Jan 27, 2011
Executives
Wayne Brownlee - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer Denita Stann - Vice President of Investor & Public Relations Garth Moore - President of PCS Potash William Doyle - Chief Executive Officer, President, Non-Independent Director, Chief Executive Officer of Potash Corporation and President of Potash Corporation Stephen Dowdle - President of PCS Sales
Analysts
Michael Piken - Cleveland Research Horst Hueniken - Stifel, Nicolaus & Co., Inc. Fai Lee - RBC Capital Markets, LLC Ben Isaacson - Scotia Capital Inc.
Mark Gulley - Soleil Securities Group, Inc. Vincent Andrews - Morgan Stanley Brian MacArthur - UBS Elaine Yip - Crédit Suisse AG David Begleiter - Deutsche Bank AG Donald Carson - Susquehanna Financial Group, LLLP Mark Connelly - Credit Agricole Securities (USA) Inc.
Jacob Bout - CIBC World Markets Inc. Jeffrey Zekauskas - JP Morgan Chase & Co Robert Koort - Goldman Sachs Group Inc.
John Redstone - Desjardins Securities Inc. Charles Rentschler - Boenning and Scattergood, Inc.
Edlain Rodriguez - Gleacher & Company, Inc. P.J.
Juvekar - Citigroup Inc
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by.
Welcome to the Potash Corp. Fourth Quarter and Year-End Conference Call.
[Operator Instructions] I will now turn the conference over to Denita Stann, Vice President, Investor and Public Relations. Please go ahead.
Denita Stann
Thank you, Brock. Good morning.
Thank you for joining us, and welcome to our fourth quarter and year-end 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; Garth Moore, President of PCS Potash; Tom Regan, 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 this presentation.
I would also like to remind everyone that today's call may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties.
A number of factors and assumptions were applied in 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-GAAP financial measures to their most directly comparable GAAP measures. I'd like to now turn the call over to Bill Doyle for some comments, and then we'll go to questions.
William Doyle
All right. Thank you, Denita, and good afternoon, everyone, and thank you for joining us for this discussion of Potash Corp.'
s fourth quarter and full year performance and our outlook as we enter 2011. We believe we are moving into one of the most positive environments for agriculture that we have seen in our company's history, and we appreciate this opportunity to discuss how we are uniquely positioned to benefit from the conditions we see today.
As anticipated, 2010 was a transition year for the fertilizer industry and our company. In the first half of the year, European debt levels and the pace of global economic recovery weighed heavily on financial markets.
But those issues held people's attention. Fundamentals for fertilizer were rapidly strengthening in the background, as demand for food continued to rise and grain inventories began to tighten.
As the year progressed and pressure on the world's food supplies became more pronounced, prices for crop commodities moved higher. Many farmers who had reduced their fertilizer applications during the economic downturn returned to the market in full force to replenish nutrients in their soils and capitalize on favorable economics.
Fertilizer dealers who were working with limited product in their warehouses increased purchases to meet the needs of their customers. The impact of this rising demand was most apparent in potash, which has the greatest influence on our performance.
After passing an important inflection point in the third quarter, demand continue to accelerate, pushing global shipments for 2010 to around 52 million tons, a 75% increase over the previous year. Our fourth quarter earnings of $1.61 per share or $482 million raised our earnings for 2010 to $5.95 per share or $1.8 billion, the second highest total in our history.
These results included costs related to our takeover response, which amounted to $0.16 per share for the fourth quarter and $0.18 for the year. Fourth quarter gross margin of $763 million was the highest for any quarter in 2010 and raised our full year gross margin to $2.6 billion.
Improvement in our 2010 performance was driven primarily by increased potash volumes as our sales nearly tripled compared to the previous year. Prices for all three nutrients moved higher in the latter half of 2010, with phosphate and nitrogen moving first, while potash price increases took hold during the fourth quarter.
These results were more than a measure of the change that took hold in 2010 as they also provided a glimpse of our potential in the years to come. Our confidence is founded in the long-term drivers of food and fertilizer demand, mainly a growing world population and economic expansion in developing countries.
While the global recession created short-term fluctuations in the agricultural world, food demand did not waver. In our view, the drivers of our business are more powerful today than ever before.
This is leading to a significant strain on the world's grain supply as evidenced by declining grain stocks. On a global basis, the 2010 crop year was the third largest harvest on record, but grain stocks fell by nearly 16 million tons.
In the United States, rising yields and increased acreage resulted in farmers producing 25% more corn than they did 10 years ago, that the U.S. corn stocks-to-use ratio fell to a 15-year low.
