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Agrium Inc. (NYSE:AGU)

Q4 2009 Earnings Call

February 9, 2010; 11:30 am ET

Executives

Mike Wilson - President & Chief Executive Officer

Bruce Waterman - Chief Financial Officer

Ron Wilkinson - Senior Vice President & President of Wholesale Business Unit

Kevin Helash - Vice President of Marketing & Distribution

Richard Gearheard - Senior Vice President & President of Retail

Tom Warner - Vice President of Retail

Dave Tretter - Vice President of United Agri Products

Richard Downey - Senior Director of Investor Relations

Analysts

Luisa Hermann - Goldman Sachs

Horst Hueniken - Thomas Weisel Partners

Mark Connelly - Sterne, Agee

Edlain Rodriguez - Broadpoint Gleacher

Paul D’Amico - TD Newcrest

Don Carson - UBS

Dave Silver - Bank of America/Merrill Lynch

P.J. Juvekar - Citi

Jacob Bout - CIBC

Hari Sambasivam - National Bank Financial

Fai Lee - RBC Capital Markets

Charles Neivert - Dahlman Rose

Elaine Yip - Credit Suisse

Jeff Zekauskas - JP Morgan

Vincent Andrews - Morgan Stanley

Operator

Good day everyone, and welcome to today’s Agrium Inc. conference call. Following today’s remarks, we will conduct an electronic question-and-answer session. Instructions on how to pose your question will be given at that time. As a reminder of this call is being recorded.

Now, for opening remarks and introductions, I’d like to turn the conference over to Mr. Richard Downey, Senior Director, Investor Relations. Please go ahead, sir.

Richard Downey

Thank you, operator; good morning everyone and welcome to Agrium’s 2009 fourth quash conference call. On the phone with us today is Mr. Mike Wilson, President and CEO of Agrium. He’s joined by our CFO, Mr. Bruce Waterman and as well as other Agrium officers to reviewing discuss our results.

As we conduct this conference call, various statements that we make about future expectations, plans and prospects containing forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information.

Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders, as well as our most recent Annual Report, MD&A and Annual Information Form filed with Canadian and U.S. Security Commissions to which we direct you.

I will now turn the call over to Mr. Mike Wilson.

Mike Wilson

Thank you Richard, and good morning and thank you for joining us today for our 2009 fourth quarter and year end conference call. This morning I’ll provide highlights of our fourth quarter operating results; share our insights on prop input outlook for the coming spring season and provide a brief update on the status of our proposal to acquire CF Industries.

We’ve reported net earnings of $30 million this quarter, $0.19 per share. However, earnings were $84 million or $0.53 per share after adjusting for the two items we exclude when providing guidance, which includes stock-based compensation expenses and gas and other hedging positions. Agrium generated an impressive $904 million in cash from operations this quarter, with EBITDA coming in at $95 million.

For the 2009 calendar year, net earnings were $366 million, or $2.33 per share, which represents our third highest net earnings on record. Agrium also generated $823 million in EBITDA in 2009, and $1.4 billion in cash from operations.

The strong cash flow realized during the fourth quarter and throughout 2009, was due to a significant reduction in non-cash working capital and Agrium’s ongoing commitment to sound financial practices. We see in the initial stages of recovery in the crop input sector over the past three or four months.

Nitrogen and phosphate product prices have raised on tight supply demand fundamentals. There’s also been a surge in domestic demand for potash starting in the fourth quarter, and from international markets over the past month. Wholesale experienced a 44% increase in total sales volumes in the fourth quarter of 2009, versus the same period last year.

We look forward to a significant recovery in the crop input markets in 2010, and we believe our diversity across the value chain will allow us to fully capture the revitalization of the sector. Looking at our business units fourth quarter results in more detail, retail’s results were impacted by the late harvest and the resulting shortened fall application season across the U.S. Corn Belt.

Crop nutrient gross profit for the fourth quarter of 2009, was $46 million, down from last year’s $60 million. Crop nutrient margins did not increase as much as originally anticipated due primarily to lower than expected sales volumes. Even though sales volumes in the fourth quarter of 2009 were up significantly from the same period in ‘08, they were still 20% below our expectation.

This resulted in some residual high cost inventory sold in the fourth quarter having a bigger impact on margins than expected, particularly in localized markets. As a result of the wet weather, retail was also not able to capitalize on the full service ammonia market in the fourth quarter, which typically produces higher margins.

The challenges this sector faced in the fourth quarter of 2009 are the same challenges seen throughout the year. However, we fully expect crop nutrient margins to improve substantially in 2010 and return to more historical margin percentages as demand and pricing for all three products are expected to be strong and overall inventory costs are well below current replacement costs heading into the spring.

Crop protection revenues, were down 19% in the fourth quarter of 2009 due primarily to significantly lower glyphosate prices. However, this was partially offset by an 83% increase in glyphosate sales volumes in the fourth quarter. Gross profit was $98 million, a 26% decline from last year’s fourth quarter results, due primarily to the timing differences in the recognition of volume rebates and lower glyphosate margins.

