Earnings Call Transcript - NTR Q3 2020

Operator, Operator

Greetings, and welcome to Nutrien's 2020 Third Quarter Earnings Call. This conference is being recorded. I would now like to turn the conference over to Richard Downey, VP of Investor Relations.

Richard Downey, VP of Investor Relations

Please go ahead. Thank you, operator. Good morning, everyone, and welcome to Nutrien's conference call to discuss our third quarter 2020 results and outlook. On phone with us today is Mr. Chuck Magro, President and CEO of Nutrien; Mr. Pedro Farah, our CFO; and the heads of our three business units. As we conduct this conference call, various statements that we make about future expectations, plans, and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders as well as our most recent annual report, MD&A and annual information form filed with Canadian and U.S. Security Commissions to which we direct you. I will now turn the call over to Mr. Chuck Magro.

Charles Magro, President and CEO

Thanks, Richard, and good morning, everyone. First off, I hope you and your families are all safe and healthy. While most companies and industries have seen an impact on their business due to the COVID-19 pandemic, agriculture has been more resilient than most and is now demonstrating real strength as we head into 2021. This underscores the consistent growth in global food demand even through a global economic and health crisis. The fall application season is well underway across the U.S., as the harvest is ahead of normal. Crop prices have increased due to a combination of excellent global demand and lower-than-expected production, resulting in strong grower margins. Furthermore, fertilizer affordability is high, particularly for potash and nitrogen. As a result, we are optimistic that the fall application season will be good, and we are also positive on the outlook for 2021. Before turning to the overview of our third quarter results and the outlook, I'd like to provide context on the noncash impairment and tax benefit we recognized this quarter. The noncash impairment was mostly associated with our phosphate facilities in White Springs and Aurora. This is based on our expectation for a challenging long-term price outlook for phosphate, caused by structural oversupply from low-cost regions. Our tax rate was lower than usual this quarter due to a combination of U.S. legislation changes, the tax benefit of recognizing noncash impairments and a shift in the mix of jurisdictional earnings. Now turning to our Q3 results. Retail ag solutions reported 13% higher EBITDA in the first 9 months, which included double-digit growth in revenue and gross margin. We continue to deliver strong organic growth and realized the benefits from recent acquisitions. Our third quarter Retail ag solutions EBITDA was down $28 million over the last year, due primarily to the weather-related shift in earnings from Q2 into Q3 in 2019. The biggest variation was in crop protection and application services that were impacted by lower-than-expected U.S. acreage, relatively low discretionary crop protection product spend, and very low insect pressure due to dry conditions in the corn belt. These factors, combined with supplier bundling programs, created additional competitive pressure in the crop protection market this quarter. However, on a year-to-date basis, our U.S. crop protection gross margins and percentage margins are both higher this year. We also continue to report EBITDA of over $1 million per U.S. selling location and retail margins of nearly 10% and significantly lower working capital over the past 12 months. In fact, retail inventory alone was reduced by over $400 million during this quarter. Retail ag solutions in Australia and South America delivered an additional $31 million in EBITDA in the third quarter over the same period last year. The integration of Ruralco continues to proceed ahead of plan. And we have now hit our original synergy target of $30 million, and we also expect to capture an additional $20 million in synergies by the end of 2021 from this strategic acquisition. Uptake of our digital platform continues to exceed our expectations, and we have now surpassed $1 billion in online sales, nearly 4x greater than the digital sales in all of 2019. The new functionalities, such as our digital seed recommendation and crop planning tools, are also being rolled out this year. We will provide a virtual demonstration of our digital platform leading up to our November 30 investor update, and we'll introduce new metrics to help illustrate the benefits of our leading digital tool for both our customers and for our business. Moving to the Q3 results for our wholesale operations. Our Potash operating results from a production, sales, and cost perspective were impressive again. Potash demand was strong in the third quarter, both domestically and offshore. Canpotex is fully committed into early 2021, and our domestic order book is nearly full for the balance of this year. Our cash cost of production was $9 per tonne lower than 2019, partly due to production efficiency gains. We do have maintenance turnaround scheduled at 3 of our mines in the fourth quarter, which will increase per tonne cost and limit sales availability. However, we still expect 2020 to be our best year from a cost perspective. For nitrogen this quarter, we reported excellent operating rates, lower costs and higher ag-related sales volumes, largely associated with our summer fill program. However, nitrogen adjusted EBITDA was down 21%, due to lower nitrogen prices and lower industrial and feed volumes due to reduced global industrial demand, largely associated with the impact of COVID-19. We made the difficult decision to indefinitely curtail production at our smallest ammonia plant in Trinidad because of uncompetitive gas costs. And we are now operating the rest of the complex at full operating rates. With U.S. harvest near complete and a clear line of sight on our potash and nitrogen businesses to the year-end, our guidance is intact, and we have narrowed the annual adjusted earnings guidance to $1.60 to $1.85 per share and our adjusted EBITDA guidance to $3.5 billion to $3.7 billion. Now shifting to our outlook for the global crop input sector. Overall, the fundamentals for our business have strengthened over the past quarter. As the grain and oilseed supply demand have tightened significantly, corn and soybean prices have increased 25% to 30% over the past 2 months. U.S. grower margins for key crops are up close to 50% compared to the previous 3-year average and are the strongest they have been in many years. This will create incentives to increase planting and crop input applications in the U.S. and other regions next year. Prices of most major crops in China have increased significantly as a result of tight domestic supply and demand fundamentals, particularly for feed grains as the hog herd quickly recovers from African swine fever. We believe the increased demand for both Chinese feed and food is structural, and we expect elevated grains and oilseed imports into 2021 and beyond that. Record crop prices in Brazil are expected to boost summer soybean and Safrinha corn planting by around 5%. While planting was delayed by dry weather, farmers have made significant progress in recent weeks. Grower sentiment is extremely strong and underscores why expanding our business in Brazil is strategically important. Harvest is in full swing in Australia, and growers are working to get a bumper crop into the bins, and crop prices remain strong. Following harvest, the weather outlook is for favorable rainfalls, which could set Australian farmers up for another successful season. Potash prices strengthened as global demand is strong, and we maintain our 2020 global potash shipment forecast at 65 million to 67 million tonnes. With increased consumption in all key regions, including China, the market conditions have tightened significantly, and we are taking domestic orders at $30 per tonne above our summer fill program. Reports indicate that most of the major suppliers are sold out for the rest of 2020. Canpotex will not place product into China warehouses after the October 30 contract expires, and other key markets are on sales allocation. We believe that potash reached floor levels early in 2020. For nitrogen, we believe there was little growth in global demand this year due to the macroeconomic impacts of COVID-19. This significantly reduced industrial demand, which we expect has delayed the recovery in nitrogen by about a year. However, strong urea demand in India and Brazil, combined with lower supply from China has provided the market with stability, and the recent increase in natural gas prices, especially in Europe, should help support global nitrogen pricing. Ammonia prices have also firmed over the past few months. In North America, urea prices are likely to rise to close the gap against global benchmark pricing. While there is still some new nitrogen capacity coming online, the regions where most of this new capacity is located have encountered significant delays or have low historic operating rates. With limited new supply after 2021, growing demand, higher global energy prices, and an expected recovery in the global economy, we expect the nitrogen market to tighten over time. Nutrien expects to lead the next wave of innovation and sustainability in agriculture. And in the first half of 2021, we will lay out our climate targets and commitments, which include tools that can fundamentally change sustainable agriculture. We will provide more details on this at our Investor Day on November 30, and we encourage you to sign up for this on our website. As we look toward 2021, we believe the fundamentals for our business are strengthening. And while we execute on closing out a solid 2020, we see compelling drivers for improved results across our businesses in 2021. We would now open the call to your questions on the quarter and the outlook for our business.

