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Executives

Denita C. Stann - Vice President of Investor and Public Relations

William J. Doyle - Chief Executive Officer, President, Non-Independent Director, Chief Executive Officer of Potash Corporation and President of Potash Corporation

Michael T. Hogan - Senior Vice President of PCS Potash

Stephen Francis Dowdle - President of PCS Sales

Analysts

P.J. Juvekar - Citigroup Inc, Research Division

Joel Jackson - BMO Capital Markets Canada

Ben Isaacson - Scotiabank Global Banking and Market, Research Division

Vincent Andrews - Morgan Stanley, Research Division

Jacob Bout - CIBC World Markets Inc., Research Division

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Michael Picken - Cleveland Research Company

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Steven Hansen - Raymond James Ltd., Research Division

Edlain S. Rodriguez - Lazard Capital Markets LLC, Research Division

Paul D'Amico - TD Securities Equity Research

Mark R. Gulley - Gulley & Associates LLC

Potash of Saskatchewan (POT) Q2 2012 Earnings Call July 26, 2012 1:00 PM ET

Denita C. Stann

Thank you, Brock. Good afternoon, everyone. Thank you for joining us, and welcome to our second quarter earnings call. In the room with us today, we have Bill Doyle, our President and CEO; Wayne Brownlee, our Executive Vice President and Chief Financial Officer; David Delaney, Executive Vice President and Chief Operating Officer; Joe Podwika, Senior Vice President and General Counsel; Mike Hogan, Senior Vice President of PCS Potash; Brent Heimann, President of PCS Phosphate and PCS Nitrogen; and Stephen Dowdle, President of PCS Sales.

I'd like to welcome the media who are listening in and remind people that we are live on our website. This morning we posted an investor presentation on our website and during Bill's remarks, we will be highlighting some information from his presentation.

I would also like to remind everyone that today's call may include forward-looking statements. Such statements are given as of the date of this call and involve risks and uncertainties. A number of factors or assumptions were applied in the 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 our most recent Form 10-K. Also, today's news release, which is posted on our website, includes a reconciliation of certain non-IFRS financial measures to their most directly comparable IFRS measures.

So I'll now turn the call over to Bill Doyle for some comments, and then we'll go to questions.

William J. Doyle

All right. Thank you very much, Denita, and good afternoon, everyone, and thank you for joining us for this discussion of our second quarter results.

We appreciate the opportunity to talk about the factors that shaped our performance during the quarter and the conditions that we believe will allow us to demonstrate the full potential of our company as we move forward.

We reported earnings of $0.60 per share for the second quarter, but the number in the headline does not fully reflect the underlying strength of our business. In fact, our earnings would have set a second quarter record if not for a noncash impairment charge related to our investment in Sinofert that had an impact of $0.39 per share.

Potash demand accelerated in most major markets as buyers worked to keep pace with the needs of the world's food producers. This strength was most evident offshore as Canpotex achieved record shipments. Brazil and other parts of Latin America shifted into a higher gear, while China and most other Asian markets also increased purchases.

At the same time, our Nitrogen segment continued to benefit from favorable market conditions and delivered record second quarter gross margin.

As pleased as we are with the underlying performance for our business, the bigger story is the strengthening agricultural fundamentals that are taking hold. As recently as early June, new-crop corn prices were on the verge of moving below $5 per bushel, with an expectation of record production in the U.S. Our U.S. farmers planted the highest total acres since 1937. Projections of record yields soon vanished. With severe drought this summer, the USDA has reduced its estimate to 146 bushels per acre, and that number is likely to fall even lower.

Tight global grain stocks are having a predictable impact on crop prices. While speculators are focusing on how high corn and soybean prices could go in the next few weeks, the more important question is how will the world recover from today's production shortfalls as this will require more than a short-term response. Right now, we need record crops every year to feed more than 7 billion people, and as we are witnessing today, it is not realistic to count on ideal growing conditions year after year. This reinforces the importance of farmers focusing on the things that can be controlled. Soil fertility is at the top of that list.

Over the past 5 years, economic uncertainty around the world has caused people in almost every industry and every country to try to be cautious with their money. In our industry, that has resulted in demand growth for potash and phosphate slowing from historical rates.

Not surprisingly, growth in crop yields during that period has been relatively stagnant as well. With a growing population that is consuming more food, pressure is mounting and we need to take a different approach.

With U.S. farmers feeling the impact of drought this year, there is considerable strain on grain inventories, and crop prices have been on the move. We are not cheerleaders for lower yields or higher crop prices, and even before this turn of events, crop economics were highly supportive for our business. But the challenge of meeting the world's food requirements continues to grow, and the need to improve soil fertility can no longer be ignored.

