World wheat and coarse grain production is expected to decline by 4.5 percent during the 2012/13 crop year, due to severe drought in the US and adverse growing conditions in many other countries, such as Russia, Ukraine and Australia. Consumers in nearly all parts of the world have been forced to reduce consumption to ration available supply. As a result, global grain consumption is projected to decline by 2 percent, only the sixth time in 40 years that use has fallen. Despite this rationed demand, production is expected to fall short of consumption by more than 40 million tonnes.
The projected production shortfall in the 2012/13 crop year will increase the pressure on already tight global stocks. In almost all regions, stocks-to-use ratios are well below the 25-year average. The reduction in stocks is most evident in North America and Europe as a result of relatively stagnant production over the past few years. The failure of production to keep pace with rapid growth in demand has drawn down stocks in major consuming countries in Asia. These tight stock levels leave limited margin for error in the coming growing season and we believe many years of excellent crop production will be required to rebuild inventories to more comfortable levels.
Prices for most crop commodities have responded to tight supply/demand fundamentals and are trading well above historical levels. Corn and soybean prices have moved down from records set in August but remain historically strong. The condition of the South American crop and demand prospects will be key market drivers over the next few months . Wheat markets have remained strong, supported by reduced supply from most major export regions and adverse conditions for the recently planted US winter crop. Prices for sugar and palm oil have been under some pressure in the second half of 2012 due to a rise in inventories in major producing countries. With strong demand expected, Rabobank forecasts palm oil could be the top performing crop commodity in 2013. The near-term outlook for sugar is more uncertain, but one positive factor would be a potential move by the Brazilian government to increase the mandatory anhydrous ethanol blending level to 25 percent from 20 percent.
The rise in prices for crops such as corn has not been matched by an increase in retail fertilizer prices. We believe this has further enhanced the affordability of fertilizer. Based on current retail fertilizer prices and USDA projections for costs of other key crop inputs, we expect crop returns in 2013 will be well above the historical average. We believe this will support fertilizer application rates in the US and in key agriculture regions around the world.
The three exporting regions depicted in the chart account for almost two-thirds of global ammonia trade and 70 percent of seaborne trade. In 2012, supply-related issues limited exports from each of these regions, which has resulted in a tight global market through the second half of the year. Trinidad ammonia production has been impacted by gas supply-related curtailments that peaked in September. The reduction in Middle East exports is primarily associated with Iran’s limited ability to obtain marine vessel insurance. High-cost producers in the former Soviet Union were forced to curtail production in the first half of 2012, resulting in lower export availability from this region. Looking ahead to 2013, we expect supply issues could persist in several key exporting regions, which could keep the ammonia market tight to balanced.
Global supply issues have affected the availability of ammonia for the US market in 2012 and imports are down 11 percent, contributing to a relatively tight domestic market. Urea imports failed to meet market requirements at the end of 2011 and early in 2012, which is one of the factors that contributed to a surge in prices during the spring. Since that time, imports have risen significantly and are now up 11 percent compared to 2011. We believe this increased level of imports will be required to meet projected demand and could prevent the kind of volatility seen during the 2012 spring season.
China’s urea exports rose sharply during the low export tax season from July through October 2012. The export level surprised many market observers and had a softening impact on the global market. Exports could exceed 5 million tonnes in 2012 compared to less than 4 million tonnes in 2011. China continues to build new world-scale urea capacity that will eventually replace small, inefficient nitrogen capacity. However, its level of annual exports will remain an uncertain factor in global trade as this transition occurs.
US DAP/MAP production is down 8 percent in 2012 due to phosphate rock supply issues and increased production of specialty phosphate fertilizer products. The constraint on production has resulted in tight inventories through most of the year. They are currently down 24 percent year over year and 26 percent below the five-year average.
US DAP/MAP producer sales to the domestic market have increased by 5 percent in 2012. Domestic shipments in the second half have been supported by limited distributor inventory following the spring season and the expectation of healthy application rates in the fall. With offshore markets relatively quiet during the final few months of the year, the US market has been one of the strong spots for global demand.
Global potash demand is expected to fall from 55.5 million tonnes in 2011 to a range of 50-52 million tonnes in 2012. The primary drivers of the reduction are reduced demand from India and inventory destocking in most major markets. Global consumption is projected to be similar to 2011 and could exceed shipments by approximately 3 million tonnes, leading to a significant drawdown in distributor inventories.