Operator, Operator

Our first question is from P.J. Juvekar with Citigroup.

Prashant Juvekar, Analyst

I have a quick question regarding phosphates. You recently recorded a write-down in this area due to structural oversupply. When a charge like that is taken, do your auditors require you to assess the next five-year outlook? Additionally, there was a CBD case initiated by a competitor that resulted in higher prices in the U.S. Did you factor that into your considerations? Could you elaborate on the timing of this charge and the outlook that influenced it?

Charles Magro, President and CEO

Yes, Good morning, P.J. So Pedro, our CFO, can answer your questions. Go ahead, Pedro.

Pedro Farah, CFO

So of course, our auditors look into that. We do very frequent reviews of our assets. There was a certain schedule for this. I think the impairment was triggered by a review with the Board of our long-term outlook for phos prices and that was corroborated with a number of different outside sources as well. So it was not only an inside forecast, but also corroborated by outside sources. So we could see that the values we are carrying on our books were no longer supported by those prices and margins into the future.

Prashant Juvekar, Analyst

I know you'll discuss your climate goals at your upcoming Analyst Day, but I wanted to ask if you have any initial thoughts on the steps some of your competitors have taken with blue and green ammonia.

Charles Magro, President and CEO

Yes, we do have plans in this area. Our ultimate goal is to be a global leader in ESG, and we have significant initiatives that we will introduce at our Investor Day. As a preview, we've been developing a robust set of digital tools, which we believe are among the best in the industry for transforming agriculture on the farm. Our starting point will be our own impact. Regarding your question about nitrogen, we are evaluating our nitrogen footprint and our product offerings. Currently, about one-third of our ammonia sales come from low carbon sources, specifically blue ammonia. This positions us as a leader in low-carbon ammonia production. We are also exploring green ammonia, similar to other key players in the industry, and we are addressing the related technological and economic challenges.