As people try to give context to the current situation in the United States, you hear a lot of differing views. No question, poor crops can affect farm revenues, but there are many other things to take into consideration. Many forget that most farmers entered this season with incredibly strong balance sheets after a number of years of historically high earnings. Those who deliver a crop, even with smaller yields, have an opportunity to capture record prices. Unfortunately, some U.S. farmers may actually lose their crops altogether, but crop insurance programs are expected to provide a strong safety net for those who are hardest hit. Based on 2011 data, almost 90% have crop insurance, and many took the fall pricing option, which means they could be looking at insurance payments based on $7 corn.

We anticipate strong fall applications in North America, and this is being backed up by the orders we are seeing today. While we believe that dealers will continue to exercise caution and not get too far ahead of the order books, an early harvest is expected, and that will mean buyers are likely to move early.

North American farmers are heading into the coming crop year with strong economic motivators and tremendous agronomic need. While lower crop yields will remove fewer nutrients from fields than a record crop, Slides 7 and 8 in our presentation highlight the growing nutrient deficit in the soil that must be restored. This season has served as a reminder that a healthy potassium level not only helps pay the bills in good years, it helps protect yields in difficult growing conditions.

If you look at Slide 9, you can see that fertilizer demand has historically been very resilient on the heels of a poor growing season.

It is also important to note that this is not just a U.S. story. A drought in one part of the world has impacts on the value and importance of crops in other areas. This is clear in what we see today in Latin America, especially Brazil. Farmers are heading into their key planting season with powerful economic motivators to increase acreage and yields. This requires more nutrients as soils there are naturally deficient in potassium. It has been estimated that Brazil could import more than 4 million tonnes of potash in the second half alone. Rest assured, Canpotex and PotashCorp will be ready to meet those needs.

The impact is also expected to be felt in China, which is a major buyer of the world's soybeans and corn. China does not want to rely on high-priced food imports when its farmers have the ability to increase their own production today and in the years ahead. We continue to see healthy demand for potash in China and believe 2012 will represent a growth year. While shipments under first-half contracts are now complete, we anticipate China will work to have new potash contracts in place in front of their important application season in September.

India is a primary example of the need to improve soil fertility practices. As one of the world's most populous countries, food security is always a key issue. Since March, India's food inflation has consistently been in double digits. Unfortunately, as this is happening, the fertility gap is widening.

If you look at Slide 11, you can see that 2012 is expected to be the second consecutive year of pronounced potash under-application. This is unfolding at a time when India's vital monsoon rains are delayed and forecasts suggest they will fall below normal levels. This poses a significant threat to yields as proper fertility, especially potash, is essential to protect food production during periods of stress. India has a significant need for potash, and we believe that will lead to a strong rebound in 2013.

In Asian countries outside of China and India, farmers are getting exceptional returns for crops like oil palm and sugarcane. This is supporting strong potash demand, which is expected to remain at healthy levels through the second half of 2012.

Looking at the world's potash markets as a whole, we anticipate shipments could be quite strong for the remainder of the year. Our third quarter earnings guidance is set at $0.70 to $0.90 per share. We have maintained our full year 2012 earnings guidance but revised it to $2.80 to $3.20 per share due to the adjustment for the second quarter impairment charge.

The key to our story is the rising need for our products and the engagement of buyers around the world. We are prepared to meet this demand through the rest of this year, and we are taking the required steps to ensure our capacity will be available to meet the world's needs in the years ahead.

As we have often said, it takes a long time and a lot of money to bring on new potash capacity and there are no shortcuts. We have the first-hand knowledge to back this up as we are now 9 years into the world's largest potash expansion program.

As we finalize the costs for the remaining work on our projects, we have increased our cost estimate for our New Brunswick project by approximately $500 million, raising the total capital cost for our entire expansion program of nearly 10 million tonnes to $8.2 billion. Despite our experience, the engineering work in advance and contingencies built into our plan for New Brunswick, we had an under-appreciation for the large scope of work and the costs associated with developing a completely new ore body.

Although the cost of this project will be higher, the timeline is unchanged. As others are evaluating and working to finance and engineer projects, our expansions will be lower-cost, paid for and available years in advance to those that are only beginning to put shovels in the ground at this time.

The strength in our cash flow generation is already beginning to show as our operating cash flow prior to working capital changes is anticipated to reach record levels this year. Even with the increasing capital cost, we see substantial potential to use our cash flow to generate strong returns for our shareholders.