Gross profit margins were 42% this quarter, slightly lower than the fourth quarter of ‘08. On an annual basis, we reported an impressive $648 million of gross profit for crop protection products. Despite the challenges in 2009, margins for crop protection products were 25% this year, only a couple percentage points off of last year’s levels.

Gross profit from seed, services and other, reached $45 million in the fourth quarter of 2009, an increase of almost 30% over last year. This was primarily due to higher seed rebate recognition this quarter, and solid results from our application services, despite the shortened fall application season.

On an annual basis, gross profit from seed sales were $152 million, more than double the previous year. This was partially due to the full year inclusion of UAP earnings in 2009. However, gross profit was still 21% higher than the previous year, after adjusting for a full year of UAP earnings in 2008. The continued growth in earnings from this product line in a challenging agricultural environment further illustrates the benefits of diversity in our retail business.

Retail’s fourth quarter net selling expenses declined by 13% this quarter, compared to the same quarter last year, due to lower fuel and maintenance costs and reduced performance incentives. Retail successfully met all its UAP integration targets with the exception of improved nutrient margins. The improvement in nutrient margins was offset by a dramatic decline in nutrient prices. We expect to realize $115 million in total annual synergies from the UAP acquisition in 2010.

We expect EBITDA from our retail operations to return to normalized levels in 2010, which combined with the anticipated annualized UAP synergies, would be in the $500 million to $550 million range. We also continued expansion of our retail business at very attractive valuations over the past several months. We purchased 24 retail outlets in the South U.S. Plains in the fourth quarter of 2009, further expanding our presence in this region.

We also made an exciting step into the Canadian retail market, with acquisition of 33 farm outlets in Western Canada, which are now operating under the crop production services of Canada brand name. The combined annual sales of these acquisitions are approximately $350 million, and the combined purchase price was approximately $100 million, a little over half of which was forecasted working capital.

Moving to wholesale, net sales for wholesale in the fourth quarter of 2009 were $716 million, 27% lower than the fourth quarter of ‘08. Benchmark prices for all three nutrients were lower than last year, as were cost of production. Our total sales volumes were up 44%, compared to the fourth quarter of last year, due to strong demand in North America. Gross profit of $180 million was the third highest on record for the fourth quarter.

Our nitrogen business had a strong fourth quarter, providing $95 million in gross profit. Sales volumes were 35% higher than last year, and average nitrogen margins remained above $100 per ton this quarter. Our average gas cost was significantly lower than last year and both domestic and South American urea demand experienced substantial increases.

Agrium’s potash business contributed $74 million in gross profit this quarter. While this was significantly lower than last year, it was more than three times the profit level earned in the third quarter of ‘09 and on a per ton margin basis, potash was the only product to surpass $200 per ton this quarter.

Sales volumes this quarter were 353,000 tons, up 70,000 tons from the same time last year, and 80,000 tons higher than the third quarter of ‘09. All of the increase in demand was due to higher domestic sales. We’ve ramped up production at Vanscoy, given the increase in domestic and international demand. The reversal in potash profit and capital tax this quarter was due to accelerated capital expenditures on the brownfield expansion and lower than expected potash prices.

Gross profit for our phosphate business was $1 million this quarter. While our sales volumes were almost 70% higher than the same period last year, margins were impacted by low prices. Realized sales prices were $725 per ton lower this quarter than in the fourth quarter of ‘08, while cost of production declined approximately $100 per ton for the same period. We anticipate an improvement in phosphate margins in the first half of 2010, due to significant increase in benchmark prices in late ‘09 and early 2010.

Other products contributed $8 million in gross profit in the quarter, while purchased for resale contributed $2 million. Our MOPCO investment provided $6 million in net earnings this quarter. The MOPCO plant expansion is moving forward on schedule to triple the size of the facility. This project will increase Agrium’s 26% equity interest in nitrogen capacity from 176,000 tonnes to 546,000 tonnes of production by 2012; and we will market all of the approximate 1.4 million additional product tonnes to the export market.

Advanced Technologies’ gross profit was $16 million for the fourth quarter, inline with $17 million earned in the same quarter last year. ESN sales volumes this quarter were up 88% compared to the previous year, although margins were lower than last year, inline with other nitrogen product prices.

The increase in SG&A costs this quarter compared to the previous year is due to inclusion of cost from the turf and ornamental operations that were recently transferred from our retail business unit to Advanced Technologies and relocation costs associated with the consolidation of our U.S. and Canadian regional offices into one head office in Loveland, Colorado. Our overall earnings this quarter benefited from a recovery in income tax as a proportion of income earned in lower tax jurisdictions was higher than originally estimated.

Turning to the outlook, grain and oil prices increased through the fourth quarter of ‘09 driven by the latest U.S. corn harvest on record, positive global economic momentum and weakness in the US dollar. However, grain prices pulled back somewhat in January in response to higher than expected U.S. corn yields, estimated by the U.S. Department of Agriculture. Despite this, grain and oil seed prices have remained above historical averages and continue to support crop input expenditures.