Operator, Operator

The next question is from John Roberts with UBS.

John Roberts, Analyst

Can you hear me? It sounded like things dropped off there?

Richard Downey, VP of Investor Relations

Yes, Chuck, I think I could not hear a part of it.

John Roberts, Analyst

Are we both open? P.J. Operator, I think we may have lost Nutrien.

Operator, Operator

Okay. We'll have everyone standby while we reconnect the audio. Sorry for the delay there.

Pedro Farah, CFO

Operator, can you still hear me? Pedro Farah.

Operator, Operator

I'm able to hear everyone else. It sounds like we have just lost the 1 speaker line.

Charles Magro, President and CEO

And operator, is my line open as well as P.J.'s? Yes. I apologize for the technical issue that caused the call to drop. Hopefully, everyone can hear me now. I’m not sure how much you caught, but we have significant plans to lead in ESG, particularly concerning climate change and sustainable agriculture. From a nitrogen standpoint, we are evaluating our footprint and product offerings. Currently, about one-third of our ammonia sales involve low-carbon production, and we are recognized as a leader in blue ammonia production. We are also exploring green ammonia options and addressing related technology and economic considerations. We will share more on that when the time is right. However, regarding our impact on climate change, that's just the baseline expectation. Nutrien is uniquely positioned compared to our peers to effect real change on farms due to our integrated business model. Our primary objective is to invest in tools and technologies that help farmers sequester carbon and monetize that process. We believe we have developed an exceptional product offering, and we will provide more information about it soon. Our overarching goal is to support farmers in sequestering carbon and monetizing it, as that is essential for the evolution of agriculture in addressing climate change. This is a preview of what we'll present on November 30 at our Investor Day, and I encourage everyone to participate.

Operator, Operator

The next question is from John Roberts with UBS.

John Roberts, Analyst

Last quarter, Mosaic was talking about the potash market entering a new up phase here. While Nutrien's comments last quarter, I think, were much more restrained. There's another quarter of sequential improvement, make you more optimistic than you were last call. It sounds like you're pretty optimistic about 2021 overall.

Charles Magro, President and CEO

Yes. John, so look, we're certainly more optimistic overall at the end of the third quarter than we were at the end of the first and second quarter. And it's further reasons we outlined in the prepared remarks. We've seen crop prices rally. Six months ago, we were talking about sub-$3 corn. Now we're talking about $4 corn. Inventories have tightened. And demand around the world for crops is increasing substantially, including in China. So we are feeling better and certainly more confident as we enter 2021. Now specific to potash, yes. I would say, look, if you look at overall the potash fundamentals, they've improved throughout this year. Certainly, when we think about demand, demand is up about 2 million tonnes. That would be our guess today. So that has really been a nice event in the industry. And we think 2021, demand will continue to grow. We also think that globally inventories are where they should be at this time of year. And so what we think will happen is that you're going to see the potash market continue to grow. There is a little bit of more new supply that needs to come into the market, but the growth should easily absorb that. And if you look at Nutrien's position, we said very clearly on the prepared remarks that Canpotex is not shipping product into China now that the contract has expired. We do believe that inland inventories are low in China and that they need the product. And potash domestic pricing in China is quite a bit higher than the contract pricing. So all this bodes well, I think, for a good contract negotiation as we enter 2021. And overall, I think we're seeing demand not only in China, but in all the core markets for potash. So yes, we're feeling a little bit better about the potash market. And for us, we are also focused on our costs. So another quarter of $52, $53 cash cost. It shows the integration that we've done since the merger and the investments that we've put into the potash business. And I think we're well prepared to continue to focus on low cost. And as the market grows, we'll be able to put more tonnes into the market at lower cost. So we like that position as we head into 2021.

Operator, Operator

The next question is from Jeff Zekauskas with JPMorgan.

Jeffrey Zekauskas, Analyst

Can you let us know what the capital expenditures are for the retail business? And whether they changed very much over time? And secondly, you're differentiating Retail more and more. It's now 70% of the revenues of the company. Do you ever revisit the question of whether Retail should be separated to increase shareholder value?

Charles Magro, President and CEO

Good morning, Jeff. So I'll have Pedro talk a little bit about CapEx, and then I'll come back and answer your second question. Go ahead, Pedro.