As illustrated on Slide 5, we estimate that world grain production would need to increase by more than 5% just to keep pace with expected consumption in 2011. This is a tall order, given that production gains have averaged 2% annually in recent decades, which means grain supplies could be under even greater pressure.
Tight supply-demand fundamentals are driving prices higher for a wide range of crops that are important all around the world, creating unprecedented competition for acres. As farmers prepare to make planning and fertilizer decisions, they can clearly see the economic incentive to ensure their soils are fertile and productive.
For example, U.S. corn farmers currently can get almost $3 per bushel more for their corn compared to this same time last year.
This equates to approximately $430 in additional revenue on every acre. Even though fertilizer prices have also risen, the cost increase is around $30 per acre, or only 7% of the revenue gain.
The economics are moving in a similar direction for a wide range of global crops, including oil palm, cotton, rice, wheat and soybeans. Farmers are savvy business people, and they are quick to act when opportunity arises.
We witnessed the strength of their response in the second half of 2010 as application rates improved, and we expect they will continue to move aggressively in 2011 to address soil nutrient requirements. However, this is a long-term process, not a quick fix that will happen in a single application season, just as rebuilding depleted grain inventories will not occur with one harvest.
We believe the renewed attention to crop nutrition will be ongoing and must continue for farmers to meet the world's growing food requirements. Although rising fertilizer demand represents an opportunity for our industry, it also brings a certain responsibility.
With prices for crop commodities increasing, it is no surprise that the issue of food inflation has re-emerged in the headlines. Finding ways to address the world's growing food requirements will take a commitment from everyone in agriculture.
The fertilizer industry has worked for years to improve farmers' knowledge of the relationship between balanced fertilization and higher yields. Through our involvement in Canpotex and our support for the International Plant Nutrition Institute, we have been providing ground-level agronomic information in developing countries for decades.
While this benefits farmers in our industry, it also puts an onus on fertilizer producers to ensure the nutrients are available to improve crop yields. Our industry has stepped up to this challenge.
The International Fertilizer Industry Association estimates that fertilizer companies invested more than $40 billion between 2008 and 2010, even during the height of the great recession, to build new capacity in all three nutrients. Our company alone has committed more than $7 billion on potash expansions to meet rising demand, which will represent more than 50% of the world's new operational capability between now and 2015.
We have made an investment that is expected to have both a very positive impact on food production and enhance our performance in the years ahead. While more of all three nutrients will be needed, we believe potash holds the greatest potential as the wave of demand that re-emerged in the latter half of 2010 is expected to continue through 2011.
As you can see on Slide 7, major markets, including Latin America, India and Southeast Asia, are expected to import record volumes in 2011. Our estimates suggest China will return to its pre-downturn consumption level of nearly 11 million tons.
In North America, the strength of commodity prices and the expectation for increased seeded acreage is supporting strong demand. We believe domestic shipments for the year will be near the upper end of their historical range of approximately 10 million tons.
Given the anticipated demand increases, we have raised our 2011 potash sales forecast to 9.5 million to 10 million tons, which would be a record year for Potash Corp. The return to trendline demand, along with reduced producer inventories, especially for granular potash, is expected to support higher prices.
We continue to book North American sales at the $75 per short ton increase announced in October, which should be reflected in our net backs near the end of this current quarter. Late in 2010, Canpotex announced higher prices for spot markets in Brazil and Southeast Asia for deliveries starting in the first quarter, and we expect that tightening market will lead to additional price increases throughout the year.
Early in 2011, Canpotex and Sinofert, the largest fertilizer distributor in China, signed an agreement that included an increase of approximately $50 per ton over previous shipments. This six-month contract represents shipments at the low end of the minimum annual commitment outlined in the MOU between the two parties, reflecting the current tight supply.
Canpotex is now fully committed for the first quarter and expecting record shipments for both the quarter and the year. More importantly, this agreement marks a shift away from annual contracts, which we believe will allow for more timely settlements and prices that better reflect changing market conditions.
Negotiations with India are likely to begin in February, and the duration of the contract will be an important part of that discussion. We believe the conditions we see today reflect a new norm for our business.
The potash demand expected to range between 55 million and 60 million tons in 2011 and estimated operational capability for our industry of approximately 61 million tons. We anticipate that additional potash capacity will be required in the years ahead.
While new projects continue to be discussed, we believe they will be more difficult and markedly more expensive to complete than many reports suggest. In our view, this will make the potash expansion program we initiated more than eight years ago even more valuable.
