Earnings Call Transcript - NTR Q2 2022

Operator, Operator

Greetings, and welcome to Nutrien's 2022 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Jeff Holzman, VP of Investor Relations. Please go ahead, sir.

Jeff Holzman, VP of Investor Relations

Thank you, operator. Good morning, and welcome to Nutrien's second quarter 2022 conference call. As we conduct this 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 shareholders as well as our most recent annual report, MD&A, and annual information form filed with Canadian and U.S. Securities Commissions. I will now turn the call over to Ken Seitz, Interim President and CEO; and Pedro Farah, our CFO, for opening comments before we take your questions.

Ken Seitz, Interim President and CEO

Good morning and I will also welcome you to Nutrien's second quarter earnings call. Before we get into the discussion of our results and outlook for the remainder of 2022, I would like to highlight three key messages. First, we believe structural changes to global energy, agriculture, and fertilizer markets will provide a supportive environment for Nutrien well beyond 2022. Second, we are accelerating strategic growth initiatives that leverage the unique advantages of our integrated business, generate excellent returns on invested capital and enhance our ability to provide sustainable solutions to help feed a growing world. And third, we are committed to a balanced approach to capital allocation that supports growth and the sustainability of our business, while also returning meaningful capital to shareholders. In 2022, we expect to invest around $3 billion on sustaining and growth initiatives and distribute approximately $6 billion in capital to shareholders. Pedro will walk through our plans in more detail later on in this call. Now turning to our results and outlook, Nutrien delivered record first-half earnings driven by the strength of market fundamentals, the advantaged position of our global production assets, and the excellent performance of retail. We continue to progress our sustainability priorities and had excellent safety performance across the Company, including a strong engagement in our serious injury and fatality prevention efforts, which is the most important work we do. Nutrien Ag Solutions had a record first half with adjusted EBITDA of nearly $1.7 billion, up 38% from the prior year. The retail team delivered higher margins across nearly all products and geographies and supported by the strength of our global supply chain and expanded offering of high-value products and services to growers. Crop nutrient and crop protection margins were very strong due to strategic procurement in a rising price environment and growth in our proprietary nutritional products. North American fertilizer volumes were down in the first half due to a combination of a very strong fall season in 2021, some crop mix shifts, and a condensed application window this spring. Fertilizer sales volumes outside of North America were up from the prior year, reflecting growth in our Brazilian retail network. Potash adjusted EBITDA increased to $3.4 billion in the first half, supported by higher realized prices and record offshore sales volumes. Potash production increased by more than 5% compared to the first half of 2021, and controllable cash costs were relatively flat. The increase in production reduced our per ton fixed costs and largely offset the impacts of inflation. Spot prices in Brazil and Southeast Asia were up significantly compared to the previous year, and Canpotex continued to prioritize its available volumes to these higher netback offshore markets. In nitrogen, adjusted EBITDA in the first half increased to $2.2 billion as higher realized prices more than offset lower sales volumes and higher natural gas prices. The delayed start of the North American spring season impacted sales volumes, in particular, ammonia and UAN, and was a major contributor to the decline in nitrogen benchmark prices that occurred in the second quarter. We had record phosphate adjusted EBITDA of $423 million in the first half as higher realized prices more than offset the large increase in ammonia and sulfur input costs. In the second quarter, we recognized a non-cash impairment reversal of $450 million, which was driven by improved market fundamentals and a more favorable view of phosphate margins. Turning to the outlook. Global grain and oilseed inventories remain historically low. The recent deal to reopen Ukrainian exports through the Black Sea would be a positive development for global food security if there is a sustained increase in shipments. However, analysts believe volumes will continue to be challenged by labor and logistical constraints in addition to ongoing military strikes in the region. Ukraine's grain production and export levels are projected to be down dramatically compared to 2021, leaving little buffer for any supply issues in other regions this growing season. U.S. grain conditions were generally favorable. However, high temperatures in July likely capped yield potential, and record high temperatures in Europe have reduced summer crop yields. Crop commodity prices have been impacted over the past month by broader market volatility but are still 25% to 35% above the 10-year average, and futures are trading at elevated levels on a multiyear basis. In North America, we expect strong grower demand in the third quarter for top-dress nitrogen, special nutritional products, and crop protection products. The crop was planted late but is maturing rapidly with the recent hot weather, and we are planning for a normal application window this fall. In Brazil, grower margins are strong, and soybean planted area is expected to increase by 2% to 4%. Fertilizer inventories have been slow to move from core to inland positions as buyers look to purchase on a just-in-time basis. But we anticipate strong movements over the next two months to ensure product is available for the upcoming planting season. In potash, much of the focus remains on supply challenges in Eastern Europe. Shipments from Russia and Belarus were down an estimated 25% and 50%, respectively, in the first half of 2022. Russian potash is not currently sanctioned but has been impacted by restrictions on financing activities that facilitate exports. The impact of sanctions on Belarus supply has been more significant due to the loss of access to Tidewater through Lithuania. Belarus is reportedly shipping small volumes via container, which for a bulk commodity is a more costly and logistically challenging option. We narrowed our global potash shipment forecast to between 61 million and 64 million tons in 2022 and expect shipments to be constrained by restrictions on exports from Russia and Belarus. Beyond the existing supply challenges, we see the potential for delays in the development of new potash capacity from this region, which was projected to be the source of approximately 60% of new potash supply, excluding Nutrien, over the next five years. We expect nitrogen prices to strengthen in the second half supported by high European gas prices as well as restricted Chinese urea and Russian ammonia exports. European gas prices averaged close to $50 per MMBtu in July, which equates to an ammonia cash production cost of over $1,700 per ton. More than 20% of Europe's ammonia production is estimated to be curtailed, and there are concerns over gas pricing and availability through the winter in Europe. Many buyers have delayed purchases given recent market volatility, and we expect a seasonal resurgence in the second half that could further tighten supply.