Following a very slow start to the year, domestic sales by North American potash producers have accelerated in the second half. The increase in demand is driven by limited distributor inventory carried into the second half, reduced offshore imports and a strong fall application season. Despite the increase in domestic shipments, we believe dealers will cautiously manage inventory levels through the end of the year.
We anticipate record global consumption of potash in 2013, driven by agronomic need and the economic incentives in place today. We believe inventories in most major markets will be well below year-end 2011 levels, supporting a more robust start to the year in all major markets. This includes the North American market where we anticipate shipments approaching historical averages, which would represent an increase of more than 1 million tonnes from 2012. India remains the major source of market uncertainty; however, we do expect demand to improve in this market to meet the agronomic needs of its crops and soils. Based on these factors, we see the potential for record global potash shipments and increased operating rates in 2013.
Latin American countries are significant producers of livestock and milk. Brazil is the largest producer in the region, followed by Argentina and Mexico. A large proportion of Latin American beef is grass-fed whereas beef in North America is typically finished on grain. Most poultry and pork are produced in large barns to take advantage of economies of scale. We anticipate Latin American demand for feed grain will continue to rise as livestock production grows and more animals are fed with grain.
Latin America grows a diverse range of crops and is a major global producer of coffee, sugar, soybeans and corn. As the leading coffee producer, the region has about 60 percent of world production, as well as approximately half of the soybeans and sugar. Brazil is a powerhouse at producing agriculture commodities. Argentina, Mexico and Colombia are the other large crop producers in the region. They have relatively fertile soils and a good climate, so investment is growing and more land is being cultivated.
Several countries in this region are stepping up their crop production efforts to meet the growing global demand for corn and soybeans. Latin America’s corn exports now exceed 40 percent of global trade, and its soybeans nearly 60 percent of world trade. Brazil is projected to be the world’s largest soybean exporter in 2012/13 and has recently surpassed Argentina as the second largest corn exporter due to growth in its safrinha crop.
Latin America is one of few regions able to add crop acreage, mainly by expansion in Brazil’s nutrient-hungry Cerrado region. Rising global food demand has given farmers the incentive to bring some of this land into production. As a result, harvested area has increased by almost one-third in the last 20 years and is projected to expand by nearly 10 percent in the next decade. However, bringing this product to market requires significant transportation infrastructure. Brazil currently relies heavily on roads and some rail to move product to its ports for the export market. This adds significantly to the cost of exporting grain and is a major disadvantage compared to the US, which benefits from established river and rail infrastructure.
Brazil’s Cerrado region represents a unique opportunity for global agriculture. To unlock its vast potential, roads and rail lines must be improved to move resources into and out of the area more economically. Numerous northern corridor projects are underway and some are expected to be ready soon. Recent investment in road and waterway development en route to ports at Santarem and São Luis is expected to reduce transportation costs over time for growers in this region. A R$ 10 billion railroad project linking southeastern Mato Grosso and Santarem has been proposed with the potential support of Chinese construction companies. The challenge is overcoming political infighting and environmental concerns that have consistently delayed projects in the past.
Although variable costs and fixed costs of production, including land, are lower in Brazil than in the US Midwest, higher freight costs in newly developed areas make the South American giant a high delivered cost corn and soybean producer. We believe production from these higher-cost regions will be required to meet growing demand. Therefore, we expect crop commodity prices will reflect the need to incent investment and production.
The diverse climate and cropping mix in South America mean a planting season occurs at most times throughout the year. The planting season for both soybeans and first-season corn is September-December, and the soybean planting season begins on September 15 or at the end of the 90-day soybean-free period in central Brazil. This 90-day period has been enforced by most states as a way to prevent rust spores surviving from season to season. Corn is planted during two seasons. Summer or first-season corn is planted in southern Brazil from early September to December, and the second-season corn from January through mid-March. The bulk of the planting of corn and soybeans in Argentina occurs between early September and December. Sugar cane is a semi-perennial crop that can be cut without replanting for five to seven consecutive annual harvests. In the center-south of Brazil, which produces almost 90 percent of its sugar cane, the harvest normally lasts eight months from April through November.
Planting progress in Argentina has been on average about 12 percent behind last year’s pace for soybeans and corn due to wet weather in key growing regions. Argentine farmers started seeding soybeans in November although not all the corn had been planted. They do not like to plant corn during November because that would result in pollination occurring during the hottest time of the year. USDA forecasts over 2 million more hectares of soybeans than last year, and the delay in corn planting could result in even more acres switched to soybeans.
