Potash Corporation of Saskatchewan Inc. Q4 2009 Earnings Call Transcript

 |  About: Potash Corporation of Saskatchewan Inc. (POT)
by: SA Transcripts


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Potash Corp. fourth quarter and year-end earnings conference call. At this time, all call in participants are any a listen-only mow. Following the presentation, we will conduct a question-and-answer session. (Operator instructions) I would like to remind everyone that this conference call is being recorded on Thursday, January 28th, at 1 p.m. Eastern Time.

I will now turn the conference over to Denita Stann, Senior Director, Investor Relations Please go ahead.

Denita Stann

Thanks, Bob. Good afternoon everyone. Thank you for joining us and welcome to our fourth quarter and year-end earnings call. In the room today with us, we have Bill Doyle, our President and CEO. Wayne Brownlee, our Executive Vice President and Chief Financial Officer, Jim Dietz, Executive Vice President and Chief Operating Officer, Joe Podwika, Senior Vice President and General Council, Garth Moore, President of PCS Potash, Tom Regan, President of PCS Nitrogen and Phosphate and David Delany, President of PCS Sales.

I'd like to welcome the media who are listening in and remind people that we are live on our web site. I would also like to remind everyone that today’s call may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in formulation of such statements and actual results could differ materially. For additional information with respect to forward-looking statements, factors and assumptions, we direct you to our news release and on recent Form 10-K also today's news release which is posted on our website includes a reconciliation of certain non-GAAP financial measure to the most directly comparable GAAP measure.

I'll turn the call over to Bill Doyle for some comments and we'll go to questions following that.

Bill Doyle

All right. Denita, thank you and good afternoon everyone and welcome to this call. We appreciate the opportunity to discuss Potash Corp’s I fourth quarter and 2009 performance and outlook for 2010. We appreciate the opportunity to share our views and a very difficult year which is now behind us and more importantly, on our preparations for new phase of growth for the years ahead.

The challenges faced on farmers distributors and fertilizers producers in 2009 have been well-documented. The onset of a global economic crisis late in 2008 brought an overwhelming sense of caution to almost every industry and ours was no exception. Farmers reduced fertilizer applications and distributors worked through their inventories bringing producer sales to a virtual standstill.

As a result, our 2009 Potash volumes were the lowest in our 20 years as a public related – public traded company. And averaged realized prices for all nutrients, especially phosphate and nitrogen declined significantly from 2008 levels. Our fourth quarter earnings of $0.80 per share were down from 256 per share in the final quarter of 2008. This brought our full-year earnings to $3.25 per share, considerably lower than the record 11.01 per share earned in 2008, but it was still the third highest total in our history.

Our quarterly gross margin $279.6 million was well below the $87301 generated in the fourth quarter 2008. While the full year total of $1 billion was down from a record $4.9 billion for the previous year. Potash remained a key to our gross margin generating 74% of the quarterly totals and 71% for the year.

Earnings before interest, taxes, depreciation and amortization and cash flow also declined on a quarterly an annual basis. While we did not meet the expectations established over the previous five consecutive years of record performance, we believe we made the right decisions to ensure long-term value for our shareholders.

We remained fully committed to our strategy of matching or Potash production to market demand which meant running 30% of our operational capability in 2009. In an environment of reduced demand, we chose to preserve our assets, confident that this approach will be rewarded as market conditions improve. The Gridlock had tied up our industry much of 2009 clearly began to lift in the fourth quarter. We recognized this would inevitably come to pass as your business is driven a simple truth.

Fertilizer use can be deferred as we saw in 2009, but it cannot be ignored indefinitely without damaging global food production. The nutrients in the world's food fly come from the soil. And in 2009, farmers in many parts of the world harvests much larger volumes of nutrients then they replaced through fertilizer applications. This practice is simply unsustainable, especially in view of the long-term fundamentals that drive our business.

Global population continued to increase primarily in countries like China and India, countries that also demonstrated economy has still continued growth in 2009. With growing populations and more money comes increased demand for more and higher quality food. An increasing number of people in developing nations want and can afford better diets with better more fruits, vegetables and protein from animal sources, which takes more grain to produce.

No one should mistake a financial recession for a food recession. Despite the economic challenges of 2009, global grain consumption grew by another 2%, continuing the long-term pattern of growth that has been established over decades.

