Nutrien Ltd. (NYSE:NTR) Bank of America Securities 2024 Global Agriculture and Materials Conference February 28, 2024 9:50 AM ET
Company Participants
Mark Thompson - Chief Commercial Officer
Jeff Tarsi - Senior Vice President of Retail North America
Conference Call Participants
Stephen Byrne - Bank of America Securities
Stephen Byrne
Welcome back, got a good panel or a good fireside chat here with Nutrien. I've got Mark Thompson from Nutrien, Chief Commercial Officer. He covers essentially all of the wholesale aspects of Nutrien. And then I got Jeff Tarsi here that runs global retail.
I met Jeff about 20 years ago when he was with UAP, and I toured a cotton farm with him, which was kind of a new experience for me, having grown up in the Northern Corn Belt, but I learned about cotton from Jeff, but anyway, got a really good group discussion going here with these guys.
Feel free to jump in with questions when we get in here a little bit further.
Question-and-Answer Session
Q - Stephen Byrne
But maybe we'll start off with potash. I think I'd like to hear your views on this one, Mark. Where do you see potash going? Why is it lagging behind your other nutrients? And what's the outlook from your perspective?
Mark Thompson
Yes. Thanks, Steve. So thanks for having us. First of all, happy to be here. Sure, on potash, I think to understand where we're at today, probably have to go backwards a little bit. So I think from a Nutrien standpoint, just to start from a high level, since the Company was created in 2018, the strategy in potash, as it relates to volume and our overall approach to the market, has been very consistent. It was continuing to maintain share as global demand grows, and that share historically has been in that 19% to 20% range.
And so, about two years ago, when we got into the second half of 2021 and we started to see some supply disruptions, we saw the flooding of another mine in Canada that was not Nutrien's asset. We saw Belarusian sanctions, and then, of course, the war, breakout in Ukraine and really caused a supply crisis. And so, our first response in that situation was to say, how can Nutrien put more volume in the market to stop prices from flying up, which we knew would be unhealthy for demand, and to try to take a path to do that.
And ultimately, I think at this point, some of that's history, but we saw potash prices go above $1,000 a ton and really saw demand be destroyed by that. And so, for the last 18 to 24 months, we've really been on this trajectory of demand recovering. And so, of course, in 2022, we saw global shipments fall from about 70 million tons down to 61 million tons in 2023. We saw some improvement in that as we worked through inventories from the panic buying and saw prices start to moderate.
And so, really, in the second half of 2023 is where we started to see broad-based global recovery in the potash market. At the same time, we've seen supply out of the former Soviet Union recover, albeit through new high cost to serve routes that weren't there previously. And so, as we enter 2024, we're actually back into a position whereas Nutrien, we say, we're continuing to see demand recover. We expect demand to grow again this year from 67 million to 68 million tons last year to what we'd now say is 68 million to 71 million tons.
So, we've got about 2 million tons of demand growth globally at the midpoint. And we believe that will be filled maybe half of that from the FSU and the balance from Canadian producers like us and Laos. And so, we see 2024 as a much more balanced market. When you think about Nutrien's role in that, it's really back now that the supply crisis is behind us, back to the role that we've had previously, which is continuing to maintain our share as the market grows. So as that market recovers, which we expect it will, as affordability has improved, some of the uncertainty around trade flows has improved.
And we look out to this year, we see ourselves continuing to grow share with the market really into that mid-cycle case that we see as 14 million to 15 million tons for Nutrien, in that share that we've traditionally maintained and enjoyed. And so, I think the benefit that we've got at this point is we put the steel in the ground, we invested in the low-cost assets we have, and really, from an installed capacity standpoint, we've got about 15 million tons there. And so, we really can grow into that more or less organically over the next couple of years as the market continues to recover, and we expect it will.
Stephen Byrne
And Jeff, on your side, on the retail side, do you think that, that severe contraction in application rates in the last two years, particularly in 2022, is driving increased application rates in 2024? Or is it just going back to normal?
Jeff Tarsi
No. I think if we -- first of all, we look at '23, we saw -- we would have seen 11% increase in tonnage for the '23 crop year within NP&K. And then, if I look at the last quarter of '23, we would have seen a 15% increase. We had a really strong fall application rate. And look, part of that is -- some of that is recovery. And I think we talked about that quite a bit that there was quite a bit of nutrients that were banked in the soil over time when growers saw prices as more affordable. I think they pulled on that bank some. And, obviously, in '22, and then in '23, we saw them start to replenish.