The planting season in central Brazil got off to a slow start but the rains have returned and the pace of soybean and corn sowing has improved significantly. In parts of the region, some soybean fields need to be replanted due to poor germination. The southern part of Brazil started the planting season with good moisture conditions but recent dryness has raised concerns about yield potential. More than half of Brazil’s corn crop will be safrinha corn planted after the soybeans are harvested. It is possible that this corn will be sown toward the end of the planting window due to delayed soybean seeding. That would certainly be the case if wet weather delays the soybean harvest during January. Safrinha corn production is a risky proposition; it is highly dependent on when the rainy season ends. If the corn is planted later than normal and the rains end earlier than usual, yields would be negatively impacted.
Brazil’s safrinha corn crop has risen in importance and now rivals the first crop in overall production. The Mato Grosso Institute of Agricultural Economics estimates that farmers in the state will plant 2.7 million hectares of safrinha corn, or 34 percent of the 7.9 million hectares of soybeans there. The greatest concentration of safrinha corn is in the north-central region of the state where 50 percent of the soybeans are followed by a second crop of corn. Farmers have one major consideration in planting a second corn crop: the first crop of soybeans must be early maturing varieties that can be harvested during January. However, January is the peak of the rainy season and harvesting soybeans can be difficult then. If a farmer planted only early maturing soybeans, the entire harvest could be at risk if there was an extended period of rainfall during harvest. Nonetheless, because of the economic incentives in the current corn market, we anticipate continued growth in second corn crop.
As well as growing crops for food, Brazil started a profitable ethanol industry more than 30 years ago, creating opportunities for sugar cane farmers. Ethanol now makes up about half of the gasoline consumed by the country’s cars. More than half of its sugar cane crop is used to produce ethanol, and rising demand for the fuel is expected to increase demand for sugar by almost 40 percent over the next five years. Since sugar cane consumes around twice as much potash as corn, this rising demand will greatly impact Brazil’s need for potash.
Crop production in Latin America has risen dramatically over recent decades. As world demand for grains and oilseeds has increased, the region has brought new land into production and become a major exporter. The top three crops grown in Latin America are corn, soybeans and sugar, and their production is expected to continue to increase, which is supportive of rising fertilizer consumption. Brazil is the single largest fertilizer consumer in Latin America, accounting for approximately 60 percent of total consumption in this region.
Fertilizer demand in Brazil has been steadily growing over the past decade, averaging nearly 5 percent per year. Brazil is one of the few countries in the world that consumes more potash than nitrogen due to its cropping mix (large soybean area) and potassium deficient soils. Consumption in other Latin American countries has grown at a relatively steady pace of 3 percent per year. Corn is the most widely cultivated crop in these countries, but there is extensive production of other crops with high fertilizer requirements, such as coffee, sugar cane, cocoa, oil palm and bananas. The increasing world demand for the crops grown in the region and supportive economics encourage fertilizer consumption.
Fertilizer consumption has increased tremendously in Latin America for more than two decades. Potash consumption has more than doubled and imports must supply more than 80 percent of regional requirements. With demand for crops rising and limited opportunity to expand domestic potash supply, Latin America will continue to depend heavily on imports. Both imports and domestic production supply the region’s rising phosphate demand. Brazil is the largest producer and importer of phosphate in the region. Latin America imports more than two-thirds of its nitrogen fertilizer requirements as domestic production has not been able to keep pace with rapid growth in demand. New capacity is expected to come online in the region but the magnitude and timing could be impacted by natural gas supply issues and political uncertainty in countries such as Argentina, Brazil, Venezuela and Peru.
Brazil is the largest nitrogen consumer in Latin America and also the number one consumer of urea. With little domestic capacity, it imports more than three-quarters of its nitrogen fertilizers, mainly from former Soviet Union producers. Urea demand in Brazil is expected to continue to grow in the medium term and some of this is expected to be met by new domestic production.
Brazil is the world’s second largest importer of phosphates and consumes a diverse range of phosphate products. While imports have remained strong, domestic capacity has been added to help keep pace with growing demand. Total phosphate fertilizer demand is forecast by CRU to exceed 6 million tonnes by 2017 and domestic production capability is expected to grow in response to this need. Brazil now has a total phosphoric acid capacity of 1.5 million tonnes P 2 O 5 and 1.6 million tonnes P 2 O 5 in granulation capacity. Four new projects are being proposed and these potential capacity expansions could increase acid and granulation capacity to 2.5 million tonnes P 2 O 5 and 2.6 million tonnes P 2 O 5 respectively by 2017.