We recognize the growing demand would eventually surpass the world's operational capability, and we began making the necessary investment to have supply available when it would be needed. We told our shareholders that this strategy would maximize earnings over the long term and that their patience would eventually be rewarded.
Today, we are well positioned to deliver on those commitments. Over the next five years, we can introduce more new potash production than any other company in the world in a market with rising demand and the potential for higher prices.
We believe this gives our company unmatched growth potential, which is why we quickly executed a $2 billion share buyback announced in November. This is the third time in the past six years we have used our strong cash flow to buy back shares, purchasing a total of 65.4 million shares at an average price of $95.
If you look at our share price today, these investments in our company have created significant value for our shareholders. Yesterday, our board also approved a three-for-one stock split and a dividend increase, further demonstrating our confidence in the drivers of our business.
In simple terms, we believe no company in our industry is better positioned to benefit from the exceptional agricultural market that we see in the years ahead. We are confident in our direction, and we'll continue to look for ways to create value for our shareholders.
We expect to benefit from strong markets for all three nutrients in 2011. On a pre-split basis, we expect net income for the first quarter to be in the range of $2.10 to $2.70 per share with full year earnings to be in the range of $8.40 to $9.60 per share.
As we prepare for the future, we are also introducing a change to our management team. Jane Irwin, our Senior Vice President of Administration, retired effective January 1.
Jane made an immense contribution to the success of Potash Corp. through more than 10 years of dedicated service to the company, and we are most grateful to her for all of her outstanding efforts.
I'm pleased to announce that we have promoted Lee Knafelc to be the Vice President of Human Resources and Administration, and we look forward to his contribution in the years ahead. Our people at all levels help drive the performance of our company.
As we enter this exciting time for our business, we know they will continue to play a large part in the future success of Potash Corp. Thank you, again, for your interest.
I'm joined today by members of our senior management team, and we would be happy to answer any questions.
Operator
[Operator Instructions] The first question today comes from Jeff Zekauskas of JPMorgan.
Jeffrey Zekauskas - JP Morgan Chase & Co
Bill, you said that you thought that the first quarter of 2011 would be a record potash year for Potash. And if my memory is correct, I think last year, you shipped about 2.46 million tons of potash as the global economy picked up and farmers supplied more nutrients.
So from your point of view, the first quarter looks a little bit stronger than that in terms of tonnage, is that correct?
William Doyle
Jeff, yes. I would say that it does.
We are essentially sold out in the first quarter. We have a little bit more to go, but not much.
Canpotex, as you know, recently concluded with China for the first six months. And the interesting thing about the Chinese negotiation is that the volume that was concluded, and while the Chinese concluded earlier than normal, if you remember not too often that we would conclude before Chinese New Year, they still waited too long.
Other people had preempted the tonnage that was available, and even though we told the Chinese that this was a very tight situation, I don't think they really believed it until after the fact. We concluded, and they looked for three vessels in the month of January, and we could only supply them one.
And so we also supplied them with lower tonnage overall for the first six months just because of the availability. I would maybe expand on that comment by just emphasizing a very important point, and that is the six-month term of the Chinese contract.
We've been pushing for that for a few years now and, of course, the market, the strength in the market today allows us to achieve that. I think it's very, very important because this six-month term better reflects the true marketplace.
As you recall, we had substantial tensions during negotiations in the past, and this reduces those negotiating tensions substantially. We also had periods of paralysis where we were laying off our workers for six months or longer waiting for a contract to be concluded.
So this avoids the paralysis for producers and consumers, frankly, farmers in China and in other countries around the world, and it's good for global agriculture. We've got a very big job to do right now, and we can't allow any type of bureaucracy or delay to get in the way of the need for increased crop yields.
And it just, overall, makes for a much better functioning market. So I think that, that also is indicative of the Chinese outcome, that 600,000 tons.
The Chinese, clearly, wanted much more volume than we were able to supply. But it's just a factor that many people saw in places like Brazil and other countries that this thing was tightening, and they move quicker to secure supply.
Operator
The next question comes from Jacob Bout of CIBC.
Jacob Bout - CIBC World Markets Inc.
I had a question on the brownfield expansion, specifically after Rocanville and New Brunswick. I'm assuming that's where the, if I remember correctly, that's where you're sinking some shafts.
What is the capital cost associated with sinking these shafts, and has this estimate moved up and down? And maybe just as a secondary, has there been much in the way of seismic activity around the Rocanville area?