Pedro Farah, CFO

Yes. So in relation to CapEx, we, of course, guided between $1 billion and $1.1 billion for sustaining capital. A good portion of that is actually NPK. The Retail is a bit less. And this year has been coming a little bit lower than normal due to COVID restrictions, where we couldn't do some of the turnarounds because we couldn't crowd some of the spaces that we had for that. So we are trying to recover some of that next year. We're guiding to be approximately $1.2 billion. In terms of investment capital, we are still leaning towards more Retail, more digital and looking more at Brazil. So that continues to be the preference in terms of capital allocation for our investment capital.

Charles Magro, President and CEO

And then just on your question on whether it's a revisit or a look at how the company is structured, so what I would say there is we do look at all of our businesses. We look at the portfolio. We're constantly optimizing our overall portfolio. And when it comes to the specifics around the integrated model, we actually look at that with some frequency. And we monitor some of the parts, of course, as well as other valuation metrics that we have. And it's not only the management team that does this. We put this in front of the Board with some frequency just to ensure that we've got the right strategy with the right structure to drive long-term shareholder value. What I'd tell you right now, though, is that when we look at the market conditions, the volatility, and how our company has performed relative to other players in the crop input space, we would say that the integrated model has shone through. And that if you look at our free cash flow and our earnings, we've been a much more stable investment than many of our peers because of the way the company is structured. And then if you look at how we have allocated capital, the reason we have the dividend policy that we have as Nutrien is because of the integrated model. And at this point, in the market, whether it's the economic market or the industry that we're operating in, in terms of crop inputs, we have a really attractive dividend policy. It's very stable. It's growing. And with interest rates the way they are today, it's a very attractive investment for shareholders. And many of the shareholders that I talked to love this model where at the bottom of our cycle, which is where we think we are today, shareholders are getting paid a very healthy dividend to wait for the market to recover, which we hope now is on our doorsteps. And then as the market does recover, we still have significant leverage to the upside. So the integrated model, I think, has been proven to show that we have less downside risk and still significant leverage to the upside. And I think most shareholders would agree that, that is a unique combination for companies in the material and industrial space.

Operator, Operator

The next question is from Chris Parkinson with Crédit Suisse.

Christopher Parkinson, Analyst

I just want to drill down a little bit more on the potash front. It does appear that certain markets are actually really beginning to turn throughout Asia. And it appears that you're confident in a rebound in China. So just in your overall analysis of the complete region, heading into '21 and '22, coarse grains, oilseeds and even on a forward-looking perspective, FMV, how should we be thinking about the regional demand dynamics? And how does that filter into your general views, which you're articulating going forward? Do you think there's upside to your estimates?

Charles Magro, President and CEO

Good morning, Chris, maybe I'll have Ken Seitz, leader of our Potash business just quickly go around the world for you and give his perspective. Go ahead, Ken.

Kenneth Seitz, Leader of Potash Business

Great. Thanks, Chris, and thanks, Chuck. Chuck mentioned our confidence in China, which is due to inventories slightly exceeding 3 million tonnes currently, but we're observing strong demand heading into the fall. This is also evident in the domestic price, along with low inventories. As the lowest potash price market globally, we are optimistic about favorable contract negotiations in 2021 and expect demand in China to remain robust, as usual. In India, we anticipate ending the year with lower inventories compared to last year and below historical averages. This year has been promising for India, and with the fall kharif crop, we believe the economic conditions for Indian farmers will stay very positive, leading to strong demand in 2021 as well. In Indonesia and Malaysia, the palm oil price is now above MYR 30 to MYR 100 per tonne, which is beneficial for plantation owners regarding potash affordability, and we foresee growth in Southeast Asia in 2021. The Brazilian market remains very strong too, and we expect growth there next year as well. The economic conditions for farmers and potash affordability are excellent in Brazil. Lastly, the U.S. is experiencing a strong fall season, with favorable weather and farmer affordability, resulting in high potash application rates. This positions us well for lower inventories overall and, moving into 2021, we anticipate demand growth and favorable pricing.

Operator, Operator

The next question is from Jacob Bout with CIBC.

Jacob Bout, Analyst

So you trimmed retail EBITDA guidance for the year. Can you talk a little bit about what's driving this? Is this just margin pressure? I know you talked about competitive pressure in Crop Protection. And then if that's the case, is this the new normal?

Charles Magro, President and CEO

Yes. Jacob, I'll discuss guidance, and then Mike can provide his perspective on what he sees looking ahead toward the end of the year and into 2021. Overall, we adjusted our EBITDA guidance by lowering the top end of the range. There were slight changes in potash and nitrogen. We raised potash slightly due to higher volumes and prices, while nitrogen decreased modestly because of pricing and slightly higher gas costs. The most significant change in our guidance was related to Retail, which is somewhat unusual for Q3. The decision to lower Retail guidance was influenced by three main factors. First, there was lower planted acreage, with the USDA revising their numbers as late as October. We expected higher planted acreage throughout the year, and we had a softer Q3 as a result. Second, crop protection applications in Q3 were lower due to dry weather in the corn belt and minimal pest pressure. Lastly, we are observing some deflationary pricing in the crop protection market, driven by competitive pressure from upstream competitors. Altogether, we believe that most of these issues are specific to Q3. I’ll let Mike share his thoughts on crop protection as we progress through the rest of this year and into 2021. Go ahead, Mike.