As the leading agricultural market in Latin America, Brazil accounts for around three-quarters of the region’s potash consumption. Given its use of modern agronomic practices, it mainly purchases granular product. Potash is imported primarily by private companies, with two-thirds of the total entering through the ports of Paranagua and Santos. Most potash is shipped to warehouses or bulk blending facilities in central and south/central Brazil, the key soybean and corn production areas.
Latin American potash demand followed a strong upward trend until the economic downturn that began in late 2008. Demand declined drastically in 2009 but strongly rebounded thereafter, supported by robust crop returns and low distributor inventories. Latin America was a region of strength for potash in 2012 and we expect the strong historical rate of growth in demand to continue in the years ahead.
Brazil is on course for record fertilizer consumption in 2012, surpassing the previous high of 28.3 million tonnes in 2011. According to the latest data from Brazil’s National Fertilizer Distributors Association (ANDA), overall deliveries of all fertilizers to end consumers reached 24.8 million mt from January through October, 4 percent higher than in the same period of 2011. Port congestion and logistical issues have been the key constraints. In our view, these issues should support a push to distribute shipments more evenly through the year as these infrastructure issues are not likely to be quickly resolved.
Forward-looking StatementsThis presentation contains forward-looking statements or forward-looking information (forward-looking statements). Thesestatements can be identified by expressions of belief, expectation or intention, as well as those statements that are nothistorical fact. These statements are based on certain factors and assumptions including with respect to: foreign exchangerates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates.While the company considers these factors and assumptions to be reasonable based on information currently available,they may prove to be incorrect. Several factors could cause actual results to differ materially from those expressed in theforward-looking statements, including, but not limited to: variations from our assumptions with respect to foreign exchangerates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates;fluctuations in supply and demand in the fertilizer, sulfur, transportation and petrochemical markets; costs and availabilityof transportation and distribution for our raw materials and products, including railcars and ocean freight; changes incompetitive pressures, including pricing pressures; adverse or uncertain economic conditions and changes in credit andfinancial markets; the results of sales contract negotiations with major markets; economic and political uncertainty aroundthe world, including the European sovereign debt crisis; timing and impact of capital expenditures; risks associated withnatural gas and other hedging activities; changes in capital markets and corresponding effects on the company’sinvestments; unexpected or adverse weather conditions; changes in currency and exchange rates; unexpected geologicalor environmental conditions, including water inflows; imprecision in reserve estimates; adverse developments in new andpending legal proceedings or government investigations; acquisitions we may undertake; strikes or other forms of workstoppage or slowdowns; changes in, and the effects of, government policies and regulations; security risks related to ourinformation technology systems; and earnings, exchange rates and the decisions of taxing authorities, all of which couldaffect our effective tax rates. Additional risks and uncertainties can be found in our Form 10-K for the fiscal year endedDecember 31, 2011 under the captions “Forward-Looking Statements” and “Item 1A – Risk Factors” and in our other filingswith the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forward-lookingstatements are given only as at the date of this presentation and the company disclaims any obligation to update or revisethe forward-looking statements, whether as a result of new information, future events or otherwise, except as required bylaw.