William Doyle
Jacob, I'm going to ask Garth since he's the man in charge of all of these expansion projects. And as you know, we've got just about every mining involved in an expansion project or in the process of ramping up from an expansion project, so Garth has his hands full with all of these various projects, but he can give you a good report on both Rocanville and New Brunswick.
Garth Moore
Yes. The Rocanville project is a single shaft.
It's a service shaft we are sinking there, and it is a slightly more expensive than the ones in New Brunswick mainly due to the fact we have to set up freeze plants similar to what we do in any place in Saskatchewan where you have to sink a shaft. And the prices depends on how much freezing you have to do and where you are.
But in Saskatchewan, you're probably looking at about $200 million per shaft, just the shaft alone. And New Brunswick is slightly cheaper, and we've got the benefit there of doing two shafts side-by-side at the same time, so we get little economies of scale on those costs.
As far as the seismic activities go, we've had no seismic activity around the Rocanville mine, but our neighbors have had some over the last several months. And it's quite a ways away from our existing shafts and our Scissors Creek Shaft, so it's not affecting us at all.
Basically, everything is fairly well on schedule as per our normal plants, and we have no problems that we see going down the road here.
Operator
Your next question comes from Robert Koort of Goldman Sachs.
Robert Koort - Goldman Sachs Group Inc.
Bill, I was wondering if you could just talk a little bit about the price changes you've seen in the export market relative to the more sizable domestic price like you pushed through? And then do you have any risk that maybe for the big fall season you would have stalled and a little bit from the spring season in the U.S.?
William Doyle
What I'd say is I'm going to have Stephen talk about the fall versus spring situation. In terms of price changes, what you're going to see is the spot market ramp up here with this tight marketplace.
And we're already seeing in Brazil some move in that area, and this will push the export price up closer to the domestic price. I don't see that gap lasting for very long.
There's such a tight market that people are going to be clamoring for potash and putting their bids in, and price is going to dictate who gets what. So the spot market price in the offshore market's going to come up considerably here to narrow the gap with the domestic price.
Stephen, you want to talk about the trade off between fall and spring?
Stephen Dowdle
Sure. We had a very strong fall demand.
This was aided by very favorable weather, as well as very low inventories and favorable crop economics. Now going into spring, we still have similar conditions and that the crop economics are still very favorable.
Inventories are still very low, and our customers are indicating very strong demand for the spring as is evidenced by our full order book for Q1, and we're taking orders into Q2.
Operator
Your next question comes from Mark Connelly of CLSA.
Mark Connelly - Credit Agricole Securities (USA) Inc.
Bill, am I reading these numbers right? You're expecting $2 billion of CapEx in 2011, which I think is down from about $2.7 billion that was mentioned in the annual?
And could you tell us what are we shifting back or have these plants suddenly become cheaper? I'm thinking maybe $1.3 billion in 2012 then, assuming that it's just getting shifted?
William Doyle
I'm going to have Wayne just cover CapEx for you here. Go ahead, Wayne.
Wayne Brownlee
Mark, the CapEx for 2011 is forecasted just a tad over $2 billion, which is fairly consistent with 2010 levels.
William Doyle
Mark, if you think about that $2 billion number for 2011, about $1.45 billion of it is potash, and you'll see a number similar to that in 2012 for the potash side of things and then that'll get us pretty far down the road.
Operator
Your next question is from P.J. Juvekar of Citigroup.
P.J. Juvekar - Citigroup Inc
Bill, we are hearing that producers are anywhere from 30 to 60 days behind on potash deliveries to dealers. So those producers ramp our production, how long do you think it will take to normalize that inventory in the channel and then for producers to catch up on deliveries?
William Doyle
It's really a global issue, P.J. Stephen can talk to the domestic market.
But I think you've got a situation in which during the great recession, that fear took over and people just flushed out their systems. And I'm talking almost every country in the world, you saw a great reduction in inventory.
So when you look at what happened in 2010, and we went from 29 million tons in 2009 to 52 million tons in 2010, you'll remember that at the beginning of last year we said 50 million. A lot of people thought we were all wet, and it turned out that we ended up at 52 million in 2010.
But it was -- that material went to the field. I mean, there really was no inventory build.
So if you look at countries like India today, very low inventories. China has much lower inventory.
We saw that in their request for additional product in the first quarter, which they're not able to get. Around the world, we're seeing a similar thing.
Stephen, why don't you talk about the North American market?
Stephen Dowdle
Sure. Again, with the very strong fall demand, shipments were and did fall behind.