Looking to 2010, we see continued improvement in the seed market, due to the trend in adoption of new seed varieties and a stronger crop protection market compared to last year, due to increased usage of glyphosates, crop health products and increased weed resistance resulting in expanded use of additional crop protection products.

The combination of record U.S. corn yields, reduced crop nutrient applications over the past year, particularly given the shortened fall season, as well as higher corn acreage is expected to result in strong demand for all three nutrients in the coming spring.

The fertilizer institute reported that December ‘09 urea inventories in North America were 42% below December ‘08 levels; and 9% below the five year average. The low inventory position has resulted in the New Orleans benchmark price rising 19% since the middle of November and prices are still below international replacement cost levels.

Phosphate prices have increased 50% since mid-November, based on a strong increase in global import demand. The tight supply situation looks like it will continue through at least the end of the spring season.

U.S. December DAP and MAP inventories were reported TFI to be 38% below five year average levels. Demand in the potash market showed significant sign of recovery at the beginning of 2010. There’s been considerable pent up demand in the potash market as importers have been waiting for Chinese potash contracts to be agreed upon. Canpotex just reached its agreement with Sinofert for 350,000 tonnes of Canpotex is now fully committed for the first quarter of 2010.

North American purchases for spring applications increased in late December and demand continued into 2010. In addition, Brazilian potash inventories are reportedly tight and import demand is expected to rebound. Regarding Agrium’s proposal for the acquisition of CF Industries, we continue to be fully committed to acquiring CF, and continue to press the Board of Directors of CF, to engage in negotiation with Agrium to execute a mutually beneficial agreement for our respective shareholders.

On January 14, 2010, Agrium notified CF, that we will nominate two independent and highly qualified Directors for election to CF Board of Directors at their 2010 Annual Meeting of shareholders. In closing, global grain prices remain above historic levels and improved economic outlook bodes well for continued growth in global grain demand.

As a result of the year and a half of lower than normal nutrient application, above average yields, and the late harvest limiting fall applications, we believe growers recognize North American soil nutrient levels need be replenished and will respond with increased application rates in the first half of 2010.

As a result of these factors, we anticipate 2010 to be an excellent year for agricultural products and services. Agrium is uniquely positioned to benefit from this expected significant recovery in 2010, given our exposure across the entire agricultural value chain. Agrium’s strength lies in its diversity and ability to deliver our growth opportunity. I’m excited about the opportunities that lie before us in 2010. We would ask that you refrain from asking questions on CF in this call and limit your questions and focus to our results and outlook.

So with that, operator, I’ll now turn it open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Luisa Hermann - Goldman Sachs.

Luisa Hermann - Goldman Sachs

This is Luisa Hermann in for Bob today. My first question is can you provide us with a bit more color on what you’re seeing in terms of increasing demand, in terms of sales at the retail and wholesale level, just over the past few weeks, compared to what you saw last year?

Mike Wilson

I’ll get Ron Wilkinson and perhaps Kevin Helash to talk about wholesale, and then turn it over to Richard and Tom Warner on the retail side.

Ron Wilkinson

It’s Ron Wilkinson. On the wholesale side demand was quite strong through the end of December and into January, for really all three major nutrients, nitrogen, phosphate and potash. We have seen a little bit of a slowdown with the drop in corn prices after the USDA report, but looking forward, we expect wholesale demand to continue strong through the spring season.

Mike Wilson

Richard, you or Tom want to comment on retail?

Richard Gearheard

Well, Tom maybe closer to it, but this is Richard Gearheard. The tons never are much in January. They are up a little bit from last year and we are at margins that are more normalized on the fertilizer side. So it’s certainly not a negative, but it’s not much can move at this point. Tom, do you have…?

Tom Warner

I think the biggest indicators are prepays through January, were up 28% over prior year.

Luisa Hermann - Goldman Sachs

Then my second question is, if you could just talk a little bit about what the impact of the increase in Ukraine gas prices is going to have on nitrogen price?

Bruce Waterman

If you look at Ukraine gas for every dollar they increase it’s about a $25 a ton impact on urea. So if they go from in the sixes toward a nine, you’ve got about a $50 to $75 increase you would expect in margin improvement if the U.S. gas price holds.

Operator

Your next question comes from Horst Hueniken - Thomas Weisel Partners.

Horst Hueniken - Thomas Weisel Partners

In your press release, you reminded us that you chose to defer several capital projects into 2010 in order to conserve cash, while Agrium has outstanding its offer for CF. As we don’t know how long you will be pursuing CF, can you comment on how long you might defer or limit your capital expenditures?

Mike Wilson

In essence, we’ve stopped deferring them. It was really in the first half of last year when there was a little question on what the finances would be. Given our cash position and given the strength of the market, we’re back on track for all of our sustaining and investment capital.

Operator

Your next question comes from Mark Connelly - Sterne, Agee.