Farmers now need to produce near record crops every year. Just to keep pace with the world's rising food requirements. This cannot be achieved if it continues strong nutrients from the soil without replacing them. In 2009, global crop production fell short of previous record harvests. A product of reduced fertilizer use and less than perfect whether in some parts of the world.

As a result, prices for crop commodities remain substantially above historical averages. With corn, soybeans, rice, palm oil and other key food staples all improving during the fourth quarter. This had a significant impact in many countries, as food inflation continues to be a major focus for governments, farmers and consumers.

Earlier this month, government officials in India raised concerns that average food prices increased more than 15% from one year ago with some items jumping nearly 50%. In China, there are indications that current corn crop may not be as large that large as that is expected which could be a factor in rapidly rising corn prices in that country.

Domestic production is generally more affordable than imported food and to avoid greater reliance on imports, farmers in these countries and their governments must pay close attention to soil fertility. It is basic facts when you grew crops you owe a debt to the soil. In many regions, that nutrient debt grew larger in 2009. Now, farmers must begin the process of replenishing nutrients to protect the most valuable assets on their farm, their soils. This is especially true of Potash, the nutrients that has the greatest impact on food quality.

Potash was historically under applied as developing countries were unfamiliar with the benefits of balanced fertilization and lack of the economic ability to address nutrient deficiencies in their soils. In recent decades, fertilizer education has improved and farmers can afford to purchase all three nutrients.

Most importantly, people in developing countries have higher incomes and have an expectation of a more nutritious diet. More fertilizer and specifically more potash must be applied to meet the demand for high quality food. This is supportive to our business and gives us renewed optimism heading into 2010. We expect this year will mark the transition between the historically low levels of 2009 and return to trend line demand in 2011.

However, it is important to understand that global agriculture is a big machine. And it takes time to get all the gears fired up after, over a year at a near standstill. As farmers reengage and focus on yields, they drive the need for distributors to access product. If their wheels get turning, they'll look to producers with growing needs. And we will be ready with our increased production capability. Right now, there are large voids in the nutrient chain, especially for potash. Filling the gaps in the soils and in the distribution system, will take time.

North American farmers took the first step, returning to the market in the fourth quarter of 2009, despite a limited window for fall applications because of the late harvest. With better crop economics and lower prices for inputs, including fertilizer, the caution that characterized the first nine months of 2009 was replaced by optimism. US dealers are once, again, booking orders and we anticipate North American demand in 2010 to be in the range of eight and a half to nine and a half million tons.

In natural markets countries are reengaging according to their current needs and confidence in market conditions. With recent re-calibrations to spot market and China settlement with a major supplier on new potash contract in late December, distributors see limited downside pricing risk and pen up demand. In India, there's increased need for potash because of the poor nutrient balance in the soil, and crop production fell well short of anticipated levels in 2009. Given their low inventories. We expect Indian buyers to resume potash imports under a new contract in the first half of 2010, purchasing volumes of 5.5 to 6.5 million tons from international producers. Their volumes however are contingent upon their commitment to a new contract, around or before the expiration of their current contract at the end of March.

With support of farmer economics and depleted inventory, we expect Brazil to import five and a half to six and a half tons of potash depending on economic conditions and access to credit while Southeast Asia is expected to require 4 million to 5 million tons.

In China, the question is how quickly farmers return to the market. The risk related to production rise every planting season that potash is not sufficiently used relative to nitrogen and soils there have already been depleted for two consecutive years. The need to increase crop production and return to proper application levels is clear. In 2010 potash consumption is expected to rebound from the low levels of the last two years. We currently estimate China will consume 8 to 9 million tons of potassium chloride and require four and a half to 5 million tons of imports.

However if recent potash price reductions lead farmers to reengage more quickly, buyers could come back to the market for additional volumes later in 2010. Combined, we estimate global potash shipments will reach approximately 50 million tons this year, up from less than 30 million tons in 2009. This increase is almost entirely related to required applications rather than a restocking of inventories. We expect demand to return to trend line in 2011 including moving even higher is farmers and distributors reach the stage of rebuilding reserves in the soil and distribution channel. When this unfolds, we expect to gain a disproportionate share demand growth for potash and capture higher margins. Customers have not forgotten that prior to the economic crisis, supply, demand fundamentals were extremely tight.

In many markets buyers were on allocation as the industry could not keep pace. Prices rose rapidly, and although they were reset in 2009, they remain at historically high levels. The experience of short supply and rapid price spikes help fertilizer buyers, farmers and even producers gain a better understanding of the need for capacity re-investment; that financial commitment however can only happen when returns support the cost of capital. Although a number of brown field expansions were announced in recent years, the sharp decline in demand led some projects to be put on hold.