Michael Frank, Retail Business Executive

Yes. Thanks, Chuck, and thanks, Jacob. Yes. So look, if you look at our 2020 crop protection margins, obviously, they were strong through the first half and deteriorated in Q3. And as Chuck just mentioned, I mean, a big part of the Q3 impact was the fact that there was lower, especially in the corn belt, insect and disease acres for us to treat. The channel, ourselves included, were loaded up with inventory. And so it ended up being a hypercompetitive market. And we saw the margins deteriorate because of that. I think that's a unique event this year. We haven't seen that in the past. And so I wouldn't expect that to repeat. The other impact that we're going to see through the whole year is just the impact of Ruralco on our crop protection margins. Like if we look at the year-to-date Ruralco crop protection margins, they're about 13%. And typically, our Australia margins are close to where we have globally. They're in the 20% to 22% range. So with Ruralco, we had to sell off the existing inventory and the purchase commitments that they made for the 0 season, we're pretty much through all of that inventory. And so as we look towards 2021, we'll also have Nutrien ag solutions costing across our whole Australia portfolio. And so that's also going to be constructive to margins as we look forward into '21.

Operator, Operator

Our next question is from Steve Byrne with Bank of America.

Steve Byrne, Analyst

Yes. I was curious about whether there's anything structural about your phosphate assets that led to the write-down. Is there just potentially subscale at Aurora and White Springs or any technical issues there? Or do you just see the recent run in global prices as unsustainable?

Charles Magro, President and CEO

Sorry, operator, it seems we're having technical issues again. Could you put the call on hold? We're back in if you can just repeat the question for us.

Steve Byrne, Analyst

Sure. The question was about your phosphate assets and whether there's anything structural or technical or scale related at White Springs and Aurora that contributed to the decision to write-down the assets? Or is it solely a longer-term outlook on phosphate supply and demand that might suggest the recent run in prices is unsustainable?

Charles Magro, President and CEO

If you consider what we've accomplished since the merger in our phosphate business, part of the synergies we achieved through the merger was optimizing the phosphate operations of the two previous companies. We reduced the number of facilities from three to two and managed to increase operating rates while significantly lowering our costs. This was beneficial, and we’re glad we took those steps. However, the reason for the impairment is that we believe the market faces significant oversupply from low-cost regions worldwide, and that supply is expected to keep rising. In examining our operations in the United States, we see that while these assets are strong regional players, they lack global scale. All these factors, combined with how our finance team and external auditors conducted the process, led to the impairment decision. Moving forward, our focus for the phosphate business will be on reducing costs and diversifying our product offerings, just as we have done over the past three years, while we continue to seek new opportunities. Overall, we believe the long-term outlook for the phosphate business is fundamentally different from that of the potash or nitrogen sectors, and that consideration influenced our decision.

Operator, Operator

Our next question is from Joel Jackson with BMO Capital Markets.

Joel Jackson, Analyst

You're discussing palm oil. If the bullish forecast for renewable diesel over the next year or two holds true, it would likely result in significantly higher palm oil prices, which should drive up potash demand in Indonesia, Malaysia, and Southeast Asia. You mentioned improvements across the board, yet it’s surprising that potash prices haven't increased in Southeast Asia. Can you elaborate on this long-term optimism? How does it impact potash, and when might we see changes? Any additional insights would be appreciated.

Charles Magro, President and CEO

Yes, Joe. So what I'll do is I'll have Jason Newton, our Chief Economist, just address the palm oil dynamic. And then I'll give you a couple of comments on the broader potash industry. So go ahead, Jason.

Jason Newton, Chief Economist

Good morning, Joel. Yes, we've seen a combination of supply and demand factors really helped out the palm oil market since bottoming in May. So we're up around 50% since that time. Part of it is supply and migrant labor hasn't been moving to Malaysia, which has had some negative impact on production and availability from there. It's also demand driven. So we've seen strong demand in China. As mentioned, India demand has been strong as well. And then we also have the biofuel dynamics, which I think is supportive as we look longer term. I think if you look at how the prices have performed in that market, it always lags what's happening in other spot markets, especially the granular spot markets in Brazil and the U.S. And so we never saw prices go as low in Indonesia and Malaysia as they did in Brazil. And they haven't increased by the same amount. But if you look at the relationship, where they are today versus the prices in Brazil, it's more along the lines of where it has been historically. And I think given the fundamentals in that market as we look toward late 2020 and into 2021, there's certainly a lot of fundamental support for prices in that region.

