the significant concern expressed by market participants regarding the retail supply of these products.

After extensive consultation with market participants, the Bureau determined that there are separate product markets for the retail supply of urea and anhydrous ammonia. Though both are nitrogen fertilizers and functionally substitutable, there are switching costs and physical characteristics that make it necessary to define separate markets for these products. Farmers typically cannot switch between urea and anhydrous ammonia without incurring a significant loss in efficiency or investing in application and storage equipment. As a dangerous good, anhydrous ammonia also has additional safety risks that are unacceptable to some farmers.

The Bureau also found that the geographic scope of these markets is local. Most retail sales of urea and anhydrous ammonia occur within a 35 km radius of a store. Transportation costs are high for urea because of its low price to weight ratio, and are also high for anhydrous ammonia because it is a dangerous good that must be transported in specialized equipment. As both products are used in narrow windows in the spring and fall, there are also opportunity costs associated with the time required to transport product from a retail store to the farm.

Though farmers can build on-farm storage allowing them to purchase urea from further away during the off season, this can be expensive and most farmers are reluctant to purchase their total urea requirements in the event seeding plans change due to a shift in commodity prices or a change in the weather. Anhydrous ammonia, given its hazardous nature, cannot be stored on a farm.

The Bureau determined, based on information from the following sources, that the parties were particularly close rivals and Viterra was an effective and vigorous competitor with respect to the retail supply of urea and anhydrous ammonia:

  1. extensive interviews with individual producers, industry associations and competitors;
  2. the parties’ internal executive and retail management documents and communications; and
  3. transaction level sales data from all Agrium and Viterra retail stores.

The Bureau noted a number of barriers to entry for the retail supply of urea and anhydrous ammonia. For a retail store to effectively carry and sell urea, significant capital expenditures must be made for storage and a high speed blender. Farmers typically require urea to be blended with other types of fertilizer. To offer anhydrous ammonia, a retail store must buy or lease a bullet tank and acquire a fleet of "rolling stock" to deliver and apply the product. Farmers rarely own the specialized equipment to transport anhydrous ammonia from a retail store to their farm and they often rent application equipment from retail stores. In addition to significant capital costs, it can be difficult for retailers to source urea and anhydrous ammonia reliably and affordably from suppliers, as these products are normally in tight supply because of their highly seasonal use and a concentrated manufacturing industry. Lastly, the agricultural industry is mature, with the total number of farmers and seeded acres either flat or on the decline. As a result, any entrant must gain its market share at the expense of incumbent rivals.

The Bureau found a number of national, regional and local competitors that could act as effective remaining competition in certain local markets. Market contacts were made to determine if an alleged competitor location offers, or is poised to offer, urea or anhydrous ammonia.

The Bureau reviewed each of the 40 local markets where the parties’ overlapped in the retail supply of urea and anhydrous ammonia. Using sales information obtained from the parties and third party competitors, the Bureau identified a number of markets with high concentration. Market contacts were made to customers and competitors in each of these local markets to assess the competitive landscape and the potential effects of the proposed transaction.

The Bureau concluded that the proposed transaction would lead to a substantial lessening or prevention of competition in the retail supply of urea or anhydrous ammonia in a number of local markets in Alberta and Saskatchewan. The Bureau believes that the Consent Agreement entered into with Agrium to divest seven retail stores, as well as nine anhydrous ammonia businesses, resolves these concerns.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.

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