At Potash Corp we have continued work on all of our projects and Saskatchewan and New Brunswick and these expansions represent the largest portion of new global production scheduled to come on extreme over the next several years. When fully operational, we expect to have capacity of 18 million tons. Roughly double our operational capacity when we started these projects seven years ago. Even with the resetting of potash prices in 2009, our brown field projects remain economically attractive. Longer term, Greenfield development will be necessary. But right now, we don't believe prices justify that type of investment.

At the current time, we believe the best use of our capital is to invest in our existing operations where capacity can be added more quickly and at a fraction of a cost of Greenfield development. We also look for strategic opportunities to expand our global reach in potash. This week, we purchased an additional 1% of Israel Chemicals Limited bringing our total interest in this potash producer to approximately 12.5%. We are committed to our potash for strategy and will keep our focus on maximizing long-term shareholder value.

As we look ahead, we expect our 2010 net income to be in the range of $4 to $5 per share, including $0.70 to a $1.00 per share in the first quarter. More importantly, we expect to see the efforts of farmers, distributors, and our company aligning once again in 2010, returning the world focus to the pressing issue of food production. Thank you for your interest in Potash Corporation. I'm joined today by members of our executive management team and we'll be pleased to answer any questions that you might have.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (Operator instructions) First question today come from Vincent Andrews of Morgan Stanley.

Vincent Andrews – Morgan Stanley

Good afternoon you and everyone. Bill, I wonder if you can give us an update on where Kappa tests with China in terms of its negotiations?

Bill Doyle

All right, Vincent. Kappa tests will have its next meeting with the Chinese next week and – we don't know exactly what the outcome of that will be at this time. I could comment by saying that we believe that the BPC settlement with China was too low in our opinion. To tie in this pricing level for the whole year, would have been a mistake for us. This element definitely came as a surprise to us, because it was way below market and did not reflect the recovery that we see in 2010.

If you look at BPC – their history they've proved to be a bit of a panic seller. They are basically inexperienced marketers and, they have panicked in both directions. They pushed the price too high in 2008 and now too low with this settlement. So we didn't think much of that and that's quite obvious with our position. We do see our issues with China being short-term in nature. China's potash consumption will start to recover this year, but it will grow considerably in 2011 and beyond. China will be at least 75% dependent on imports of potash going forward and will need our new capacity to fill their needs in the not too distant future. The International Plant Nutrition Institute, by the way, forecasts China potash consumption to grow from the current normal level of what they say is 10 million tons a year even though that – it's been about half of that the last two years to 26 million tons over the next 15 years, so growth of 16 million tons from a normal consumption year. So part of our strategy, you've heard us talk about it before, just to transition to quarterly pricing in China so that we won't have these annual contracts keeping the world with – really a short breath and we think that this is going to be, much healthier for the market, not distorting the market and we do expect to sell China on this basis this year. So, if you think about it from the BPC and maybe even the ICL the Israeli point of view, I think they'll both come to regret their contracts with China, by the time the second half of the year rolls around.


The next question comes from Bob Koort of Goldman Sachs.

Joe Fisher – Goldman Sachs

Hi everyone, it's Joe Fisher sitting in for Bob. If you just help me understand the $288 a ton price on the offshore side and if we've seen prices clear at 385 or 400, in recent weeks and if China was allegedly the floor at 350, can you kind of reconcile that number for me just maybe walk me through? And then just one other comment, if you comment on the inventory situation in the three big countries, Brazil, India, and China, that would be very helpful.

Bill Doyle

All right. Joe, I'll have David comment on the price first and then I'll talk about inventory.

David Delaney

Joe, the price in the fourth quarter was mainly attributed to a December inventory adjustment price, price adjustment with the new settlement in some of the markets around the world as well as we are underwater on our freight management contracts for the year for about, by about $65 million, so on lower volume, that's about a $20 hit there. In addition, we have with our fixed costs for terminals and rail cars, that probably added – added another $20 to the lower net back realization.

Bill Doyle

Joe, in terms of inventory, Brazil, empty. They have, they went out of 2009 with 400,000-ton estimate of inventory. Very, very low, as I was on the phone with Brazil this morning and throughout this system, they're continued to be very low and as we said, we think five and a half to six and a half million tons this year imports, so there's a long way to go in Brazil and you're going to see that market heat up here.