We expect the remainder of 2012 and the years that follow will bring a sharp new focus in the world to the necessities of food production and proper crop nutrition. We have prepared for these times, and we will be ready to deliver.

I'm joined today by our senior management team, and we will now be happy to answer any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from P.J. Juvekar of Citigroup.

P.J. Juvekar - Citigroup Inc, Research Division

What do you think is going to be the reaction of Latin American growers to the U.S. drought? And what kind of acreage growth do you foresee in Latin America in both beans and corn? Do you see any shift from corn to beans and all that?

William J. Doyle

Well, P.J., if you think about Latin America, of course we have to talk about Brazil because it's the main driver. And if you think about where crop prices are, these guys are going to go into planting season with $7 corn, $15 beans; real, about 2 per dollar. I could tell you from what I know and the customers that we have down there and the reports I'm getting back, the Brazilian farmers are salivating about the opportunities for profitability in this next crop. There's no question that this is about as good a stimulation as you can get, and Brazilians are very quick to respond to market fundamentals. I don't know if you're going to see a huge acreage shift, and I don't know that you're going to see a massive addition to acreage. If you think about where Brazil is, obviously, the supreme crop, the corn crop has become more important and maybe a small expansion there. But I think most of the effort is going to be responding to the need to apply better fertilization to capture that profit potential. So I would look more towards application rates being expanded in Brazil. And as I said during my formal remarks, we're expecting an additional 4 million tonnes of potash to be exported to Brazil during the second half. Right now, the forecast for NPK is 29 million to 30 million metric tonnes, which will be a new record, and that has real potential to exceed the record previously set last year in Brazil. So Brazil should be very strong. It's not the only story in Latin America. Of course, we've got wonderful markets in Columbia, Peru, Chile, of course, a very strong ag market, Central America, Guatemala, Costa Rica. All of these markets are responding to profit incentives that are out there. So we expect Latin America to be quite strong.

Operator

The next question comes from Joel Jackson of BMO Capital Markets.

Joel Jackson - BMO Capital Markets Canada

A couple of points I want to touch on in the New Brunswick mine expansion and cost escalation. Maybe you can elaborate on the source of cost escalation. Could you also talk about if we might see some CapEx inflation on some of your remaining work on your Saskatchewan brownfields? And also, considering your recent commentary to return cash to shareholders pay as you go, does the $500 million cost escalation in New Brunswick imply that there's sort of reduced incremental cash returns over the next 18 months?

William J. Doyle

I'll answer the first question -- the last question first and then have Mike Hogan to talk about New Brunswick and our other potash expansions. The answer to your question is no. The additional capital cost will not affect our ability to return cash to our shareholders. Mike, do you want to speak to the New Brunswick situation and the other mines?

Michael T. Hogan

As Bill mentioned in his opening remarks, our Picadilly project is unique relative to our other expansion projects in the sense that we are accessing an opening, a new ore body, boring 2 shafts and the associated infrastructure to support that. This aspect of the project closely mirrors that of a greenfield operation. At the time, we do not fully appreciate the scope of work required for this and our adjacent mill facilities. And as Bill mentioned, this does not impact on our current timelines. We've recently conducted a review of our Rocanville expansion project, and it is on time and on budget.

Operator

The next question comes from Ben Isaacson of Scotiabank.

Ben Isaacson - Scotiabank Global Banking and Market, Research Division

I just have one question on your guidance. It's a bit of a long-winded question. It appears that you're going to need to sell about 15% more potash in the second half of the year than you've ever sold in any second half, and that's to achieve the low end of your guidance of about 8.8 million tonnes. And so when I look at your Q3 guide of $0.70 to $0.90, it suggests that Q4 is going to have to be a pretty big quarter. Can you just talk about how you see the shape of volumes developing over the next 2 quarters both offshore and in North America and maybe put that in context of your comment that there might be some more downtime taken?