Mark Connelly - Sterne, Agee

Two related questions on retail. First, you said you spent about $100 million, if I heard you correctly, you said about half of that was working capital. The assets that you’re picking up, are they inline profitability wise with the assets that you have? Just trying to get a sense of value there and opportunity for further improvement?

Then the second question is about mix. UAP’s mix of business was different a little bit than yours and I’m wondering whether you’re seeing that difference already with UAP fully integrated and whether these new acquisitions are going to change that mix very much?

Mike Wilson

Richard, can you comment on the relative value and sort of multiples we’re paying for these businesses and how they relate to our existing operations and then maybe comment on Loveland brand and products like that.

Richard Gearheard

Let’s talk about down in Texas, those facilities are actually the legacy Agrium retail had no places in Texas. These were former AG reliance places from my understanding they’re more fertilizer-oriented than what the UAP places would have been around them. Having said that, it’s not going to be, there are 24 places versus over 800 so it’s not going to be that major of an impact.

Western Canada is more I would say their mix is higher fertilizer versus chemicals than you would in most of the U.S., so those two probably are going to be higher fertilizer than chemicals, but just be a slight blip on the radar screen. As far as UAP mix, they always will be higher in chemicals than fertilizer than Agrium retail is, but what we will get, make more progress in that area to more fertilizer, I don’t know if that’s progress, but after last year, but anyway, there is a slight change there, but you’re not going to see major changes on that.

Mark Connelly - Sterne Agee

The profitability of those assets, you’re picking up relative to your own?

Richard Gearheard

Well, on pre-synergy levels, we’re probably a little less than a five multiple on that. So I mean I would say that there’s certainly excellent opportunity on it. A lot of those facilities, particularly in the southern part of the U.S., were for sale for like an extended period of time. Just knowing what their future is, it’s going to be helpful.

Mike Wilson

Yes, they are starting out with a lower EBITDA to revenue margin, but we’re hoping with synergies to get it up closer to our legacy business.

Operator

Your next question comes from Edlain Rodriguez - Broadpoint Gleacher.

Edlain Rodriguez - Broadpoint Gleacher

Just wanted to get a sense of what’s going on in the retail distribution chains. Because the expectation is, we’re supposed to see inventory restocking and so forth. Are you doing that in your retail business, let’s say for potash; are you restocking inventories in anticipation of a strong spring season?

Richard Gearheard

Well, yes, that’s normal for this time of year. We are at a lower tonnage level than we were a year ago, but last year’s fall were, as Mike mentioned earlier, our fall this year was 39% above tonnage-wise from last year. So we were about two-thirds the level that we were last year on inventory levels and we’re just being a little bit more conservative on inventory, but we’ll be stocking here in before the spring season, but we’re fairly full at this point.

Edlain Rodriguez - Broadpoint Gleacher

I have a question of phosphate I mean there was a surprising 25% decline in volumes sequentially. What would you attribute that to? Because, when we saw potash and nitrogen, volume increased sequentially. Does that have anything to do with the surge in that price as we saw late in the quarter kind of put a damper on demand?

Mike Wilson

I wasn’t clear on that. You’re saying a decline in what in margin…?

Edlain Rodriguez - Broadpoint Gleacher

In sequential volumes for phosphate

Ron Wilkinson

You’re talking from third quarter to fourth quarter?

Edlain Rodriguez - Broadpoint Gleacher

Yes, there was a 25% decline in volumes. Does that have anything to do with the surge in that price as we saw kind of dampening demand a little bit, I mean what would you attribute that volume decline in phosphate?

Ron Wilkinson

It’s really just more a timing issue. We probably had a bigger third quarter on phosphate volume and shipped more than would be normal and I think we stole some tonnes from the fourth quarter. We certainly didn’t see any reduction in demand in the fourth quarter, due to the increase in pricing.

Operator

Your next question comes from Paul D’Amico - TD Newcrest.

Paul D’Amico - TD Newcrest

Mike, a few questions, just first, and not to sort of throw it back out, might have missed this, but you used language there about increasing crop nutrient margins pretty strong language. I’m just wondering if we can get a little more color. Are you expecting to double at your more normal level or is that too optimistic in 2010 given the commentary?

The reason why I’m asking as well to understand on the Q3 call you mentioned that was in November, you mentioned expected normalized level in that area of Q4 and pricing in November and December was good. So I’m just wondering if I can understand what happen then as well as to interpret, what’s going to happen now?

Mike Wilson

What happened then was that we didn’t get the volume we expected and we commented; we’re off about 20%. Maybe Richard you can comment on where margins are going.

Richard Gearheard

So you said, you think we’re double last year. I think last year was about 8%. We certainly anticipated to be more than double that and that would get us closer to historic averages. The one thing that happened to us in the fourth quarter, we were anticipating a higher volume in which we would have been able to purchase more potash at the lower pricing and we didn’t experience as much of that as we thought.