I should also say that the Real, the weakening of the Real is very favorable for soybean producers so that's also seen as a positive. And the change with Worley [ph] taking over the production assets of Bongi [ph] is seen by the market as positive. That there will be some growth there amongst retailers across the board, so it won't be dominated by one retailer.

In India, also extraordinarily low inventory levels. We wouldn't be surprised to see India conclude earlier and even the expiration of their contract in March, that's how tight situation is in India. There's tremendous food pressure in India. I mentioned 15% of food, food inflation, as many much as 50% for some items and the government is very sensitive to this issue because it's life-threatening for a politician, so I think you're going to see a very robust Indian consumption in potash this year and they have the worst N to K ratio in the world and they need to bring up that, that potash application rate so the next few years India is going to be, very strong market for us.

China, the inventory levels, we think are somewhere in the range two and a half million tons totally, but that's coming down rapidly as you know. They don't produce during the winter months, The Qinghai Salt Lake freezes up and so as the prices. When you look at corn, you look at the prices for grain in China. Of course, they don't relate to, to Chicago Board of Trade Prices or global prices. They are unique to China and those prices are, are much higher than, than what we see around the rest of the world in terms of the government establishing higher prices, so I think you're going to see Chinese farmers reengage. I thought it was interesting that profit warning – put out, they talk about the impact of the global recession on demand in China being so staggering, but they also indicate that there's going to be recovery there in 2010.

The big question is, how much is the recovery? We say, 8 to 9 million tons but it could be, it could be more than that. As these farmers reengage because the need certainly is there and after two years of down – we think that China could definitely have, have a better year, so you know, in our earnings forecast, what I tell you is that we, we call it as we see it all the time and we deal with reality and maybe after last year – the dog got kicked under the seat on the front porch – we're going to be, I would say, just maybe a little more reserved in terms of forecast, but we're going to believe it when we see it. We're going to deal with it all year long. Just call it as it is, but I do think that as these weeks transpired, I mean, if I had to tell you domestically within North America potash after three weeks of January, we had already sold more potash in North America than we did through August of last year. Through eight months. In three weeks. Now, that tells you how sick 2009 was, but it should give you an indication that farmers are starting to reengage around the world.


Next question is from Don Carson of UBS.

Don Carson – UBS

Yes, thank you. Bill, question on pricing. You know contract prices appear to have bottom with the Chinese settlement, but you've still got some pretty significant premiums in Brazil, and I'm just wondering, how you sort of sustain those premiums given that Brazil is importing as much as or more than China now and China is no longer taking freight risk. What's your sense of sort of the spot versus contract spread as we look forward into 2010?

Bill Doyle

Don, what I say is China doesn't have their whole order book filled yet. They've had, they've had some problems, as you know. I mean, we haven't done anything with them, and as far as I know, Germany hasn't done anything with them, and the Jordanian haven't done anything with them and even IPC hasn't done anything with them. So they've got two contracts, which are BPC & ICL, but they're going to need a lot more than that. So it's a question of, of how do they get that done. I think the rest of the players, they see it as a market through their eyes. We certainly see the market in a recovery mode in 2010 and you know, as I said, we saw that Chinese price just too low. So we said no. We're not going to – we're not going to supply at those levels.

So Brazil is a spot market. And, it's reflective of, of the current supply and demand situation. So, even since BPC, they booked just before Christmas, I got some coal in their stocking I guess, but you know we see the market a month later here, stronger than we saw it even before Christmas and even then our ideas, obviously, were quite different than, than BPC. So, I think those settlements will go down as the low, absolutely the low point, but even then, how much follow through China gets with that, when everybody else sees higher price. Why would you sell at that price when you're getting even now, you know, $60 a ton more than that price that make any sense. So I just think that there's, some ferreting out there, I don't think that Brazil is the anomaly. I think China is the anomaly.


The next question comes from Fai Lee of RBC Capital Markets.

Fai Lee – RBC Capital Markets

Thanks Bill. BPC has suggested it wants to move China to a spot mark in 2011 because of growing domestic production makes them less import market and Mosaic offer indicate it doesn't expect China be as influential going forward. You seem to have a different view on China in terms of demand, if you're correct, would that make it more difficult to move China to a spot market in your view?

Bill Doyle

No, I don't think so. And I don't think that, that Kappa Test, when we talk about China, I don't think any of us disagrees about the long-term importance of China. I think there may be some his misunderstanding of comments made in the short-term.