However, we are getting caught up. We feel that by the end of February, we will be caught up with all of the fall bill obligations and we'll be shipping current against new prices in March.
We do expect that we will be under considerable pressure throughout the spring to keep the current, and we're confident in our delivery capabilities that we will be able to meet this challenge.
Operator
Your next question comes from Vincent Andrews of Morgan Stanley.
Vincent Andrews - Morgan Stanley
Bill, could you comment a little bit about the Chinese and India prices and the price gaps that they're still enjoying with the South American and Southeast Asian spot markets and any sort of color you can put around the price component of the negotiation, particularly given your statement that they didn't get the volume that they wanted. What's the opportunity going forward, and maybe it's not in the back half of this year, maybe it's next year.
What's the opportunity to narrow the Chinese and Indian price gaps with just the spot markets?
William Doyle
Vincent, what I would say is that personally, I was a little disappointed in the BPC settlement with China. I thought it was too modest.
China certainly, with the size market that it is, it deserves a discount from the spot market from much smaller customers. But that differential shouldn't be what is $400 versus $440, $450.
Should it be $40 to $50 a ton? I don't think so.
So I think sometimes I've been critical of BPC for being too gung ho when the market was really tight in 2008, and I'm probably a little critical now for being too modest. So it's like Goldilocks with the soup I guess.
Sometimes it's too hot and too cold. But I just think that you have to have economics reflective of reinvestment, and so we're looking at a situation, by the way, we just had an update from the main contractor building potash mines not only here but around the world, a company called AMEC, in which they change their number for construction of a mine from $2.8 billion to $4.1 billion in just a reflection of their experience and the real cost that that entails.
So you look at that number, and we've been saying that you need $600 a ton to get to a 10% return, that $600 FOB mine. So you look at that average price of $323 that we had during the fourth quarter, and then you look at the settlement of BPC, and we know that they have, if you look at the Russian producer Silvinet, they've got this reserve that they bought from us, $1.5 billion, a couple of years ago that they're going to have to, at some point, build a new facility there.
I mean, the price is nowhere close to that, and you have to have the true economics reflected to make any type of substantial investment, and we know that new potash mines are going to be needed. But you can't justify it today.
I mean, we can justify the brownfield but you can't justify the greenfield, and that's why the price is going to have to move towards that $600 minimum level to get a 10% return. So I do think you'll see, especially the spot market moves up here that you'll see especially with the six months contract, and we get another kick at the cat here come June, and China's going to need more tonnage, and we think that their second half tonnage could be bigger than their first because they didn't get what they needed in the first half, that you're going to see I think another substantial increase in the Chinese price, that moves it closer and narrows the gap between the spot market and the contract market.
I'm not saying that they don't deserve to have a better price, but they don't need to have that much better price.
Operator
Your next question is from Don Carson of Susquehanna Financial Group.
Donald Carson - Susquehanna Financial Group, LLLP
Bill, you just mentioned how you were critical of BPC a few years ago for pushing the price too aggressively. What do you think the point of price elasticity is for potash in international markets where you might start to see some demand destruction?
Would it be sort of the $550 equivalent domestic price that you're going to be seeing effective March 1? Or do you think it's back at that $800 level that they pushed prices to or tried to in 2008?
William Doyle
I don't have an exact number to give you, Don, but we're a long way from it. And you start looking at the crop economics, and we talked about in my remarks about corn.
But in that one slide that we have on our website, you just look at the percentage of fertilizer cost as part of the return. I mean, it's miniscule.
So there's a hell of a lot more room with $14 soybeans and $6.50 corn and $8.00 wheat, MYR 3,800 palm oil and sugar at $0.33 a pound, and cotton at $1.50 plus. I mean, you start looking at the incentive here.
We're a long way from any type of demand destruction.
Operator
Your next question is from Fai Lee of RBC Capital Markets.
Fai Lee - RBC Capital Markets, LLC
Bill, you've talked a little bit about your expectations regarding offshore export pricing increasing, including the gap with North American pricing. I'm just wondering what are your expectations regarding North American pricing in the meantime?
Do you believe we will have to wait until the gap between offshore and domestic pricing closes before North American prices increase? Because there seems to be a reluctance from producers to increase prices in North America even with the tight market conditions.
William Doyle
Fai, I think that you're going to have, and rightfully so, some reluctance until you get the spot prices up internationally. But spot prices are going to move pretty quick here.