Pedro Farah, CFO

Thanks, Ken. First, a few comments on our guidance, we expect a strong second half and the projected adjusted EBITDA in the region of $14 billion to $15.5 billion and adjusted EPS in the range of $15.8 to $17.8 per share. The midpoint of our adjusted EPS guidance represents a nearly threefold increase compared to 2021, reflecting both the increase in total earnings and the reduction in our weighted average shares outstanding. Retail had a very strong first half, and we are now guiding to adjusted EBITDA between $2.1 billion and $2.2 billion in 2022, which represents a 12% annual growth rate over the past five years. We expect a more normal fall application season in North America and anticipate per ton crop nutrient margins below the historically strong levels we achieved in the second half last year. In potash, we narrowed our adjusted EBITDA guidance range and expect record volumes driven by strong demand in offshore markets. Potash prices have been the most stable among the three primary nutrients, and we anticipate that will continue through the second half. Our revised nitrogen earnings guidance range reflects the impact of low North American benchmark pricing and higher than previously forecast domestic natural gas prices. Despite this change, we maintain our constructive outlook for nitrogen markets through the second half of the year and into 2023. We project cash from operating activities of approximately $9.5 billion assuming a cash conversion ratio of 65% at the midpoint of our adjusted EBITDA guidance. This ratio is lower than previously forecast due to a change in timing of working capital requirements; however, we expect this to result in a more favorable impact on our operating cash flow in 2023. As Ken mentioned earlier, we have a balanced approach to capital allocation and intend on allocating approximately 1/3 of our operating cash flow to growth in sustained projects. The remaining 2/3 we plan on returning to shareholders through dividends and share repurchases. Reinvesting $1.3 to $1.4 billion in sustaining projects to ensure we maintain safe and reliable operations, as well as support our expanding production capability. This is slightly higher than our previous guidance and reflects inflationary pressures on labor and equipment. We believe that inflation on equipment, in particular, may be transitory. We are allocating approximately $1.7 billion to advance high-return strategic initiatives across our business that we expect will drive earnings growth through the cycle. Critical accounts for nearly 60% of the growth capital with acquisitions and investments focused on expanding our network in core geographies, enhancing our digital capabilities, and growing our proprietary products portfolio. We have completed or announced 10 acquisitions so far this year in Brazil and Australia, for a total investment of approximately $450 million. Following the completion of the two recent announced acquisitions in Brazil, we expect to surpass our stated target of $100 million of adjusted EBITDA by 2023. Our portfolio of Brazilian acquisitions are performing very well, exceeding our hurdle rate for this market. In potash, the majority of investment is related to underground mine development and additional mining equipment to support the accelerated ramp of our production capability to 18 million tons by 2025. This is flexible, low-cost production capability that is unmatched in the industry. Based on what we are seeing in the market is production that will be needed to meet global demand. We estimate a capital cost at $150 to $200 per ton, providing a very short payback period or, in other words, a low-regret cost based on projected margins. We continue to advance our low-cost Phase II nitrogen brownfield expansion projects. In May, we announced our intention to build a 1.2 million ton clean ammonia facility at our existing site in Geismar, Louisiana. This project provides an opportunity to leverage existing infrastructure and access to tidewater. We believe this project can achieve attractive returns at mid-cycle ammonia prices and allow Nutrien to participate in the current and emerging end-use markets for merchant ammonia and play a key role in achieving our 2030 emissions reduction goals. To be clear, we are not relying on additional volume or a price premium that may come with the development of a larger clean ammonia market. This will be upside. Finally, we intend on returning $6 billion in capital to shareholders in 2022, which equates to 13% of our current market cap, around $1 billion of this is our dividend, which was increased by 4.4% back in February. Given the confidence in our operating cash flow, we announced yesterday our intent to complete our existing 10% NCIB in 2022. Completing the NCIB to lower our common shares outstanding to around $500 million by year-end, we plan on factoring in the significant reduction in share count in the decision criteria as we target sustainable and growing dividends over time.