As I said, our issues with China are short-term, because China is going to need us and we're going to need them and when you have 75% of your potash, demand is going to come from imports over the years. That number's going to go from $10 million tons to $26 million tons as I said earlier. They're going to need Canadian Potash. There's just no doubt about that and I just think that, that we all agree that these long-term contracts, as I said on the last conference call, I don't know what kind of contract it is, when the customer doesn't take anything you know for a whole year.

I mean, you've got a year contract and they didn't take anything. That's zero performance, that's not much of a contract. So let's try something different and that's why we think spot, when I say spot, I'm talking quarterly pricing much like we do in Brazil.

I think it's better for China. I think it will be better for Chinese agricultural production because Chinese farmers have been held up with this type of approach to the market in this, this nonsensical annual negotiation which just leaves everybody exhausted and stupidly so, in terms of what it means for serious issue like global food production.

I mean, this is too important to risk and we just think that spot pricing is coming, we think this year in China. And we have no doubt that 2011, China will be a spot market and market just like, all the other markets around the world.


The next question comes from Mark Connelly of Sterne, Agee.

Mark Connelly – Sterne, Agee

Thank you. Bill. Following on that, do you expect the structure of the India negotiations to be different? Obviously you're not thrilled with the outcome of BPC, but you've tended to follow BPC, would you think of conducting parallel or leading those negotiations potentially? I'm talking about Canpotex obviously. And secondly do you see when you're saying on the contract versus quarterly applying to India as well.

Bill Doyle

I do think that India will eventually go to quarterly pricing as well. I just think that you get too many market distortions here for both sides and, I mean again, India, gosh, all mighty they had this terrible monsoon last year. You saw what happened to their sugar crop and their grain production and we're, we get sometimes, we are bureaucrats involved that worry more about ego than they do about taking care of food production in their country and so it really is not the greatest outcome.

It hasn't been good. So I think India will make that transition as well. We'll see how soon India comes to the marketplace here. Our guess is they're going to come earlier than normal because the inventory levels are low and there's pressure on food and they're talking about, revamping the subsidy in India but I can guarantee you the politicians are saying look, one thing for sure, don't let us have another bad crop in 2010 because we, were following around for subsidy. I mean that would be suicidal for every one of those politicians. So, I think you're going to see quarterly pricing be the way markets will unfold in the years to come.


The next question comes from Charles Neivert of Dahlman Rose.

Charles Neivert – Dahlman Rose

Hi, guys. I had a couple real quick questions. One is, what is the current China split on imports versus produced product and what they do this, this past year for instance and how fast to you expect to get to that 75% level that you're talking about?

Bill Doyle

Well, if you look at last year, Charlie, the current split was very heavy on domestic because the consumption was so long. They were only consuming 5.5 million tons, so they're so far down for the second year in a row. So you're seeing the domestic production take up more of the total. What we're saying this year is that, if China's going to be 8 to 9 million and we say that there's going to be 4 million tons produced in the country totally and so that means if you've got 9 million, you are going to have 5 million tons import. We might change that balance here in 2010 and then we're going to be quite a different situation going out as demand returns to China and they start to adjust their N to K ratio.


The next question comes from PJ Juvekar of Citigroup.

PJ Juvekar – Citigroup

Yeah, hi, Bill. It's increasingly clear that big mining giants are getting into the boss with bally buying assets and BHP buying, I think Athabasca Potash this morning. Now, when you look at that what do you think of the implications on the industry and its oligopoly?

Bill Doyle

Alright PJ. Well, I mean, I did see the, Athabasca Potash acquisition news this morning and I guess my comment on that would be that it gives everyone holding a lottery ticket hope. It's quite perplexing, all of us that are in the business are scratching our heads with that one but to talk about, the big mining companies and bally and BHP, it's pretty clear that a Greenfield mine cannot be justified economically by anyone at the current time.

I mean, there's just not sufficient return on investment to make it work. And these are, these are capitalists companies as well, so I know that they're taking a look at that and of course, they haven't made their decisions. I mean, heck current prices barely justified Brownfield expansions. So you can't make Greenfield investment decisions currently.

In the case of BHP, they've said, that publicly they will not make an investment decision until November 2011. I know they're hoping for better prices by then to make that decision because their board can't be any different than our board. We took a Greenfield mine to our board today, they said what's the return on this and you say negative. That wouldn't get a whole lot of traction with the board, so I know that they're waiting to see what it looks like in November 2011. But if they made that decision to go ahead then, let's say the economics were favorable.