But then you also got to recognize that from a corn standpoint, we pulled off 177 bushel corn crop last year. And so, that naturally is going to take a lot of nutrients out of the soil, and therefore, a lot of replenishing. We're forecasting tonnage to be up again in '24 over '23 6% to 7% across our retail network. So we -- you can't -- Steve, you can't invest in these hybrids, and in the last session you were having here and talking about a lot of the dynamics with the hybrids that we have today, but you can't invest in those hybrids and pay the cost they are to plant those without giving those hybrids to proper nutrition in order to get the yields that we're desiring to get.
Stephen Byrne
Do you think that 177 bushel suffered from soil deficiency?
Jeff Tarsi
First of all, I'm going to tell you, I was very surprised at the 177. If I would have looked at just how scattered rainfall was across the Corn Belt last year, I wouldn't have personally predicted. And I always feel like I'm a pretty good -- I've been in this thing for over 40 years. And I always feel like I got a pretty good feel for where yields are going to come in. Those yields surprised me from that standpoint.
I can't sit here and tell you that I think that yields suffered from deficiency because even when I look today, I think USDA came out a couple of weeks ago, and they're projecting somewhere 180 to 181. And I have a hard time following that as well because that was a really big crop we produced last year. And we're going back into the spring. We've had some drought relief, but we haven't had as much as we need from that standpoint.
Mark Thompson
Steve, I think we've looked around and we asked ourselves this question -- I mean, we've seen in some of these international markets on potash, what we would believe to be severe under-application of nutrients in the last couple of years. And of course, you got a lot of different factors going on that can drive yield on an acre.
But when we look across key global markets across the world, and we look at -- traditionally, how we think about it is you've got that trend yield, and really, how are yields performing versus trends. So when we look across all the major ag regions of the world, we would say that over the past three years, which is really when you've seen more of that under-application of nutrients, particularly potash, yields are about 3%, on average, below that trend if you look across global markets for grains and oilseeds. And of course, that can be weather. It can be nutrient under-application.
But I think your question on potash in particular, potash is a nutrient that is really important when you've got drought conditions. It's going to be one of those nutrients that helps to prevent the impacts of drought. So we look at those yields globally and they are below trend, and we think nutrients is obviously one of those things that's going to help catch up.
Stephen Byrne
All right. Let's jump to nitrogen. What is your outlook near term for nitrogen demand in the U.S.?
Mark Thompson
Yes. With respect to the U.S., in particular, right at this moment in time, heading into the spring season -- Jeff could comment after me on what he is seeing from a retail standpoint, but we see the U.S. Gulf, in particular, as being very tight just in this moment in time. Obviously, the U.S. is a net importer of nitrogen products, and we're shaping up to have another pretty strong year from a planting standpoint on corn, it looks like.
And so, really, the U.S. needs to attract those imports on an ongoing basis to get ready for that spring season. And so, particularly in urea and UAN today, we see trade balances continuing to be tight. And with some of the weather starting to improve in pockets of the U.S., if we get going here a little bit more quickly than maybe is traditional, we could see a squeeze in some of these inland markets for nitrogen.
I think the same is true on ammonia. Ammonia has really been a bit of a mixed supply picture, but we do see some tightness right here and now today in the U.S. Gulf. And so, as we look out at least through the first half of the year, we're very constructive in terms of nitrogen demand, but also tightness in supply heading into the spring here in North America. But I'll let Jeff...
Jeff Tarsi
Yes. We -- and again, we saw very heavy ammonia usage in the fall, which sets up well for '24 season. And as Mark just discussed, one of the things that I look at right now is the fact that we're planting corn in South Texas right now. We've started planting some corn in Louisiana. We're not out of the month of February yet. And so, this thing looks like it could shape up really early.
Now, I realize there's some weather patterns going across the Midwest this week with some temperatures cooling off some. But my immediate mind goes to is how quick could we see a pull on products like nitrogen and how quick can we get ourselves replenished, and also coupled with the fact that until we got into turn of '24, we were dealing with a very low river.
And so, we couldn't move a lot of product up and down the river as well. So if this thing kicked off really quick, I think there could be some constraints there. I know we feel good about our asset base and how we're positioned going into the spring. So, we think we'll be able to satisfy our customers' demands, but it could make it tight.
Stephen Byrne
And how is it that you are well supplied on nitrogen? Is it in your wholesale supplies? Or is it at the retail facility that you think you have adequate...
Mark Thompson
Yes. Well, I can talk from a -- certainly from a nitrogen perspective in the wholesale business. We've talked about this, Steve. Reliability has been a big focus for us. When we look on a year-over-year basis for the Company, we were at about 10.4 million tons of nitrogen sold in 2023.