Charles Magro, President and CEO

Yes, Joel. So I covered the potash, our view of potash, I think, pretty well globally from a fundamental perspective there. The nuance then, if you go back to China, what we're seeing in China, though, I think and it's early days, but we think there's some really interesting structural changes happening there. There's good demand for grains and oilseeds. You can see corn and soybean imports well above the historical levels. And China inventories have been depleted. So when we look at this and we see China pricing for potash, but also for food, it's much higher than the global benchmark prices. So what's happening is if you look at African swine fever, which was a major headwind for the industry last year, now that's becoming what we think a structural tailwind because as the Chinese rebuild their hog herd, they're doing it with, what I would call, professionalism and commercial aspects around the world and so they're bringing in professional commercial feed lots which are going to use a lot more crops. And I think that's a safer way to grow these animals, but it's also, I think, going to drive, I think, a change in demand for crops around the world. And so all of this is positive, I think, for crop fundamentals, but also for NPK. And so that's why you've noticed maybe a slight change in our view now, is that we've been watching this for the last, I'd say, 6 to 9 months. And there's still some more to kind of understand as this unfolds, but we are more optimistic today than we have been in the last 2 or 3 quarters.

Operator, Operator

The next question is from Andrew Wong with RBC Capital Markets.

Andrew Wong, Analyst

So just wanted to ask a question on nitrogen. I don't think we've covered much of that on the call. Regarding the nitrogen cost curve, it looks like there's a lot of moving parts here with the energy prices, oil is weak, nat gas prices are rising globally, coal prices look like they're going up in China. Just what's your outlook for the cost curve over the next 6 to 12 months? And more specific to Nutrien, obviously, AECO gas has gone up, but you still get a pretty good margin there. Can you just maybe give us a little bit of a preview into 2021, a bit on how that segment might play out?

Charles Magro, President and CEO

Good morning, Andrew. I'll keep it brief, and we can dive deeper if needed or discuss later. We have observed that the recovery in nitrogen fundamentals seems to have been delayed by approximately a year compared to our initial expectations. The nitrogen sector, like parts of the agricultural industry, has felt the impact of COVID-19, while the rest of our operations have seen minimal effects. There are variations in crop mixes and other factors, but overall, the nitrogen industry has been affected more significantly due to its connection to industrial applications and the broader economy. We anticipate a slight increase in global nitrogen demand, with agricultural demand remaining strong but a downturn in industrial nitrogen consumption worldwide. Some new production that was scheduled to begin late last year and earlier this year has also been delayed. For 2021, we expect growth in nitrogen for agriculture and also within the industrial sector as the economy starts to recover and new supplies come online. We believe that nitrogen supply will be more balanced in 2021 than we had previously anticipated. In contrast, we expect strong demand growth in potash, although some new supply is expected. Overall, we foresee a tightening in the potash market next year while nitrogen should remain more balanced, with promising growth opportunities in 2022, 2023, and beyond.

Operator, Operator

The next question is from Duffy Fischer with Barclays.

Patrick Fischer, Analyst

Question just around China, in particular. You had mentioned that potash prices internally are higher than global prices. I think you can see the same thing for corn. And it's been a while since you've seen that kind of delta where there's more value in ag inside of China. So maybe if you would take a first cut across NPK, whether they're a net importer or a net exporter how you think that net import/export number changes next year relative to this year for China?

Charles Magro, President and CEO

Okay, good morning, Duffy. I'm going to have Jason Newton just go through that for you.

Jason Newton, Chief Economist

Good morning, Duffy. Yes, that's a great question. The agriculture outlook in China is significantly stronger than it has been in a while, which we believe will boost fertilizer consumption there. This year, we've observed positive trends across all three nutrients. For instance, we project Chinese urea exports to be around 5 million tonnes, consistent with last year’s figures. Looking ahead to next year, we foresee domestic demand increasing, coupled with ongoing supply reductions, leading to a decline in urea exports by about 1 million tonnes in 2021. Phosphate exports have also decreased this year, and we anticipate a continued rise in domestic consumption in 2021, which will further diminish the export surplus. Regarding potash, we've experienced rising domestic consumption in 2020, and while shipments have decreased, we expect a slight uptick in shipments for 2021, depending on late-year import activities. Overall, we anticipate strong domestic consumption growth in China again in 2021.

Operator, Operator

Your next question is from Vincent Andrews with Morgan Stanley.

Vincent Andrews, Analyst

I just want to drill down a little bit more into the natural gas equation on the AECO, Henry Hub piece. Just looking at Slide 21, we've always talked about the AECO advantage and that chart generally shows it. But more recently, since maybe the end of last year, that advantage has narrowed. And just curious what you think is causing that? And then if we do see a further spike in Henry Hub, whether you'd anticipate AECO following it or not?