William J. Doyle

Well, the downtime issue is always one to match in supply and demand, which we've been faithful to that philosophy as long as it serves us well, and it has for many years. When I think about how the markets shake out for the next couple of quarters, obviously, with this profit incentive, Ben, we're going to see a real response in the U.S. If you think about the U.S. market alone, we're on a fertilizer year, which ended June 30. So the fertilizer year of July 1, 2011 to June 30, 2012, U.S. market was down 2.1 million tonnes. That was due to macro factors and the end-of-the-world story, which happens every day with Europe and Spain and Greece. And we talked about the impact on the conservative nature of farmers' spending and dealers' spending. So that market down 2 million, that's very unusual. Normally, the U.S. market clicks along at a very steady, predictable pace. So with that, we see -- and with the profitability out there for the next year's crop, which obviously starts to be fertilized once this one is harvested, we see very strong demand shaping up. And I can tell you that we just finished our summer fill program last Friday, and we had very, very strong orders placed. So that gives us a really good idea that this market is going to respond. We think the U.S. is going to be up more than that 2 million tonnes, that it will rebound nicely from this current year. If you look at previous years, you go back to 2008, 2009 and then see the recovery, you can see a substantial recovery, and we've seen that before. So we expect a strong U.S. market. And then I would also tell you with the signals we're picking up overseas, and I talked a little bit about Brazil but other markets as well, that people are starting to understand what the impact of this unbelievable drought situation. And I read a lot of things that analysts write and supposedly, knowledgeable people write, I'm surprised how few people really understand that this is a global game-changing event, the drought in the United States, which is of historic proportions. And then if you go back -- we don't know yet how big an impact. People originally compared it to the '88 drought, and now you're hearing the 1956 drought. We don't know yet what the final outcome is going to be. But when you look at the U.S. growing 1/3 of all the corn produced in the world and being the #1 corn exporter to the world, the impact of this drought is going to be felt for a number of years. This means that you're going to have enormous pressure on grain supply around the world for at least the next 2 years, if not longer, because what other -- the other thing that people forget is demand is growing. Demand is not abating. Even in 2009, which was the worst year for our industry, grain consumption went up 2% around the world. And so we have more mouths to feed, people with higher incomes, the expectations for better diet, the move from starch to protein. Very few people understand demand. They can add up what projects they see out there on the production side, but they consistently ignore and underestimate the power of demand. And so this is a game-changer, a global game-changer that people need to appreciate. But we see 2013 as an extraordinarily strong year. We think it's going to be a record year for Potash Corporation. I think it's going to be a record year for the fertilizer industry. There is such a need to no longer ignore the soil fertility requirements around the world, and so you start adding up all the pieces, the need for India to also respond to 2 years of severe under-application from a distorted subsidy system. They can no longer do that because food security is the essence of the issue. So I think that it's very important to understand what the real impact of this severe record drought in the U.S. will have not only for the balance of this year but in the years to come.

Operator

The next question comes from Vincent Andrews of Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

Maybe we could talk a little bit about where inventory sits at the producer level in potash. And just, Bill, give us a sense of when you think we'll get back towards that 5-year average because, I guess, it's obviously very clear what's happened to your point in terms of corn and soybean supply and demand. But from what I can tell, the dealers' view is that there's plenty of products around right now and there's no sense of urgency around procuring it because there's no concern price is going to go up. The concern that price is going to go down is obviously abated, but there's no concern that price is going to go up. So just give us a sense of how you see that playing out over the balance of this year and into next year. I think that'd be helpful.

William J. Doyle

All right, I’m going to have Stephen Dowdle respond to that, Vincent.

Stephen Francis Dowdle

Vincent, we have producer level inventories that run at the 3 million tonne level. And as we saw in the second quarter, that there was certainly risk-aversion mentality going on amongst our customer base. And they were determined to destock the dealer pipeline, and they were very successful on doing that. But as we were watching this, we knew that in the third quarter, as we're coming into our summer shutdown period, that we were going to need to have the inventory meet the anticipated demand that we saw coming to us during the third quarter and in the fourth quarter for the fall application season, as well as to be able to meet our offshore commitments. So we consciously accumulated that inventory, which we feel will be necessary. And now as we enter the third quarter, looking at the fall application season, knowing that we are going to have very strong demand for fall application, and we have already seen evidence of this with the response to our summer fill program, we feel that we are going to be in a very strong position to meet that demand, as well as to meet the offshore demand that is very strong, particularly as Brazil is preparing for their planting season.

William J. Doyle

Vincent, I would just add that you talked about pricing being flat, and I know there's a lot of assumptions. I heard someone said, well, pricing will be flat for the next 2 years, which I find just astounding how anyone knows that. But if you look at where the market is today, and we say -- we've said towards the lower end of our guidance range, so we think it's somewhere in that 53 million, 54 million tonnes this year. That's the best guess we have at the moment. But next year, you're going to see a record potash year. And so what's that number? Is it 60 million, 61 million, 50 million? I'm not sure exactly. We'll have a better feel for it as we get closer to the end of this year. But this is going to be a takeoff year, and because people are going to respond to this problem, which is a very serious one, so you're going to see pricing pressure return, and it's going to be returning here -- in the next 6 months you're going to see a pricing pressure return to the market, and you're going to see escalating prices in 2013 and '14. There's just no doubt about it because you're going to have real pressure on potash supply because the demand is going to be needed to respond to the need for higher yields around the world. And the only way to do that is to stop playing with soil fertility, stop the political games that occur in some areas of the world and understand this is an important mission because people's lives are at stake. It's that serious. I mean, this is a very, very serious drought that has enormous repercussion for global food supply.