I might add, at the end of the third quarter, we were looking at total inventory values and they were in line, but we do have pockets within our geography that had some high cost inventory and they used the fourth quarter to eliminate those high cost positions and that was primarily in the south and west, which is not a high volume mover in the fall. So our weighting changed a little bit there, so that hurt our margins as well.

Paul D’Amico - TD Newcrest

I appreciate it Richard for the detail. A bigger macro question in terms of taking it to context, the tighter phosphate market you’re seeing. Longer term, the [caps] casing plans, is it still to import rock in 2013, ‘14, or is there something else refer with respect to how to handle that?

Ron Wilkinson

Paul its Ron Wilkinson. Yes, our story on caps casing is the same, we expect what I’ll call the profitable reserves to be exhausted in the 2013, 2014 timeframe and at that point, we’ll look at our options around imported rock.

Paul D’Amico - TD Newcrest

Last question, probably for Bruce, the working capital sourcing in Q4 was much higher than I expected. So I’m just trying to understand in Q1, what the build in the commentary obviously with the strength the marketplace. Are we looking at the majority of that Q4 sourcing being reversed in Q1, or is Q1 still typical, regardless of what the size of the Q4 sourcing was?

Bruce Waterman

Well, what we’ll see in the first quarter, we have fairly large tax payment that’s going to come up in the first quarters it’s about $350 million. If you’ll remember, we have a partnership structure in Canada, which allows us to defer our tax effectively a year. So we’ve got a big tax payment nearly relating to 2008, this going to come out and that will impact our working capital.

The second thing that will impact our working capital as you run into the spring is the pricing momentum is upward, which means that you have a little higher cost inventory?

Bruce Waterman

We will see some claw back on that.

Operator

Your next question comes from Don Carson - UBS.

Don Carson - UBS

A question for Richard on retail, you’ve talked about a strong crop nutrient outlook. Just had a few questions on crop protection and seed, say volumes were up significantly, but you mentioned that you’re changing vendor rebate recognition. I know Monsanto’s throwing a very sizable vendor rebate for 2010. With that rebate, with we’d like to say, demand picking up here, what’s your outlook for crop chemicals? On seed, did the late harvest also slow your rate of Q4 orders and are you seeing any shift from Q1 to Q2 in the seed business?

Richard Gearheard

Well, let me start with seed. The late harvest did slow the orders. Of course, that didn’t affect revenues in 2009, because we normally wouldn’t be shipping that until 2010. The thing that probably affects our revenues on seed more than anything else was the significant reduction in wheat acres. On chemicals, I’ll let Dave Tretter comment. I think I know what I would answer, but I better might want to hear the right answer.

Dave Tretter

Maybe, if I get you to clarify the question on the glyphosate again with Monsanto’s change?

Don Carson - UBS

Yes, I know they’ve got their largest ever vendor rebate to encourage dealers to stock up with all the glide to say the product to the pipeline, but volumes picked up dramatically and I would think you’ve got a strong volume outlook. Just wondering, if you can talk about price and vendor rebate outlook and give us an idea of what profitability and our crop protection looks like this year?

Dave Tretter

Go for next year, we expect the profitability to remain relatively constant. If you look at last year versus the year before, if you include the UAP in legacy business all the way to the first of the year, the margin percentages were pretty flat.

Going forward, we don’t see a big change in overall chemical rebates, though there may be some decline in the chemical rebates for the glyphosate lines, only because they lowered the list price, but the net price didn’t change as much. So overall, see consistent margins on crop protection going forward.

Don Carson - UBS

Richard, just your overall profitability target you’re talking about your $550 million EBITDA target with an improved crop nutrient outlook with what looks like it could be higher corn age acreage this year. Does that appear somewhat conservative?

Richard Gearheard

I’m never going to say anything’s conservative anymore, after last year, but I think we feel confident we’re going to be able to, keep in mind, we’re basing our projections off the best years ever that both UAP and Agrium retail had in 2007 up until 2008. Best years ever plus $115 million in synergies. So I think if we do that, we’ll be very pleased.

Mike Wilson

We’ll be happy to get close to $550 million.

Operator

Your next question comes from Dave Silver - Bank of America/Merrill Lynch.

Dave Silver - Bank of America/Merrill Lynch

I have a couple of questions, first question I’d like to ask you about the natural gas hedging result for the quarter. So I guess there was a mark-to-market loss or a negative effect and kind of scratching my head, I’m wondering if you could just talk about that, because I think about the normal flow of a book of prepaid business and into a rising gas market. I’m not quite sure why that would translate into a mark-to-market negative effect for the quarter?

Mike Wilson

I’ll get Kevin to comment. We do hedge forward beyond just the short term, but Kevin, do you want to comment?

Kevin Helash

Mike hit the nail on the head. It’s a combination of all of our forward positions, David. So when we look at them all together it resulted in a bit of a loss there.

Dave Silver - Bank of America/Merrill Lynch

Would I be correct in assuming that all those positions, regardless of the maturity date, but all those forward positions relate to orders in hand, as opposed to speculating on the direction of future gas prices?