And between improved reliability in Trinidad by operating on a three asset plan to fully utilize our gas that's available to us there, and improvements on the back of some of the turnarounds we did at Borger and Geismar last year. We see about 0.5 million more tons this year, going from 10.4 million to 10.9 million tons at our midpoint. So, improved reliability is definitely playing a role in, I think, our network and us having supplies available to support our customers.
From an intercompany perspective, we always look at optimizing the integrated model in a way that's freight logical. So we've got areas of the U.S. and Canada, where it's extremely freight logical for Nutrien to self-supply from a nitrogen standpoint. And there's other areas where, of course -- and Jeff can talk about -- where they'll be procuring from third-party suppliers. But yes, we feel like we're in a good position if we do kick off with an early spring to support customers. And obviously, we do everything we can to do that.
Jeff Tarsi
Yes. And obviously, with fertilizer, that's obviously not a just-in-time market. And so, we're buying pretty much every month of the year. And as I look today at our inventory levels where we sit today, I think we're adequately surprised -- very adequately supplied through the middle of April and into 1st of May and in a good position really and truthfully for the first half of the year.
But we do that keeping in mind that we don't ever know when these springs are going to open up. And I could say four to six weeks from now, if the spring was very slow start, then I might have pulled it in a bit quick, but just in case, and now it looks like we're looking at it just in case where I think we're going to have -- I think we're going to have an early plant window here.
Stephen Byrne
And Mark, why is the U.S. so tight and not having attracted sufficient imports? Why is that?
Mark Thompson
Yes. I think there's a couple of factors to that. I think if you look sort of on a fertilizer year basis, or even look back 12 months, one of the dynamics we have seen more over the past year is exports in certain cases leaving the U.S. or Trinidad that sometimes are destined for North America that have sought out other destinations or end markets.
But I think on the supply side, you've seen some constraints out of Trinidad from a gas standpoint. You've seen some supply issues in the U.S. itself with production assets in the U.S., and I think different producers have been public about that. And then, I think from a Middle East standpoint, just you consider the logistics interruptions and some of the escalated costs associated with the conflict around the Red Sea area.
And as producers in the Middle East think about netbacks and where that nitrogen is going to be directed, right now, there's maybe some more complexity around getting to the U.S. Gulf and the cost of that than would be traditional. So I'd say it's really a combination of a variety of supply side impacts that, as Jeff said, if they coincide with demand, that's a little bit earlier than we expect, and a real push to get that product in market. I think that's what could coincide to cause some tightness potentially.
Stephen Byrne
So you clearly have excess supply of potash that you could bring on stream. What about nitrogen? Is that an area that you would be looking at capacity expansions?
Mark Thompson
Yes. I think when you think about our improvement plan. I think the best way to anchor over the next couple of years is probably that mid-cycle case that we talk about. So in the mid-cycle case, from a volume standpoint in nitrogen, you're short of at 11.5 million to 12 million tons in that mid-cycle case.
And I think the supply walk, the easiest way to think about the supply walk to get there, as I talked about, was from 10.4 million tons last year, the improvement to our midpoint this year is really that 500,000 tons. If you break it down, probably 60% of that is Trinidad. And the strategy we've employed at Trinidad to fully utilize the gas that's available to us, and then about 40% of that 500,000 ton improvement would be really looking at assets like Borger and Geismar where we've undertaken major turnarounds.
Really the remainder of that gap to get from 10.9 million to the 11.5 million to 12 million tons would be getting access to full gas utilization at Trinidad because we still assume in 2024 we'll be about 20% curtailed, and then, the completion over the next three years of the smaller incremental brownfields that we have been undertaking across our network and fleet. And as those come to fruition over the next two to three years, we see that 11.5 million to 12 million ton number being probably a good landing spot for us.
Stephen Byrne
All right. Jeff, I want to drill into the retail business a little bit here. You guys acquired a retail organization that I've known for a long time. It was a privately held group. And I knew them for a long time. My old college roommate was a farmer and relies on this group. But what that group explained to me was their profitability doubled, and they attributed it to the benefits from having your low-cost position, the cost that you can acquire crop chemicals, your proprietary products, and then the scale and the density of the platform and the benefits from that. Is this an opportunity that's going to be a continued driver for your business to continue to bolt on in the U.S.? Is there a limit to how much further you can go on that?