Charles Magro, President and CEO

Okay, Vincent, good morning. Raef Sully, our Head of Nitrogen and Phosphate, can take that question. Go ahead, Raef.

Raef Sully, Head of Nitrogen and Phosphate

Thanks, Chuck. To reiterate some points Chuck made, we are witnessing a global increase in prices. LNG is on the rise, which is driving European gas prices higher to a more natural level. AECO and Henry Hub prices have also increased. We believe AECO will continue to hold an advantage over Henry Hub next year, largely due to an abundance of production available at current prices. There are uncertainties around Henry Hub, particularly due to the election, but there is significant capacity available in the 275 to 325 range. While both Henry Hub and AECO may see slight increases, their growth will be limited compared to LNG prices and prices globally. Therefore, we anticipate that our position in the market will be more favorable compared to some competitors that have recently benefited from lower gas prices.

Operator, Operator

The next question is from Ben Isaacson with Scotiabank.

Benjamin Isaacson, Analyst

You guys have given a very clear outlook on your views with respect to nitrogen over the midterm, at least from a noncontrollable point of view. When it comes to controllables, what is your strategy for nitrogen? You've talked in the past about debottlenecking. What about product mix shifts or lowering costs or potentially offshore investments, consolidation, et cetera?

Charles Magro, President and CEO

Yes, good morning, Ben. Raef, do you want to take those questions, please?

Raef Sully, Head of Nitrogen and Phosphate

Yes, no problem, Chuck. So Ben, regarding the controllables, we are focused on several key areas. The first is enhancing the reliability of our equipment. Over the past three years, we have made significant efforts to improve this by ensuring that our sustaining capital is directed towards essential investments. You may have noticed improvements in this area. This year, we are on track to achieve about 93% to 94% capacity utilization, and we aim to push beyond that in the coming years. We have also invested approximately $300 million to increase our capacity, which has given us greater flexibility with downstream products. This investment has enabled us to convert ammonia into urea, UAN, and ammonium sulfate, which has been beneficial for us. Additionally, we have identified further low-cost brownfield expansions, which are advantageous compared to greenfield projects, focusing on product mix and regional flexibility. We are analyzing our individual regions for the necessary flexibility. These expansions will also enhance energy efficiency and reliability. Therefore, you can expect continued improvements in our equipment reliability and increased flexibility in our product mix to better manage the variability in application windows.

Operator, Operator

The next question is from Adam Samuelson with Goldman Sachs.

Adam Samuelson, Analyst

The question pertains to retail. As we look toward 2021, the crop price environment is significantly more favorable, potentially leaning more towards soy and corn planting at the current prices. I am considering how Nutrien may leverage this in retail next year. Will we experience a slowdown in operating expense growth similar to Ruralco, or will there be additional investments in digital and Brazil that could lead to operating expenses growing as fast or even faster than gross profit next year?

Charles Magro, President and CEO

Good morning, Adam. Mike, do you want to take that question?

Michael Frank, Retail Business Executive

Sure. You bet, Chuck. Good morning, Adam. So let me talk about OpEx, firstly, this year. The vast majority, over 90% of the OpEx increase this year is coming from acquisitions, in particular, Ruralco, but we also had a couple of medium-sized acquisitions in Brazil. And so that's where we're seeing OpEx growth this year. Right now going into 2021, we don't have those big acquisitions at this time that are going to have that same kind of impact into our 2021 year. And so I would expect a more stable OpEx growth going into next year, probably less than inflation. Look, in terms of grower sentiment, you're right, whether it's the U.S., obviously, it was an early harvest, good yield, strong prices right now. And good government support programs. And we're seeing that play out. Our seed bookings are up. We've had a record October from a tonne standpoint in terms of getting applications, fertilizer on the ground. And we've also seen a record number of soil samples come into our Waypoint Analytical lab network. And so we are seeing growers really starting to think about how do they make investments into the '21 crop that are going to really be focused on maximizing yields. Of course, it's the same in Brazil, grower margins are extremely strong. And in Australia, they're just about to harvest what looks to be a really good crop and moisture conditions are once again looking positive going into the '21 season. So across the board, I would say all those things are setting up right now for really strong grower fundamentals. And when that's the case, there is a positive impact, of course, on our retail business from product sales margins. And obviously, there's a lot to play out in terms of planted acres for '21 between corn and soy. But as Chuck mentioned in the prepared remarks, there was about 8 million acres that didn't get planted this year because of revamp plant. And so again, I think as we're looking at the '21 season, we're expecting a lot of those acres to come back into play in the U.S. as well.

Operator, Operator

The next question is from Jonas Oxgaard with Bernstein.