Mike Wilson

We have a combination, David, of short term and long term gas that we buy. So we do buy some nearby gas, what we call margin management work with and then we do have some gas we buy on a longer term basis.

Dave Silver - Bank of America/Merrill Lynch

I’d like to ask maybe Richard or Tom another inventory question and I’ll come at it maybe from the other direction. I mean, normally we look at the inventory number on the balance sheet and we ask you guys whether it’s too high? I’m kind of wondering, whether the sharp year-over-year decline of the working capital rundown leaves you guys maybe a little less able to exploit the rising market for fertilizers that I think Bruce and you guys have talked about on the call here.

So in terms of taking advantage of the pretty sharp moves up we’ve seen in things like DAP and ammonia. I mean, how do you think your overall retail purchasing and inventory position, let’s say, at December 31, is versus what you would say would be ideal?

Richard Gearheard

I’ll take a stab at this, but looking at only inventory can be a little misleading in that you do have commitments for purchases, either without prepayments or with prepayments, and so our prepayments are up to suppliers somewhat as well versus last year. So I believe we’re covered. We intentionally did not go at it thinking we’re going to be 100% covered for the spring, and this is more historical.

We normally would go into spring with a significant amount covered and then hope to be replacing at the tail end of the spring in prices start to go down. So I mean, just looking at the inventory number alone isn’t the total picture of what we’ve done and because the market has softened somewhat, you’re able to get some commitments out there without having to prepay everything as well.

Operator

Your next question comes from P.J. Juvekar - Citi.

P.J. Juvekar - Citi

A question on seeds, I think Mike you mentioned in your comments about higher rebates in seeds. I was wondering if you can talk about the competitive pricing dynamic in seeds this year, and sort of compare that to last year.

Richard Gearheard

I’ll just say first, I think when you talk about the higher rebate structure, that’s more related to our private label seeds and as we increase in that and those rebates are better. I’ll let Tom Warner speak to the seed in general about the pricing.

Tom Warner

The seed this year has been very competitive. We had a late harvest and there’s still a large push towards market share, but we’ve really gained a lot, particularly in our private label seed this year. So I don’t think it’s so far out of normal, quite frankly.

P.J. Juvekar - Citi

Can you talk about this private label seed I mean, what’s going on with that? Are they getting more aggressive?

Tom Warner

They meaning us, or who?

P.J. Juvekar - Citi

Yes, either you or people who are supplying you with private labels?

Tom Warner

We want our private label to be a certain percent of our total sales. So we’ve really had a focus on our private label over the last year in particular, so we’ve had some excellent results from our yields on 2009 private label. So we’ve got a lot of momentum going into 2010 on our private label seed products.

Richard Gearheard

Well, technically too, by definition, private label, we’re the ones that have our own private label, which is Dyna-Gro and we’re really not competing with that. So you’re not as much in the competition as you would be with, say, one of the name brands. This is along the lines of our Loveland products on chemicals as well. When you have your own private label, other people don’t have that to compete with.

P.J. Juvekar - Citi

One quick question on potash, with your brownfield expansion and all your Canadian competitors expanding as well, and combine that with operating rates moving up from very low levels. How do you see that supply/demand playing out in like 2012 and ‘13 when all that capacity starts up?

Mike Wilson

If you go out to 2012, ‘13, we see a significant increase in global potash demand. You’re talking three years out. We see this year getting back into that high 40s to 50 million-tonnes range and then the world needs to increase its potash usage significantly. So we think we’re in a pretty good position.

Operator

Your next question comes from Jacob Bout - CIBC.

Jacob Bout - CIBC

Just continuing on that theme on potash, when do you expect to fully ramp up on Vanscoy? What is the effect of capacity there? Is it still 2 million tonnes a year?

Ron Wilkinson

Current production capacity is approximately 2 million tonnes at Vanscoy. This brownfield expansion, we’re looking to add about three-quarters of a million tonnes to our annual production capacity. We’d see the bulk of that capacity come on in 2014 with full capacity achieved by 2015.

Jacob Bout - CIBC

Right now, even at that 2 million tonnes, you’re still operating below that?

Ron Wilkinson

We’re expecting, we’ll be close to 2 million tonnes for the year, assuming the markets stay strong.

Jacob Bout - CIBC

What would be the unit cost at that full 2 million tonnes a year?

Ron Wilkinson

It will be around USD 100.

Jacob Bout - CIBC

The Capatex announcement on that 350,000 tonnes with Sinofert, the one thing that was missing from that press release was indication on price and just where historically we’ve actually seen that disclosure. What was our price, or why has there not been any disclosure there?

Ron Wilkinson

Historically, actually we haven’t disclosed our Chinese pricing. You’ve seen sort of what the Russians negotiated with them and the view that we followed. We’ve had a pattern with them of not disclosing and we agreed with them we wouldn’t do it on this time as well. What I can tell you is it’s reflective of the current market, the current netbacks that we’re getting.

Jacob Bout - CIBC

Would it be close to what is really the chemical settled at?