Jeff Tarsi
Well, I think if you just look at it from a share perspective today in that U.S. market, we're still probably below 25% market share. So my answer to that would be that there's still runway there for further consolidation. If you look at our retail organization, we really built it through a series of tuck-in acquisitions. I can probably name off -- I could probably go through the list and name off 200 and 250 that we did over time from that standpoint.
And these have always, and Mark knows this, too, because he spent a lot of time at M&A and we spent a lot of time together. These are always very synergistic to us. First of all, when you find these businesses like this, very rarely do any of them have a proprietary platform. And with proprietary products, a lot of times, we can double our margin with that proprietary portfolio. And that's -- look. That's across seed, that's across crop protection. That's what plant nutritionals and biostimulants and seed treatments and those type of things.
And then, the other factor that you mentioned was that because we do procure on such a large basis and that we should have some synergies there from that standpoint. And I might also mention that we take things from those businesses as well. And when we see niche things that they do in there -- and look, every one of these proprietary or independent-owned businesses, they have to be good to survive in these markets.
And so, when we find those niche things that they do that work well in their business, we can spread that out across 2,000 retail facilities across the globe. And like the Company that you're referencing now, they did some very unique things in seed, and they were very strong in selling seed. And that's something that, over time, we have greatly desired to increase our market share in seeds. So these -- they go both ways. There's a lot of things we can bring to those businesses. And yet at the same time, there are things that we can bring back across.
If I look at our Australian business and the Landmark business, that we bought in 2010, there are a lot of things there that we saw in the financial and grower financing side of the business that we've been able to bring over across our bigger portfolio. So we've gained a lot of synergies over time. And look, we've made a lot of investments in the last 15 years in that retail side of our business. And I tell our people every day, let's take some time now and collect some dividends off of that. We want to continue to be opportunistic when we find really good opportunities from a tuck-in standpoint, and we will be.
Stephen Byrne
And maybe talk a little bit about your Brazilian business where you recently took a write down. Has that been a more challenging area for you to build out that platform and why?
Jeff Tarsi
Well, it has been a challenge, particularly over the last 18 months. And the Brazilian market has been a lot more -- in my opinion, a lot more volatile than the North American market or the Australian market. And what happened in -- just to go back, we've acquired roughly 10 companies there in Brazil, 10 acquisitions in that marketplace. And what we're doing right now is we're taking a breather from acquiring further, and we're making sure that we get those 10 fully integrated. That's very important from us.
And particularly, when I speak to the fact that we had an extremely hard reset on nutrition prices, a lot of devaluation in the fertilizer market. And just as we got through that fertilizer devaluation, we went into a massive devaluation on the crop protection market. And I'm sure you've heard a lot of the basic suppliers talk about that same thing. We feel really good about where we sit right now from an inventory perspective. We really worked hard last year to get our inventory down. We really worked hard to put a lot of controls from a procurement standpoint in there.
But what happened is, when the Mark has referenced many times, when the Ukraine -- Russia's invasion of Ukraine came in, growers really started hoarding a lot of product because there's a long supply chain window on getting product into that country. And almost everything is an import into Brazil. And what's different there is it's very easy to lose transparency into what inventory levels are in that country for a couple of different reasons. Number one, it is a very fragmented retail marketplace.
Steve, we've got about a 2% market share there, and we might be the third largest retailer in Brazil, so very fragmented. Secondly, because growers store a lot of inventory on farm, so as you would know here in the States, 98% of the fertilizer we sell NP&K is bulk truckload, okay. That market there is 98% of bag market and super bag, we call it. And so, growers will store that fertilizer on farm.
Well, once that's on farm, it is very hard to have transparency into what those inventory levels are. They did the same thing with crop protection. And you wake up one day and you went from not knowing if you were going to have enough inputs to you've got a glut of inputs, and that starts a devaluation in a spiral and a lot of cost reductions and price reductions and such.
We think that we'll see significant improvement over '23, starting in the back half of '24. As you know, we're planting second crop corn there right now. Soybean harvest is coming off at a really pretty fast pace right now. And the big heavy season for us will be from August to December. So, we think we'll start to see improvements in that as we get into the second half of the year. But it is a much different market than the North American market from that perspective.
Stephen Byrne
Anybody want to get in here with a question? Up here in front?
Unidentified Analyst
I have two questions. So, one is, we are -- talking about how nitrogen is -- seems to be tight in the U.S. on the wholesale level. But at the same time, you made a comment that Nutrien retail is adequately supplied. So how do we reconcile tightness, which you see further upstream with the fact that you say you have enough inventory? That's the first one.