I think in the second half of the year, you'll see an increase in North American prices because I think you're going to see a substantial move in spot market. This market is going to be a supply constraint.
When you get in a supply constrained market, you're going to see prices move up more rapidly.
Operator
Your next question comes from Horst Hueniken of Stifel, Nicolaus & Co.
Horst Hueniken - Stifel, Nicolaus & Co., Inc.
I just want to make sure I'm understanding the dynamic in the potash market that Robert Koort referred to earlier. If producers were behind in their shipments in the fourth quarter and are still behind now, is it correct to assume that inventories are low at the retail level currently?
And if this is the case, am I correct in thinking that the wider fall application season did not really have a meaningful influence on shipment volumes in the fourth quarter?
William Doyle
I'm going to ask Stephen Dowdle to respond to that.
Stephen Dowdle
As from our information from our customers, they have told us that with the wide open fall, that there really was no opportunity to build the inventories. A product was transferred from the rail cars, often not even going into the buildings, just going onto trucks and going out into the field.
So even though the fall volume was very high historically, the information that we have is that there was no significant inventory build.
Operator
Your next question comes from Michael Piken of Cleveland Research.
Michael Piken - Cleveland Research
Just a quick question on the guidance that you guys provided. I mean, everything you're sort of suggesting would seem to indicate that prices are going to probably move up higher and yet you look at kind of plugging in 9.5 million to 10 million tons of potash volumes and presumably more favorable costs on a per ton basis for running full out.
I mean, how should we be thinking about your commentary with respect to the potash gross profit guidance that you guys have provided? Is there something on the cost side we're missing or something else?
William Doyle
Michael, what I'd say to you is that when you get into a market that is on the up slope like we're on right now, sometimes things move faster than you can forecast. But we just deal with the reality of where we are at any one particular point in time.
We think that there is some opportunity out there. It depends on how close you get to the 60 million tons.
Now if we say it's going to be between 55 million and 60 million, 2010 was 52 million. With these grain prices, and some people are forecasting that there's more to go in grain prices if you look at corn, and a lot of people think that you're going to have to get a price that corn supply is rationed and they're saying, I've seen numbers as high as $7.50 or $8 corn to be able to do that, does China come in and rather than take 1.5 million tons of imports, does China go to 3 million to 5 million.
I've seen some reports saying it could be as high as 7 million this year. So I think there's overall obviously, pressure on grain prices and Ag commodities worldwide.
I don't see that lessening as demand for these agricultural commodities seems to be gaining traction. So when you're in that type of scenario, it's hard to call it exactly.
But I like our chances.
Operator
Your next question comes from Charlie Rentschler from Boenning and Scattergood.
Charles Rentschler - Boenning and Scattergood, Inc.
Given the gap between supply and demand rapidly closing, what's to prevent a recurrence of overly aggressive price increases that cause this growing demand?
William Doyle
Yes, Charlie, I think people learned a lesson. I was critical earlier about BPC, but I think BPC learned a lesson a couple of years ago.
And I think everyone did -- you get to keep an eye on what your farmer customer can afford. If a farmer can't afford it, the grain economics don't work, there's no return for the farmer, everything comes to a halt.
That's why I'm pretty encouraged right now about what I see from an economic return point of view, and $323 average price FOB mine is long way from $1,000. And I'm just saying we've got a lot of room to go in crop economics.
The returns that farmers are getting today are far better than they were in 2008. And we don't think there's another great recession coming at us, and we think that you're going to see multiple years here of fertility restoration around the world and healthy grain prices to get back to producing more grain.
The disturbing thing to me is when you see countries that say, okay, we're going to fix, artificially fix Ag commodity prices in a particular country. It defeats the purpose.
Farmers need incentive. If we take the incentive away from them, in certain countries, you're not going to grow more grain, you're going to get less grain.
We have the technology. We have the capability.
We need to let the market work. And so I don't see demand destruction anywhere close.
I mean, when you look at the returns that farmers are getting worldwide, it would say just the opposite, that there's demand creation.
Operator
Your next person comes from the line of David Begleiter of Deutsche Bank.
David Begleiter - Deutsche Bank AG
Bill, just on the operational capability, you mentioned for 2011 61 million tons. What about 2012 and 2013, and how much of that increase will be yours?
William Doyle
Well, we think as I said, we're going to have over 50% of the stated expansions between now and 2015. So as you get up closer to 60 million tons even this year, we're talking 61 million tons what we think is operational capability around the world.