Operator

The next question comes from Jacob Bout of CIBC.

Jacob Bout - CIBC World Markets Inc., Research Division

My question is on longer-term potash demand, and I think what you're looking for 2012 is somewhere between -- I think it's 53 million and 55 million. And now you're talking about potentials of maybe 60 million in 2013. How are you looking at growth in the 2013, 2014? And maybe help us with a bottoms-up analysis. And what do you expect in Brazil, India, and China over that time period?

William J. Doyle

Continued growth in all 3 and a big recovery in India. If you look at India alone, under-applied by at least 2 million tonnes for 2 consecutive years, so 4.5 million tonnes shortfall in India. Some of the statistics show now a 7:1 N-to-K ratio, and I just read earlier in the week that one Indian authority said he think it's closer to 10:1 N-to-K ratio. And so what does that give you? That gives you, as we said, at the moment, the last 3 months, April, May, June, 11% food inflation each month in terms of Indian wholesale food prices. And then if you break that down, you think, well, what does that mean? And they talk about the fact that cereals and sugar production is good, still, 7% increase in cereal and sugar wholesale prices. Fruits and vegetables, up 18%; oilseeds, up 19%; pulses, up 20%. This is going to get people's attention in India. You've got an election year coming in 2014, and there's just so long you can have a distorted subsidy system which makes the nutrient in greater supply the most attractive. For a lot of reasons, that just doesn't work, and the biggest one is agronomics. And so you have an increasing threat to the Indian food supply, an increasing threat to food inflation in India, and that's just one bottom-up example of what's going on in the world. Does China continue to import soybeans at a growing record level so they can move from 60% of all the soybeans in the world to 70% of all the soybeans in the world when they can grow their own soybeans much more efficiently as they apply the proper amounts of potash and other fertilizers? I think China is going to be very much focused on increasing fertilizer application rates and making sure soil fertility levels are proper to address the food pressures that they're feeling. Brazil, the agronomic powerhouse, the food powerhouse that Brazil represents, whether it's soybeans or sugar or cattle or oranges, and Brazil is going to respond to these market signals as well. The U.S., which has been under-fertilized for a number of years, will respond as well. So just look at those 4 markets and then think about Malaysian, Indonesian palm oil and the pressure on edible oils. And you can go down the road and see that this pressure is a global pressure on the need to respond to the implications of extraordinarily tight stocks-to-use ratio across the board for grains, oilseeds, fruits, vegetables, tremendous pressure on food supply.

Operator

The next question comes from Mark Connelly of CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Bill, you used to talk about diversification a lot more than you have lately, potash first, but nitrogen and phosphate, important, too. And I think we see in this quarter's results that they were important. What I'm wondering is, do you still value that diversification of mix the same way, and do you think you're getting to get credit for it as potash gets bigger and bigger?

William J. Doyle

We evaluate. We sure do, and we think it's very important. Whether we get credit for it or not, I don't know. But as a company, we certainly appreciate the world-class position we have in both phosphate and nitrogen. We spend a lot of time on those business. We talk more about potash because obviously, we're the biggest in the world in potash. We got more activity in potash. And if you look at gross margin, there's another reason to talk about potash. We're very proud of those businesses. They are extraordinarily well placed in the world both in terms of their competitive capability, the natural resource. The rock in North Carolina is as good as it gets around the world. What our people do in Northern Florida, also extraordinary capability there. And then you start thinking about our nitrogen plants, and we're going to be bringing on this 0.5 million tonnes at Geismar here in January of next year. We're going to be a player in the UAN market in the first quarter, ready for spring season next year. A little addition there at Augusta. We're looking at some other potential de-bottlenecks at Lima. We think that we've got tremendous capability in nitrogen and in phosphate. It doesn't get talked about a whole lot, but I can tell you, within the company, we appreciate it very much.

Operator

The next question comes from Michael Picken of Cleveland Research.