I'm not sure that they will be but let's say that they are, then that would put the start of any meaningful production out of BHP in 2017 at the earliest, at the earliest and if they do decide, I mean if BHP decides to get into the business, they're not going to do it just on the basis of Greenfield. The Greenfield route is too time consuming and expensive. It's an expensive process. You have to have a lot of expertise. The people issues are huge.

But even if you read their old proclamations, they say that they would have this chance in project up to 8 million tons by 2026. That's a long time from now. 16 years from now, so I just don't believe that they've, they'd followed just that route and then at the end of that time frame at best, they'd be the sixth or seventh largest player in the world when they used to be number one, number two or number three.

And we do think that some of the recent public pronouncements have been designed to drive down the share prices of existing potash players to make a potential acquisition more attractive. Now they're certainly not stupid but neither are we. So, the attention from the iron ore miners reminds me a little bit of the conditions in the late '60s, when the oil companies discovered fertilizer. You had standard oil at that time getting in a business of gulf oil, mobile and others all investing huge dollars in fertilizing thinking easy returns were on their way.

And they ended up losing billions of dollars and they got out of the business just as fast as they got in. So as study of this history might be worthwhile exercise with companies but no fertilizer expertise. I guess my last comment would be that BHP doesn't walk on water. They have to go through the same high capital expenditures, time consuming route; we went to bring out a Greenfield property. At the end of the day, they're going to have a much higher cost structure than we have. And I'm fully confident we'll be able to compete against them or anyone else who decides they might want added space. PJ, we don't want you to take us for granted. We can be very tough when we need to be.


The next question comes from Jacob Bout of CIBC.

Jacob Bout – CIBC

Good afternoon. I had a question on your Brownfield expansions and maybe even just help us out on the sensitivity both on demand and pricing. I'm looking at your statement of cash flow here and your free cash flow negative this year. What price or what global potash demand level would you think of not going ahead with some of these projects especially those that require you to sink a shot.

Bill Doyle

Jacob, all of our potash Brownfield projects will be economically justified at a certain time at the current price.


The next question comes from Edlain Rodriguez of Broadpoint lender.

Edlain Rodriguez – Broadpoint

Thank you, guys. Quick question Bill. Just going back to Canpotex and China, can you give us an idea about how long you are willing to wait and also should we be disappointed if you don't succeed? And also just trying to see given that the decline with failing corn prices since January 12th, USDA report are you sensing any change in behavior from the farmer's sense since then.

Bill Doyle

Let me tackle the first part of your question and I will have David Delaney talk about the second part. I don't know how long it's going to take for Canpotex and China to come to some agreement this year.

As I said earlier, the issues that we have with China are short-term. So, this year, might be the second half before we conclude. We did learn to live without China last year. That was (inaudible) and what I tell you also is that I look at the potash supply around the world and you know it's like a balloon. You squeeze it on one side and the air pops up on the other. So BPC and the Israelis are occupied with China low prices.

We're going to take the business that they might have taken someplace else in higher prices and I mean, that's just the way it works. And so I don't think there's any disappointment. I think it's send a really strong message as a matter of fact to the marketplace that Canpotex has agreed to that low price. And it's, we see this market a little differently

I guess than those two companies that took it but maybe the same as the companies that haven't taken it because it was as much a hot spit deal, these other guys would have jumped on it too and they have not so I think that China may well need us this year. You start to look at the ice conditions in the bolsa [ph] right now.

St. Petersburg is full ice. They've got ice clash ships required there. They freight rate has jumped up there. I mean it's got to be really pain full for BPC. We even have ice now in Vince field. We haven't seen that in quite some time. So there's some pressure on the logistics and it's hard to tell exactly what that will mean for China supply. So there's a lot of moving parts here but the issues as I said are short-term issues with China. David's answering the second part.

David Delaney

Yes. I think we were all a little bit surprised by the USDA January 12th report with field coming in at 165-bushels per acre. We here there's still probably 3 to 5 hundred million bushel that have not been harvested yet. That would take total corn production this year up a billion bushels but what people tend not to get is the demand side is also up a billion bushels.

So we need a big crop every year and if you look at the next 2 or 3 years we need to plant 88 million to 90 million acres and grow 13 billion bushels just to keep up with demand. Corn prices have still very strong. Farm gate price is 350. We think if you look at the future priest, December is around 393 and the next three years after that. It's well over $400. Net farm income is still a very good averaging around $72 billion this year, and forecasted at 70 million to 80 billion the next four years.