Presentation Overview• World Agriculture and Fertilizer Market Update• Latin America Agriculture Market Review• Latin America Fertilizer Market Overview
Latin America Animal Protein ProfileLarge Producer and Exporter of Major Livestock Products Percentage of World Production Percentage of Regional Production Source: FAO, USDA
Latin America Crop Production ProfileLeading Producer and Exporter of Major Crops Percentage of World Crop Production Percentage of Regional Production Source: FAO, USDA
Latin America Soybean and Corn Export ProfileRising Demand for Food Shows Latin American PotentialLatin America Soybean Exports Latin America Corn Exports Million Tonnes World Trade Share Million Tonnes World Trade Share Based on crop year data. For example, 2012F refers to the 2012/13 crop year. Source: USDA
Brazil and US Infrastructure ProfileNew Land Requires Development and Marketing Infrastructure InvestmentsBrazil’s Infrastructure Burden US Infrastructure Advantage Water RoadRail Rail Road Water Brazil’s freight costs from US$ 80 to US$ 160 per tonne to move US freight costs range from US$ 30 to US$ 40 per tonne to move soybeans from the Mato Grosso to the southern ports. soybeans from the Midwest to Gulf ports. Source: Macquarie Research, USDA
Mato Grosso Infrastructure DevelopmentsSignificant Investments Expected to Improve Competitiveness Source: El Tejar, ANDA, Google Maps
Corn and Soybean Cost CurvesBrazil Is a High-Cost Corn and Soybean Producer Due to Infrastructure BurdenFOB Corn Cost Curve FOB Soybean Cost Curve US$/bushel US$/bushel Source: USDA, CONAB, Macquarie Research
South American Crop Calendar Crop Production Activity Occurs During Most of The Year - Planting - Pollination - Maturing - Harvest Sep Oct Nov Dec Jan Feb Mar Apr May Jun JulArgentinaWheatEarly CornLater Corn1st Soybeans2nd SoybeansBrazilNorth East CornCentre-South Safra CornCentre-South Safrinha CornSoybeans Source: USDA, Rabobank
Crop Producing Regions – ArgentinaCrops Are Primarily Produced in the Northern/Central ProvincesSoybean Growing Regions Wheat Growing Regions Corn Growing Regions Source: USDA
Crop Producing Regions – BrazilCrops Are Produced Across Many States Under a Wide Range of ConditionsSoybean Producing Regions Sugar Producing Regions Corn Producing Regions Source: USDA
Brazil Corn ProductionThe Second Crop Is No Longer Safrinha “Small Harvest” Million Tonnes Source: USDA
Brazil’s Sugar Cane Industry Rising Demand for Fuel and Food Expected to Support Cane Production Corn vs Cane Debate Cane Used In Ethanol and Sugar Characteristic Million Tonnes Brazil USFeedstock Sugar Cane CornTotal ethanol fuel production 5,573 13,900Total area used for ethanol crop (2006) 3.6 (1% of Arable) 10 (3.7% of Arable)Productivity per hectare 6,800-8,000 3,800-4,000Energy balance 8.3 to 10.2 1.3 to 1.6Estimated GHG emissions reduction 86-90% 10-30%EPAs estimated 2022 GHG reduction for RFS2. 61% 21%CARBs full life-cycle carbon intensity 73.4 105.1Estimated payback time for GHG emissions 17 years 93 yearsTotal flex-fuel vehicles produced/sold 16.3 million 10 millionEthanol fueling stations in the country 35,017 (100%) 2,326 (1%)Ethanols share in the gasoline market 50% 10%Cost of production (USD/gallon) 1.75 2.48 Source: PIRA, FO Litcht, USDA, PRX,
Latin America Fertilizer Consumption Corn, Soybeans and Sugar Account for Majority of Fertilizer Consumption Fertilizer Consumption by Crop Fertilizer Consumption by Region Other All Other Crops Corn Chile ColombiaCotton ArgentinaWheat Fruits & Mexico Brazil Vegetables Soybeans Sugar Crops Source: IFA, Fertecon
Latin America Fertilizer ConsumptionStrong Consumption Growth in Most Countries Brazil Fertilizer Consumption Other Latin America Fertilizer Consumption Million Nutrient Tonnes Million Nutrient Tonnes Source: Fertecon
Latin America Fertilizer Consumption ProfilePotash Consumption Met Primarily by ImportsNitrogen Phosphate Potash Million Tonnes N Million Tonnes P2O5 Million Tonnes K2O Source: Fertecon, PotashCorp
Brazil Nitrogen Market Profile FSU Is the Major Supplier to Brazil Brazil Urea Import Profile, 2011 Brazil Urea Consumption Million Tonnes Product Other Qatar OmanArgentina Ukraine Egypt Russia 2011 Imports – 3 million tonnes Source: Fertecon, Potafertz, PotashCorp
Brazil Phosphate Market ProfileRising Domestic Production and DemandBrazil Phosphate Operations Brazil Phosphate Fertilizer ConsumptionRising Domestic Production and Demand Million Tonnes P2O5 Source: CRU, Fertecon, PotashCorp
Brazil Potash Market ProfileConsumption Is Concentrated in Cerrado AreaPotash Imports by Port, 2011 Brazil’s Potash Consumption by State Source: CRU, ANDA, PotashCorp
Latin America Potash Demand Growth PotentialExpect Significant Growth in Potash Demand Million Tonnes KCl Source: Fertecon, PotashCorp
Brazil Fertilizer Deliveries to End ConsumersTotal Fertilizer Deliveries Remain Robust in 2012 Monthly - Million Tonnes Cumulative - Million Tonnes Source: ANDA
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