Michael Picken - Cleveland Research Company

I just want to address the question regarding what happens with grower yield in crops and whether you think that there'll be more P&K retained in the soil. We had talked to some regional dealers, particularly in the most drought-impacted areas, and they had talked about some potential volume weakness as the reason maybe they were being cautious on purchases, and I just wanted to see sort of how you see that playing out. And if, in fact, we do get an August rain that saves the soybean crop, could we see stronger fall demand in those areas this fall as well? But just understanding the whole agronomic picture in terms of what happens when there is a lower yield in crop.

Stephen Francis Dowdle

All right, Michael, I’m going to ask Stephen Dowdle. Some of you may not know Stephen has

A PhD in tropical agriculture, so he's well-equipped to answer that question. Steve?

Stephen Francis Dowdle

Yes, Michael, last week we had the opportunity down at the Southwest Fertilizer Conference in San Antonio to meet with our customers, and of course, everyone is very upset with the growing conditions. And we're in the growing business, and we like to see bushels. And people look out their windows and see their crops suffering and burning up, it's not a pleasant sight. And as far as what the agronomic impact in nutrient removal, people recognize that to have lower yields, you're removing less nutrients. But people -- our customers are not focused on that. What the focus of the conversation last week was on the opportunity that very, very strong planting acres for next year, very strong prices to incent higher yields, and by far, that is going to trump the concern over fertilizer application than what residual nutrients may or may not be in the soil. As you can see from the slides that we presented, in years following drought years, in every year, there's been an increase in nutrient consumption, except for 1974, which, of course, was the year of the oil shock. And given the fact that across the corn belt here, we have been under-applying fertilizer, particularly potash. We have been drawing down the soil bank. And there is a growing realization that we need to make up for this deficit, and there's also a growing realization that this year and this coming year is going to be a great opportunity to do that because the returns and the affordability of fertilizer, as you can see also in the slides, that both for all nitrogen, phosphorus and for potash, all 3 of these nutrients are near their 10-year lows as far as the affordability relative to corn production. But we think that these realities are going to manifest themselves and very, very strong recovery year this coming fertilizer year.

Operator

The next question comes from Kevin McCarthy of the Bank of America Merrill Lynch.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Bill, I was wondering if you could comment on potash pricing prospects and specifically address how much of the $30 per tonne increase in Brazil has been implemented successfully at this juncture. And then with regard to Asia, what have you incorporated into your financial guidance with regard to realizations in China, Malaysia, Indonesia, et cetera?

William J. Doyle

Kevin, I'm going to ask Stephen to comment on that. I'm not going to comment about China or India negotiations because we just don't do that before we negotiate. But Stephen can talk about some of the other issues.

Stephen Francis Dowdle

Yes, so Brazil, the price increase -- the $30 price increase has not been fully realized, but I should say that prices are marching up. And we saw in July that there was a little pullback in the demand as the importers were wanting to clear some of the congestion at the ports. There's a very heavy lineup in August. There's very strong demand projections for September, October. And as what happens in Brazil, when you get into these very strong demand months, Brazil is very much of a spot market. Pricing goes month by month usually. And what we're seeing right now, as this demand increases, we see that price increase marching month by month as well. So by the time we get into the very, very peak demand, it's very possible that that full $30 will be realized, and there could be more to come.

Operator

The next question comes from Don Carson of Susquehanna Financial Group.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Yes, also a pricing question both near and medium term. In your guidance, you talked about how you expect pricing on potash to be down slightly in the second half of the year. I'm trying to square that with your comment that you're going to have a record -- or expect record domestic shipments in the second half of the year. It would seem that with that premium-priced domestic mix, that you should have higher price in the second half of the year. And so I'm wondering, does this sort of reflect the continued aggressive competition from Russian barges, which you outlined on your last call? And then would you see the Russians getting more disciplined next year as the market tightens? And then finally, just to clarify on price. So you talked about pricing going up next year. How do you see it playing out in terms of domestic versus offshore? Is this going to be the year we finally eliminate that gap between offshore and domestic pricing? I know there's a great differential, but there's still a significant gap, even taking that into account.

William J. Doyle

Will take it to a tag-team answer here, Don. First of all, I have no idea what the Russians are going to do. I never have any idea what the Russians are going to do. Secondly, in terms of...

Denita C. Stann

Is pricing lower in the next...

Stephen Francis Dowdle

Yes, as far as the domestic pricing scenario, what you're seeing in the second half is really a reflection of our summer fill price. We had a summer fill price that was below levels that we were selling during the spring application season. And it's very difficult to predict exactly what the volume will be in the third quarter and the fourth quarter and exactly what volume is going to move, at exactly which price, particularly before we have our order book. But that's what you're seeing in the second half on the domestic side. It's really a reflection of our summer fill program.