If you look at US fertilizer costs as a percentage of corn revenue, it's right in line with the ten-year average right at 18%. And we think the contribution margin for corn this year will average around $300 to $350 and the base is $350 farm [ph] and $400 farm [ph]. We've seen great enthusiasm in the first quarter on our potash order book. The fall application was about 1.6 million tons of potash short of where it needed to be.

We think on the first year basis if we ship 4.8 million tons as an industry in the United States here in the next four months that's still leaves this crop frankly short of potash. Now on a calendar year, calendar we think we'll be closer to 995 on a get year, this crop is still going to be short of nutrient after a huge crop this past year.


The next question comes from Jeff Zekauskas of JP Morgan.

Jeff Zekauskas – JP Morgan

Hi. My question is, India is now the largest contract buyer in the world. So is it logical to think that their financial term to buy potash would be more favorable than the ones that China received? And secondly, can you talk about how much you're distribution and transportation costs went up per ton in '09 versus '08?

Bill Doyle

Jeff, I'm going to have David talk about the second one. India's largest contract buyer of two, China and India, obviously we have contracts with Japan, Korea and a couple others that are much smaller and much more traditional.

I would say, but when you look at contract buyers around the world that everyone supplies, in past it's been China and India. So in terms of favorable terms, Indians have always been able to get favorable terms. Being a bigger buyer than China, that's a short-term issue too. China will be a much bigger buyer than India long-term. India is going to be a big buyer, but China is going to go much faster.

Dave, do you have –

David Delaney

Sure, Jeff, the average T and D cost from a rail car and terminal stand point costs are up $20 year-over-year from a (inaudible) Freight stand point our freight management contracts as I mentioned earlier were under water by $65 million just to give an example.

The average market daily higher in '09 was about $17,000 a day. And our contracts were at $31,000 so that's why we're under water. Looking at 2010, we're in much better shape. We're not quiet at market. The average hire is around $17,000. And our contracts are at 20 so we're steel going to be under water but probably only by $5 million in 2010.

Bill Doyle

What it says is obviously in a very, very lean buying year as we said, it's the lowest year since we've been publicly traded in 20 years, the impact on your distribution costs it cost per ton your laying off a bunch of people. You've got all these shutdown weeks. It's very poor comparison to what happens when we're operating with even one hand tied behind our back. This year we had two of them tied behind our back so you see some of these comparisons don't look so hot.


The next question comes from Elaine Yip of Credit Suisse.

Elaine Yip – Credit Suisse

Well. Good afternoon. Lower potash applications in the US seem to have had very little impact on yield. Can you share with you us on what you're seeing with current yields in other reason and why the business impact from lower fertilizer application.

Bill Doyle

Sure. Hi, Elaine. I would tell you that lower application in US, keep in mind US starts out with a very healthy soil bank. US is the (inaudible) practices in this country are amongst the very best in the world and so what we had in 2009 is that soil bank concept I've always liked because it's a very good metaphor that help people understand fertilizer but in 2009, there were major withdrawals from that soil bank around North America. And what we're seeing in 2010 already just with the order book we have through the first part of January here is they're going to be some pretty big deposits put in because you pulled off 165.2-bushels of corn, you harvested nutrients with every one of those bushels. And these farmers especially with the economics – that David just went through a little while ago are very inventive wise to fertilize and they are domestic customer base, they're optimistic as can be about what's going to happen. Of course, we had a slow fall so we're going to have a big spring here in 2010.

So I don't think, I don't think you can go out draw any conclusion from U.S. being down one year is as much as they were because of the nutrient level had going into the year, in terms the rest there were also a different store. There you are go in with poor fertility level in India poor fertility level China, poor fertility level Brazil, poor fertility less. They don't have the history of the economic practice that U.S., Canada the developing, the developed agricultural world has, so they don't have much margin for error because they just don’t have a build up and even this year with what we're forecasting 50 million tones as I said earlier, that doesn't have any inventory restock associated, this is just on a matched consumption and then you're going to have inventory restock for 2011 plus consumption and that's where you really see a move back to trend or above trend 2011.


The next question comes from Michael Picken of Cleveland Research.