And the second I want to ask, in potash, Anglo American has a big project in the U.K. for a slightly different potash nutrient, polyhalite. And if you can talk about that because I think it's scheduled to come online in the next three to four years, how big could it be? How does it compete with MOP? And whether this is something of interest to you because they are actually looking for additional investments there?
Mark Thompson
Sure. Thanks. Maybe I'll take the second one first since the first one is probably for both Jeff and I. But yes, I think in terms of the second one, when you look at polyhalite as a product today and the global market for that product, it's sort of maybe 1 million tons or just under that. And it's been between a couple of hundred thousand tons and 1 million tons for probably most of the last decade.
And so, I think the biggest difference from sort of an agronomic or a content perspective is you think about MOP or potash and being in around that 60% potassium content, polyhalite, by contrast, is about 14% potassium content combined with micronutrients. And so, it's not really agronomically a substitute for potash. And because of the low analysis nature of the product, the use cases are quite different.
So from a nutrient standpoint, it's not something we've been focused on. It's not something that we would expect we will focus on. There are some smaller agronomic use cases for that today, but we wouldn't see that playing a role in having an impact on the overall global MOP market, and the use cases would be quite different for that product. I think maybe I can let Jeff start on talking about the nitrogen position that retail has today, and then I can maybe reiterate anything on the supply side.
Jeff Tarsi
Yes. And I think I stated a bit earlier in that because we sell the mass volume of tons that we sell, we're buying basically every month of the year, some product somewhere. We also have a very extensive logistics network and a lot of storage capability as well. And so, when I say we're adequately supplied, I look at it from a standpoint from a historical basis, where we sit today and where I think that market is, and I think we're sitting in a pretty decent position today from that standpoint. Now, how my competitors are supplied? Obviously, I wouldn't have any idea on that. And I do know that from a storage capacity standpoint, we're probably sitting at as good a position as anyone does from that perspective. Mark, you might want to add some more.
Mark Thompson
Yes. I'd just reiterate all the comments I made earlier. I think the supply tightness is coming from a few different places with respect to production interruptions that have happened, and in some cases, have seemed to continue to happen in Trinidad because of gas and the U.S. And I think in some cases, we understand that's really probably shipping from prior seasons still catching up because of some of those supply interruptions.
And of course, as I mentioned, Middle East is playing a role in that. And we don't expect you're going to see really a material amount of Chinese urea exports probably until sometime in the second quarter. So again, I think all those things are exacerbating. And as Jeff said, the supply chain is distributed very differently. Different players have different asset bases.
So, I think the key point here is that I think from a nutrient standpoint, whether it's the supply customers or other nutrient ag solutions, as Jeff was talking about, we feel like we're pretty well positioned, I think, in that whole equation, whether it's from a volume standpoint or just generally, the natural gas and the profit advantage we have on the wholesale side of the business in that environment where you've got supply tightness this spring in North America.
Stephen Byrne
We're out of time, but I want to squeeze one more in, and that's phosphate, a relatively smaller wholesale fertilizer business for you, but quite profitable right now. Is that an area that you would consider expanding?
Mark Thompson
I think with the phosphate business we have today, Steve, you've got sort of the two assets, Aurora and White Springs. And really, the focus in phosphate has been around optimizing product mix. And so, we've got a very diversified business in phosphate today. So actually, just over 50% would be non-agriculture uses in phosphates. And so, a lot of those businesses are very profitable for us, where you look at purified demand, as an example, and some of the different feed and industrial markets that we're serving.
So really, the focus in Nutrien has been how do you optimize the asset base so that you have White Springs and Aurora serving the right places? And really, on the agriculture side, the focus has been on converting some of our traditional dry phosphates business to MAP+MST, which is a sulfur-enhanced MAP product that we've had just great penetration in North America. In the last year here in 2023, we increased sales by over 100% of that product. And it's become very competitive. And our integration of Nutrien and Nutrien Ag Solutions has been a big part of that, of Nutrien Ag Solutions playing a role in having that product penetrate the market.
So, I think with phosphate today, it's more about how do we optimize the asset we have. Of course, we continue to watch how the discussion around LFP evolves globally. Again, I think there's a lot to be determined there. But certainly, where Nutrien sits today, we're sort of at the top of the list in terms of available purified demand and purified capacity to meet that demand. And so, I think as we watch that market evolve, we'll see what that means for the existing product mix that we have. But I think it's an optimization story versus a growth story in phosphate.
Stephen Byrne
Very good. Join me in thanking Mark and Jeff here. Thank you.