Ron Wilkinson

We can play brackets all day. We’re not commenting on it, Jacob.

Jacob Bout - CIBC

Last question, retail inventory levels maybe you can give us a little more granularity on where it stands right now for nitrogen, phosphate and potash?

Richard Gearheard

Let’s see, potash, we’re roughly, probably about, I’m just eye balling this, 45% level that we were a year ago on tonnes.

Jacob Bout - CIBC

What would that be, roughly?

Richard Gearheard

Well, 195,000 tonnes at the end of December. Now, we’re higher than that now, I would assume. Phosphate, shoot, let’s see. Probably about 150,000 tons, somewhere like that.

Jacob Bout - CIBC

Year-on-year, what would that be, differential?

Richard Gearheard

We had roughly 180 a year ago.

Jacob Bout - CIBC

Okay, and then on nitrogen?

Richard Gearheard

Well, the big nitrogen tonnage is a solution we’re about two-thirds of that. We had 660 a year ago.

Operator

Your next question comes from Hari Sambasivam - National Bank Financial.

Hari Sambasivam - National Bank Financial

A quick question on the crop chemical side, could you give us a sense as to what type of efforts you are sort of engaging in terms of expanding, I would say the crop chemical usage this year? Last year in Q3, there were certainly sort of ups and downs. I’m just wondering, are there ways in means of mitigating that kind of surprise?

Also wanted to ask whether what level of sort of a comfort do you have in terms of anticipated increases in glyphosate, is that simply prepays that you’re counting on or are there other sort of indicators to suggest that glyphosate numbers should be going up this year.

Mike Wilson

Do you want to steer that question?

Kevin Helash

I’ll let Dave talk about that. I think he’ll probably talk a little bit about the supplier programs on fungicide would you just give a little bit more predictability, go ahead…

Dave Tretter

If you look at the variability in chemicals over the last couple years, there has been quite a bit when you look at the fall purchases, as an example. You saw our last quarter there was a big increase in glyphosate sales, but keep in mind that our last quarter is relatively small.

Normally we only sell about 10% or less of our total year’s sales on last quarter. So that meant that this past year, we sold less than 20% of our total. When you look at the full year last year, glyphosate still was about 10% behind what we sold the year before, so with the lower price to glyphosate, we expect to get back to the same levels that it has been historically.

Richard mentioned some of the fungicide programs, if you look at fungicide this past year for us, the sales were down. A lot of that was grower economics that it was harder for them to pencil out why they’d use fungicide. There are vendor programs out there today that should put those products back in play and make them more economical for farmers to use. So we’re hoping that does level out the usage more year-over-year.

Hari Sambasivam - National Bank Financial

I have a quick question on the greenfield development. Given the sort of a current prices at this point in time and also I would say, expanding or increasing sort of visibility on the BHP project, where do you stand with your greenfield project at this point in time in terms of pricing as well as commitment to going forward with this?

Mike Wilson

We continued to have excellent reserves for greenfield point of view. Our focus today is on the brownfield operation. So we continue to evaluate the greenfield, but we’re not pressing on aggressively on it at this point.

Operator

Your next question comes from Fai Lee - RBC Capital Markets.

Fai Lee - RBC Capital Markets

Just a question for, Richard when you were talking about Western Canada, I believe you used the words maybe blip on the radar screen and I’m just trying to maybe get more color on that. Is that with reference to the upcoming year, or do you see additional opportunities to significantly grow your Western Canada presence perhaps through consolidation?

Richard Gearheard

I think we’re seeing Canada and our U.S. acquisitions, which are fairly significant, I mean, roughly last year we bought around 60 places. That’s really significant, but I think the revenues are like $350 million that we’re projecting. When you have revenues of over $6 billion, that’s what I meant is that they’re not going to have major impacts on our results in 2010.

They will be positive impacts, but to say that things, that our mix of chemicals, fertilizer, like that, they’re not going to substantially change. That’s my point. I think they’re very good acquisitions. I didn’t mean to minimize that.

Fai Lee - RBC Capital Markets

I guess my question is there more opportunity to continue to grow in Western Canada through acquisitions?

Richard Gearheard

Definitely.

Fai Lee - RBC Capital Markets

You mentioned that there’s a greater weighing to fertilizers in Western Canada. Can you maybe just elaborate in terms of how those margins compare? Are they a little lower than the U.S. Corn Belt just due to the type of services you offer?

Richard Gearheard

Generally, retail margins are somewhat lower in Canada in general. It’s just, their expenses are lower too. So depends we have some facilities up there that are fully engaged in application business, some that aren’t. Your expenses are heavier in your application facilities, but so your margins are also higher, but for the most part, I would say that the margins are lower in Western Canada than the United States.

Fai Lee - RBC Capital Markets

Just on a separate question, in the press release there was a mention of the chemical rebates increasing year-over-year. Is that just due to the full year inclusion UAP or there were a change in the rebate structure in ‘09 versus ‘08?