Jonas Oxgaard, Analyst

We talked a lot about China and the outlook for pretty strong potash applications. But are you thinking about China differently in the strategic sense this upcoming year? I mean it feels like we're repeating the same story every year of sending too much volume through China and then negotiating from a position of weakness?

Charles Magro, President and CEO

Yes, I believe our approach to the upcoming contract with China is quite different from previous years. If you remember, Canpotex signed a contract that only lasted until October, which was less than 12 months. We emphasized that we did not think the contract price was sustainable at that level. Canpotex will not be shipping any volume after the October contract, which is a significant distinction. As we look ahead to our volume forecasts for 2021, we are not depending heavily on China for early volume. Additionally, the domestic potash price in China is much higher than the contract price. I see this as creating a different dynamic. Contract negotiations will always be challenging, as people tend to refer to port inventories, which are visible and transparent. The Chinese are aware of this, but from my viewpoint, I believe that potash prices in China will only increase; the only uncertainty is by how much.

Operator, Operator

The next question is from Michael Tupholme with TD Securities.

Michael Tupholme, Analyst

I know you feel very strongly about the robustness of your digital platform. I'm just wondering if you can talk about the strength you've seen in that platform, you've well exceeded the targets you put out? And I'm just wondering if you can talk about what you think it is that's allowed you to do that and how you think about that going forward?

Charles Magro, President and CEO

Sure thing, Mike Frank, will you take that question, please?

Michael Frank, Retail Business Executive

You bet, Chuck. Yes. So Michael, obviously, the platform has exceeded our expectations this year in terms of revenue that's come in on the digital portal. Obviously, that was aided by COVID, where we got into the March busy season. And we wanted to make sure that both our employees and our customers stayed safe and healthy. And so we really turned to the digital tools and leveraged them in that window. But the good thing is we've seen that continue through the third quarter and even in the early start of the fourth quarter. So look, I think the benefits, there's really two big categories of benefits that we're seeing. Firstly, it's around efficiency. So our best sales agronomists that are at capacity doing it the old way. With these digital tools, they're able to increase the number of acres that they can serve by probably 25% to 40%. Just because these tools allow them to reach their growers and helped the growers make decisions in a more convenient way. And we're also seeing a less duplication of kind of back-office work. And so there's also a leaning down of the administration that we're seeing, and we can anticipate as we do more and more transactions on the digital portal and get more payments through the portal that it's leaning down our administration. The other big area of benefit is really, I would say, both grower convenience as well as our sales agronomists convenience. And we're seeing, for example, growers that are engaging online are churning less. They're more likely to buy multiple shelves from us. And so we do see this as an avenue. I think it's early days, but it's an avenue for us to drive organic growth as well.

Richard Downey, VP of Investor Relations

Operator, we have time for just one more question.

Operator, Operator

Our final question is from Michael Picken with Cleveland Research.

Michael Piken, Analyst

Just wanted to go briefly through the seed and crop protection market. You mentioned that, that's causing some pressure in terms of your retail margins. How do you see that evolving into 2021? And maybe you could talk about kind of the competitive dynamics of seed a little bit right now with the price cards now out?

Charles Magro, President and CEO

Good morning, Michael. Mike Frank?

Michael Frank, Retail Business Executive

Yes, Michael. So look, I think we already talked about the crop protection market and the impact this year, in particular, the impact of Ruralco and the mix effect that Ruralco had on our overall margins as well as just a very competitive Q3 that obviously lowered our margins in the U.S. in Q3 as we sold through the inventory based on the smaller market. Now I would say on the seed side, look, if you look at our margins year-to-date, our margins are strong on seed. They're strong because we've performed well with our proprietary products. Seed portfolio, and I would say we've never had a stronger proprietary product seed portfolio than we have going into the '21 season. So we feel really good about that. And right now, again, I think based on positive grower sentiment, growers are focused on the seed that's going to help maximize yields. So that they can take advantage of $10.40 cents soybeans or $4 corn. And so we're seeing actually in soybeans, probably a trading up, less roundup ready two soybeans, less roundup ready by LibertyLink soybeans. And we think that our overall ratio of both Enlist and Xtend and XtendFlex beans are going to be up this year. And so it's a competitive marketplace. But again, growers are focused on making sure they can get the best seed. And really, it's the same on the corn side. We're not seeing extraordinary competition, I would say, right now in seed. I mean the market is focused on getting the best seed, making sure that we have inventory of it. And that's where the focus is right now. It's more so there than it is on, I would say, on the price equation.

Richard Downey, VP of Investor Relations

So it's Richard Downey here. Thank you for everyone who dialed in. My apologies for the technical difficulties this morning, but we are available for any follow-up questions that you may have. Thanks for joining us. Have a good day.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.