William J. Doyle

Yes. I guess, Don, the point that I was going make is that pricing power, and people say you do have pricing power, well, when the markets are tough and you go through some slower periods, U.S. being down 2 million tones, as I said, the fact that the price stays moderate and doesn't take a big dip, to me, that's pricing power. But I would also say on the plus side of prices that we expect this market to tighten considerably here over the next 6 months and into 2013, and you're going to see higher prices for potash. But higher prices are coming, and it's just a function of the market tightening up and demand returning full throttle, as I said earlier when someone asked me about the top-up approach. But pricing power is -- it works both ways, and I think you'll see higher prices in potash as we go into 2013.

Operator

The next question comes from Jeff Zekauskas of JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Over the past several months, there's been good strength in pricing in the ammonia market in North America. Can you give us an idea of how you see ammonia prices and margins over the coming year? And maybe if you can also discuss changes and supply-demand balance.

William J. Doyle

All right, Jeff, I'll let Stephen answer that one as well.

Stephen Francis Dowdle

Of course, ammonia prices are very difficult, let's say, impossible to predict. We know the volatility that's inherent in nitrogen. However, we've seen recent strength in ammonia, and our expectation is really look out maybe 30 or 60 days. And some of the reasons for the strength have been some delays in some of the new projects that were coming on. There's also some turnarounds right now. But I think in general and to make a general comment about the nitrogen market is that the expectation is particularly for the upcoming year with a very large area for corn planting in North America is that this is going to lend some underlying support for the nitrogen market. On the industrial side of things, our industrial customers are telling us that they are surprised by the demand that they have for their products. Our ammonia sales have remained quite steady, and they are benefiting from lower gas prices in the U.S. and even seeing an increase in their export opportunities. So our industrial customers are in good shape. They have low inventories. Their customers have low inventories, and so their demand has been very steady.

Operator

The next question comes from Steve Hansen of Raymond James.

Steven Hansen - Raymond James Ltd., Research Division

Just very quickly on your demand expectations for next year when you suggest Indians will likely step back into the market. I'm just curious whether you make any presumptions around the changes at the subsidy system, which seem warranted, or whether or not you just believe that they will simply force a step back in the market in order to protect the yields.

William J. Doyle

I think both, Steve. You just can't -- you can't play games with food production in a country of 1.2 billion people. It's just a very dangerous thing. So I think they're going to be forced to respond because you just can't let the N-to-K ratio deteriorate further. There are a number of Indian agronomists who are saying that it is an absolute agronomic disaster in India, what's going on right now, and they say it needs to be addressed immediately. And so this is coming out of some of the best agricultural minds in the country. And so they are going to have to change the subsidy system to address that because you just can't have this continuing imbalance because the yields are deteriorating and you're going to have much higher food inflation, which is already a serious problem, as I talked about earlier.

Operator

The next question comes from Edlain Rodriguez of Lazard Capital Markets.

Edlain S. Rodriguez - Lazard Capital Markets LLC, Research Division

Just a quick follow-up on India, Bill. I mean, have you entertained the option that they might decide to stay away from the market this year? I mean, they saw the same reports that you've seen in terms of they need to come back, but the government doesn't seem to be doing anything about that yet. I mean, could it be that this year, they'll just, like, stay away from the market because the issue has been the price they're willing to pay and no one seems to be budging in terms of the producers and the Indians?

William J. Doyle

Now, Edlain, what I've learned about India is I never listen to what they say or believe what I read because it's always a negotiation in the press. What you really have to do is watch what they do, and that's much more meaningful. I don't know exactly what they're going to do. We think that they're going to have a new contract before the end of this year. They've become very unpredictable, in a certain sense, are our most unreliable customer over the last few years. You can't rely on the Indians to be in the market, and they've gone to essentially about 5% of global trade from normal 10% position. But they just -- the fundamentals of food production don't allow them to do that for much longer. So I think you're going to see them come back despite the negotiations in the press. I think you'll see them come back into the market, and I think you'll see it before the end of this year. But certainly, 2013, India is going to be very, very strong in the potash market and I think in the phosphate market as well.

Operator

The next question comes from Paul D'Amico of TD Securities.

Paul D'Amico - TD Securities Equity Research

Just 2 small questions, first for Mike. You were talking about in terms of $500 million incremental cost in the New Brunswick expansion. I'm just curious. I know you said that it doesn't extrapolate to the other expansion projects. I'm wondering, does it have any impact to your estimated greenfield mine costs in terms of what you discovered and what you would anticipate for others? That's the first. Second, Bill, with respect to reference for next year being a -- expecting a record year for potash, I'm just curious, is there any influence or impact on your targeted year-end inventory for that?