But if you get close to 60 million tons, we're going to take a disproportionate share of that because we're the ones that have the volume. So we're saying already that we're going to have a record year, but it could be better if we get up to 60 million.
Operator
Your next question comes from Mark Gulley of Soleil Securities.
Mark Gulley - Soleil Securities Group, Inc.
I had a question for Garth on supply response with respect to the healthy prices for potash that we've discussed today. I know it's early days, but are you seeing any changes in Russia behavior with respect to their own capacity plans?
Garth Moore
We don't see any changes in Russian behavior as far as the production side goes, the supply side goes. I think they've been running flat out for the last several years, and they're pretty well up to the wall in what they can do.
And as Bill said, we're the guys that are in position to pick up some of the extra tonnage as we go forward.
Operator
Your next question is from Edlain Rodriguez from Gleacher & Company.
Edlain Rodriguez - Gleacher & Company, Inc.
Just looking at the strong volumes in Q4 in the offshore market, was there any pre-buying ahead of higher prices or do you think that this is still fundamental and not demand and consumption? And also switching gears to DAP, with Ma'aden coming on line pretty soon, how do you see this market developing in terms of pricing in the next two quarters?
William Doyle
Edlain, I will respond to the first part, and I'll let Stephen respond to the DAP question. We didn't see any pre-buying.
The material that went Q4 offshore, that's all gone to the field as well. I mean, if you look out, just take the big markets, take Malaysia, Indonesia, Brazil, India and China.
The inventory levels are extraordinarily low. What was shipped went to the field.
Brazil, I used to hear people complain about a strong real, and I don't hear any of that anymore. I mean, everybody's focused on $14-plus beans, and they're focused on sugar at $0.33, and Brazil is just going to have a tremendous record year.
So we didn't see any pre-buying. If you look at some of the suppliers around the world, if Israel Chemicals, which we're an investor, they worked off a lot of inventory in 2010 that isn't there this year.
And even then, the inventory that they sold didn't end up in someone else's inventory. It ended up on the field as well.
So after we dropped to 29 million tons in 2009, we knew that there was a huge fertility hold entering 2010 and then you saw these crop economics return, and boy, this thing just took off in the second half of the year, particularly the fourth quarter, and that flame has not diminished at all.
Operator
Your next question is from Elaine Yip from Credit Suisse.
Elaine Yip - Crédit Suisse AG
Looking at your 2011 outlook, despite your increased guidance for 9.5 million to 10 million tons of shipment, you're still going to be running well below your operational capability. How should we think about your cost per ton in 2011?
And where would it fall -- would it run at your full 12 million-ton operating rate? And also, how quickly can you bring on the additional supply should the market need it?
William Doyle
Elaine, I'm going to let Garth answer that. But I just want to apologize to Edlain for missing his DAP, second part of his question.
I'm going to ask Stephen to respond to Edlain after Garth responds to you, Elaine. So I beg your pardon.
I didn't mean to do that, Edlain. But, Elaine, ladies come first, so go ahead, Garth.
Garth Moore
Two parts to your question. The first part, as far as the costs go, I think they're going to be basically flat on a year-over-year basis.
But several things happening. We've got extra depreciation come in, so the cost of goods sold are going to be probably flat somewhere around $100 range here, and it's a good estimate going forward.
And as far as the productive capabilities go, that's kind of a floating number. For 2011, we have about 11.3 million-ton capability, and the reason that capability is down a little bit from what it could be is because we have some 14-week shutdown at Allan's and there was four weeks at a couple of the other mines, do some of the tie-ins for the ongoing projects will be coming on stream later down the road.
So we're capable of bringing on those extra tons over and above what our forecast is, right now up to 11.3 million at any time. So it will just be a matter of when it's required out in the marketplace.
William Doyle
Now, Stephen, please respond to Edlain.
Stephen Dowdle
Sure. With regards to the Ma'aden project at the end of last year, Ma'aden made two announcements indicating delays and the start up.
Meanwhile, as we go into this year, we're seeing phosphate rock prices increase. We have at least two examples of a nonintegrated producers shutting down.
We believe with the higher rock prices, that there will continue to be pressure on nonintegrated DAP producers. But we expect from Ma'aden is, in the second half, we expect the startup to occur.
We think there'll be somewhere around 500,000 tons that may be available if the startup goes as planned. And we think with the low inventories in the market and with the favorable crop economics around the world, that the market is very ready to absorb the Ma'aden product.
Operator
Your next question comes from Ben Isaacson of Scotia Capital.
Ben Isaacson - Scotia Capital Inc.