Richard Gearheard

Well, I think we actually said that, in the fourth quarter they actually went down, but overall, that is one of our major synergies and that’s one thing we’ve been focused on and it was hoping to get the expertise of people like Dave Tretter and the rest of the UAP procurement group and chemicals and apply it to all of our chemicals including the Agrium Retail.

Fai Lee - RBC Capital Markets

Yes, I was referring to the annual. So the increase was also a combination of synergies too then?

Richard Gearheard

Yes, our margins in total are down somewhat from ‘08, but if you compare them from our baseline, which is ‘07, they are up.

Operator

Your next question comes from Charles Neivert - Dahlman Rose.

Charles Neivert - Dahlman Rose

Quick question on Vanscoy, what’s the current operating rate there?

Ron Wilkinson

We’re running at full capacity right now.

Charles Neivert - Dahlman Rose

Obviously, you’re looking at doing that for the remainder of the year. What’s your current share of Capatex? When they’ve made sales, how much do you guys get of that?

Ron Wilkinson

It’s just below 9.3%.

Charles Neivert - Dahlman Rose

You had mentioned that, you guys have a little bit of, I guess if I’m looking at the major crops, not so, and do you guys have a leaning toward wheat, I mean in terms of where your fertilizers are going, is wheat as the more important crop for you guys in terms of acres and things of that nature?

Richard Gearheard

Well, from retail, definitely its corn.

Charles Neivert - Dahlman Rose

Yes, on the wholesale side I think is where I’m…

Ron Wilkinson

From the wholesale side, the majority of our sales are in the United States, so we do like corn. It is probably overall the most important crop. Then followed by wheat and then in Western Canada, Canola.

Operator

Your next question comes from Elaine Yip - Credit Suisse.

Elaine Yip - Credit Suisse

With regard to your national gas hedging, how much of your nitrogen production do you have now hedged for 1Q and at what price?

Kevin Helash

Sure. We have I’d say, essentially the majority of our gas hedged for the first quarter when we take into account our industrial sales and for the entire year, we’re about 50% hedged and depending on the day, right now we’re a little above or a little below with the strip.

Elaine Yip - Credit Suisse

I know what the spread between your NYMEX and ACO gas having really narrowed over the past few months, what is your outlook on the typical cost advantage you see on the gas side, and also if you can comment on your sulfur cost currently and looking out into 2010.

Kevin Helash

I’d say at a high level we’re expecting that the spread, the ACO basis spread will probably continue for sometime at the current level, which will be down from the historical average. So you can just pencil that in if you look at where historical basis has been to today on our nitrogen side. Then on sulfur, we have I’d say a quite complicated mix of how we buy sulfur.

If you think of it in terms of kind of a third on an index, a third on fixed and a third kind of exposed to spot, that’s about how our sulfur is sourced. If you see a $10 increase in the price of sulfur in the Vancouver or Tampa markets, the impact to us on a cost of MAP is quite small. It’s not a significant increase to us.

Elaine Yip - Credit Suisse

Then with regard to your retail acquisition strategy, you’ve closed on a good number of assets over the past year, but with the outlook improving in 2010, the outlook for a strong spring, do you expect that pace to continue or do you expect it to be more difficult to find attractive acquisitions on the retail side?

Mike Wilson

It’s Mike. It’s always a challenge to find good acquisitions, but we’ve got a strong team in the retail group that understands the different assets around North America, knows which ones to target and our growth is going to be a combination of organic and acquisitions. So we’re still confident that we can grow that business significantly.

Operator

Your next question comes from Jeff Zekauskas - JP Morgan.

Jeff Zekauskas - JP Morgan

Your overall natural gas was $4.82/MMBtu including gas hedging. What would it have been without the gas hedges?

Mike Wilson

Kevin, do you have that number handy?

Kevin Helash

Jeff, I don’t, but I can certainly get back to you shortly with that.

Jeff Zekauskas - JP Morgan

Then just secondly, on your private label corn seed prices for 2010, do you expect them to be up, I don’t know, roughly 5% this year? Is that a good number?

Richard Gearheard

Tom, why don’t you give an answer to that?

Tom Warner

There will be not much change between 2010 and 2009. It’s insignificant this year.

Operator

Your final question comes from Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

I just wanted to follow-up on some of the seed discussion. You mentioned in the release that farmers were moving to new seed technologies and I wonder, particularly in corn, last year was a year where maybe there’s was less migration to the higher traded offerings, particularly seem to be more people interested in the double stack.

I’m wondering what you’re seeing in terms of farmers mix shift? Are they going back toward the triple or are they going to smart stack? What are you seeing?

Richard Gearheard

Tom, can you give that?

Tom Warner

Yes, it depends where you are. Obviously, you can see in the Western plains, you don’t need the triples, but I don’t think there’s been a big migration either way in 2010, I don’t see much changes in which way the farmers are moving.

Mike Wilson

I’d like to thank everyone for joining us, 2010 looks like it’s going to be a pretty good year. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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Source: Agrium Inc. Q4 2009 Earnings Call Transcript
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