Michael Picken – Cleveland Research

Hi, good afternoon. I had a question on nitrogen and phosphate shifting gears per second. I saw your guidance they are projecting combine 400 to 500 million in combined gross profit – just looking back at historically it looked like you produce those results in '05 and '06 when corn was closer to $2 a bushel that price has gone up quite a bit and the returns for nitrogen also look pretty favorable. Can you talk a little bit about kind of – why the guidance was – in my opinion a little bit low and that being said I do appreciate, you're giving guidance and understand why you guys might want to be a little bit more conservative. Thanks.

Bill Doyle

Thank you, Michael. I'm going to ask David to speak to you and then some of the rest of us might pipe in.

David Delaney

Michael, nitrogen prices have improved a little bit in last two weeks, so there could be some upside in our nitrogen forecast. Tampa was just settled at 365, we think world trade for ammonia, you could go from 17.5 million to 19 million tones. Urea prices are strong at 325 and with the low fall application for ammonia here in this country, it's going to probably require more urea and UAN, which could improve that price even more, as we go into spring and if you look at import level on a per year basis today or behind historical levels.

So nitrogen is looking a little better you still have the issue of what the gas price is going to be in Ukraine first quarter, Russian gas prices are up a little bit, European gas prices are higher. So again, with low beginning inventories around the world for nitrogen and the need for nitrogen in this crop year basis, low crop year, the Bill just mentioned around the world. I think nitrogen could be a little bit stronger this year and prices are starting to indicate that.

Phosphate has moved up a lot in the last 45 days, our DAP/MAP price from the trailing quarter could be up as much as $100 we're seeing improvement there. Some of our industrial contracts have that yearly lag, so we'll not see the improvement there, as we did in '09 that will hurt is a little bit. But we do see our assets prices for example, to India improving and some of our other product lines. We’re turning this a little bit in the forecast to is we’ve been – we've probably been conservative sale for forecast, we have a high sulfur number in there so that's probably pulling our phosphate margin down from what you think it should be.

Bill Doyle

Michael, I'm just going to – just to underlying that the sulfur point that David made I'm going to ask Tom Regan, who's head of our phosphate and nitrogen business our operations is there to comment on physical may availability to sulfur to the pricing tendency, where you think to thing is going Tom, give us a little more color on that would you?

Tom Regan

Okay. Sure. One of the things we can say at the upcoming year is liquid sulfur supply is very tight. We've seen a bit of a change in the U.S. where both drilling and revolving facilities have been added in order to give the liquid sulfur supplier the opportunity and service more than one market. And also with that, as I'm sure most of you know we've seen a fairly dramatic increase in the Tampa reference price for sulfur, currently at $90 tones and that's indicative of this tight supply, that indicatives of choices that typically refine your liquid provider, liquid sulfur had and what they do their product.

Now currently, we have a sulfur supply situation that fits our forecast for 2010. If that was move upward then we’ll be after additional supply and there could be increase in pricing. And that's basically where we stand for the upcoming year.

Bill Doyle

You're seeing sulfur around the world right now. People Chinese, Middle East, people looking for sulfur and that's kept pressures over that Tampa reference price also has transportation in that so you shouldn't just look at it as 90 bucks there's a little bit more to it. So sulfur definitely is taken lack out of the DAP margin, so that's reflected in our overall guidance.

Denita Stann

We'll have the time for just one more question.


Thank you. The last question comes from Hari Sambasivam from National Bank Financial.

Hari Sambasivam – National Bank Financial

Hi, yes. Thank you. Just a quick question on the valley bungi [ph] acquisition and I'm just wondering in terms of the price that they paid and the EBITDA that they paid for that asset, do you have any comments on what this implies for rock prices going forward for the coming year?

Bill Doyle

Hari, the price that highly paid for bungi [ph] phosphate assets is very encouraging to us. We clearly realize that we're significantly undervalued. Because it's – I'd say, a fairly robust price I would say, what assets are just going more valuable over time. I mean rock is the whole key and you're just seeing of the much higher bias to rock prices especially, from a quality point of view, this is from depreciation plants, chemical plants, the permitting issues involved in phosphate rock are enormous and growing to the expensive permitting, rock is the whole key to phosphate and you're going to see higher phosphate rock, you're already seeing higher rock reflected in the costs side and we talked about sulfur and ammonia, people you also got to think about phosphate rock. So all the valley price was Dallas [ph] and I will look for us.

Denita Stann

Thank you, everybody. If you have any further questions, please don't hesitate to give us a call at the office. Have a great day.


Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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