I just have a two-part question on China. The Vice Governor of Qinghai Province came out a couple of months ago and stated that China could reach about 10 million tons of MOP by 2015.
To me that seems quite high. And I just wanted to get your thoughts on what MOP capacity in China should reach over the next five years.
The second part to my question is on the 11 million tons of potential consumption in China. Is that using historic nitrogen to potash ratios that China has used over the past few years?
Or is that really improving their potash application?
William Doyle
Ben, I'll let Stephen answer the second part of the question. The first part of the question is kind of a mugs game.
I don't know if anyone knows exactly what they'll have between now and 2015, but I'm with you. We don't believe 10 million tons for a minute.
China is really working hard at doing this. Of course, when they talk about potash, they talk about anything that's remotely contains potassium.
And of course, they throw in SOP and potassium nitrate, very low-grade muriated material that's less than 50%, and you can't sell it anywhere in the world except you can get a little bump in the plant from an economic point of view. Yes, it adds some value, but really it's not commercial.
But they're not going to make 10 million tons. They're at somewhere in the 4 million, 4.5 million-ton range today.
And it just takes the same time barriers-to-entry exist in China as they do any place else, and they don't have any underground deposit that they've identified. The biggest piece there is in Qinghai Salt Lake area, and we know full well what that capability is.
Steve, you want to talk about 11 million tons in China consumption?
Stephen Dowdle
The 11 million-ton number really stands on its own as far as what our estimate that potash consumption will be. We did not back into that number, using an NPK ratio.
But there will be a concerted effort in China this year in 2011 to increase fertilizer use, and that will be for urea and for phosphate and for potash. And in fact, even with 11 million tons of consumption, it's possible that the NPK ratio could worsen in 2011.
Operator
Your next question is from John Redstone of Desjardins.
John Redstone - Desjardins Securities Inc.
I just wanted some clarification on the timing of your various expansions, most notably whether or not the expansion at Cory is fully ramped up yet and when do you expect for those production from the expansion in New Brunswick.
William Doyle
John, I'm going to ask Garth to talk to that one as well.
Garth Moore
John, we're just right now in the process of doing some of the commissioning and preliminary commissioning on the Cory project, and we'll be ramping that one up gradually over the next, a little bit this year towards the end of this year and on into 2012. As far as the New Brunswick project goes, that's a lot longer-term project because of the fact that the mine itself was a greenfield mine.
We still have two shafts to sink, which will be not complete in the 2012, and then we have mine development to do. So it'll be 2013, 2014 slow ramp-up there as we do the mine development, and we expect to see most of our operations ramped up and ready to produce about capabilities around 17.1 million tons in mid-2015.
William Doyle
John, I'd just add something here. The one thing that we know for sure that we've learned through all of these expansions, keep in mind this is eight years now that we've been into it.
It takes a hell of a lot longer than anybody says. So when you say something, you hear someone say, "Oh, we're going to have potash, we're going to start next year 2012, we're going to have it ready to go in the market 2015," it's just impossible.
And it's almost comical that anyone would believe that. We'd welcome any of our friends to come and the analyst community come and see what it takes to do this.
We've tried to do a number of educational pieces at various times and we've had sell side and buy side. But apparently, we haven't had enough of you because I still read some stuff that says that you can have a potash mined up and ready to go in two to three years.
It's not a nitrogen plant now, it's a potash mine.
Operator
The last question today comes from Brian Macarthur of UBS.
Brian MacArthur - UBS
I just want to clarify your 55 million to 60 million tons this year of shipments, I've heard throughout the call that you don't think anybody has really fixed the supply chain that we've talked about historically, that being potentially 5 million tons. So that 55 million to 60 million include any of that 5 million tons refilling the supply chain?
Or do you think it could be strong enough that we go through this whole year, and by definition, if there's only 61 million tons out there, that we'd go into next year with the supply chain being rebuilt? And I realize it depends on weather and lots of other things, but I'm just trying to see exactly where you're sitting on this.
William Doyle
Yes, Brian, I don't think that you're going to see the supply chain rebuilt in 2011. It's going to take multiple years to do it.
There's so much pressure on the field nutrient requirements that we're just seeing people go to the field. And of course, you got to get those potassium levels up to be able to get the kind of yields that you need to enjoy these crop economics.
So we don't see 2011 making much headway in terms of inventory.
Denita Stann
Thank you, everyone. We appreciate your time today, and don't hesitate to give us a call at the office if you have any further questions.
Bye now.
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating.
Please disconnect your lines.