William J. Doyle

The second part of the question again?

Paul D'Amico - TD Securities Equity Research

You mentioned about a record year for potash for -- well, you said Potash Corp, but I assume you also talked about the potash market for 2013. So I'm just wondering if we're talking about production curtailments probably by the end of the year as well. Is there any influence from the expectations for next year into maybe carrying a higher inventory number for year end?

William J. Doyle

No, I don't think so. In production curtailments, we'll make that judgment when the time comes, as we always do. But let me go back. And I'll ask Mike to comment what he sees, but I would tell you that the big issue, the change from the early projects to the later stage projects, even that we've had -- the first half of our expansions were done with fixed-price contracts. Second half of our expansions are cost-plus. All of the new projects for brownfield projects and, of course, greenfield projects, we don't have any that are starting yet. They're talking about they're doing some work. All those are going to be cost-plus. So cost-plus has made me whiter-haired than I should be, to tell you the truth. And If I don't ever hear of another cost-plus contract, it will be too soon. But the impact that that has on the cost, the unpredictability of the cost because essentially, what you're doing is you are entering a situation in which -- in Western Canada here, our labor is getting shorter and shorter and more expensive and more expensive and you're cost-plus. So you're getting guys out of the union who have no idea what they're doing. I mean, they're a warm body, but you hire them as a pipe fitter, let's say, and they have no clue how to fit the pipe. So they come in, you're paying them $60 an hour, but they don't know how to do it. And so then the supervisor eventually has to come and do it, and so you pay a kid that should've done the job in 30 minutes, you pay him for 3 hours, and then the supervisor actually has to come and finish the job and you have to pay him too. And so these are some of the things that are going on on the cost-plus side, which, if I was starting a new project today, from a contingency point, I don't know what the hell I'd put in the number because it's so -- it's like trying to figure out what's in a gunny sack. You reach in and the thing is moving all the time. You don't know what you got. And so the fact that we're 78% complete with our potash expansions as of today gives me great comfort versus how I would feel if I were starting all over again or starting from scratch without even a brownfield capability. So I mean, I think the cost for brownfield expansions from this point forward are going to be a rude awakening for a number of players, and the greenfield cost for anybody that comes into that type of new mind, it would give me pause to think. But Mike, do you have anything else to add on that?

Michael T. Hogan

I think, Paul, the numbers that we spoke to on greenfield capital cost before those numbers were generated, and they're somewhat dated now. In light of our experience at Piccadilly, it has shown to us the increased risk associated with greenfield operations when you're looking at opening up a new ore body. Brownfield, I mean, you have existing infrastructure. You have existing access into the mine, and you know the ore body relatively well. But to me, it just indicates the upside risk for greenfield operations.

Operator

The last question will come from Mark Gulley of Gulley & Associates LLC.

Mark R. Gulley - Gulley & Associates LLC

Bill, I appreciate all the data with respect to nutrient addition and removal, but I'm wondering if the IPNI study can also make the link between that and ultimately, the question that farmers have on their mind, and that is crop yield. Even the reduced levels of fertility in the soil could still support good crop yields.

William J. Doyle

I'm going to have Stephen speak to that, Mark.

Stephen Francis Dowdle

Well, Mark, we know that there's a relationship between nutrient levels in soils and crop yields. That's why these soil tests have a so-called critical level, and the critical level is -- if you're below the critical level, there will be yield impact. If you're above the critical level, there will be the opportunity to have good yield. Of course, there's other factors besides nutrients that come into play, but there is no question that the IPNI data has been very definitive about the impact of the nutrient levels in soil. And I should say that growers are aware of this. University recommendations are aware of this, and there's many people -- most growers will do soil tests, and they will fertilize accordingly. Although we have seen recently, for whatever reasons, people have decided to withdraw that soil bank. But there is an awareness that the soil bank has been drawn down, and there's an awareness that it needs to be rebuilt.

William J. Doyle

Mark, when I was much younger, I had the opportunity to get to know Dr. Norman Borlaug pretty well. He said one simple thing to me, which I'll never forget. He said, "Bill, remember one thing. Agriculture is a science-based business. Anybody who ignores the science of agriculture does so at their own peril." Simple.

Denita C. Stann

Thank you very much, everyone. We appreciate your time today, and if you have any further questions, please give us a call at the office. Thank you.

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