Ken Seitz, Interim President and CEO

Thanks, Pedro. I would just make a few final comments. The fundamentals for our business remain very strong, and the challenge of feeding a growing world has never been more apparent. Nutrien is uniquely positioned to safely and sustainably respond to this challenge through our close connection with the grower, our extensive global supply chain, and our top-tier production assets. I'm confident we can deliver due to the efforts of our talented people across the organization who I would like to thank for their hard work and dedication to helping Nutrien feed the future. I'm joined today by members of our leadership team, and we would be happy to take your questions.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Andrew Wong of RBC Capital Markets. Please go ahead.

Andrew Wong, Analyst

So just regarding the nitrogen guidance, obviously, the market was a bit weaker into midyear than we all expected, but also, like you mentioned in the prepared remarks, supply is very constrained with the high nat gas situation that we're seeing in Europe. And we just already heard urea moved up about $100 last week and things can move pretty quickly in nitrogen. So just kind of curious what your assumptions are in the upper and the lower end of the guidance range. And are you maybe being a little bit conservative here just because of what we're seeing today?

Ken Seitz, Interim President and CEO

Great. Thank you for the question, Andrew. And yes, I mean, it's true that we had a full application season -- a strong fall application season in 2021. And of course, the late start to the spring, which led to some shifts in crop mix and some prevent plant area, which led to lower application rates and therefore some carryover from the spring season. So yes, we've seen some seasonal volatility here, and yet it is a supply-constrained market. I will -- I'll hand it over to Raef to provide some additional color just on how we've centered and maneuvered through the year.

Raef Sully, Executive

Yes. Thanks, Ken, and thanks, Andrew. Look, as you noted, the volatility was much higher in the first half than we had thought. And that impacted our results. As Ken mentioned, we had really good application rates last fall. We had the delayed start to the season. We should've had some supply constraints. That said, looking forward, the fundamentals remain really strong here, global demand continues to outstrip global production increases. As you mentioned, the EU gas pricing remains high, leading to challenges there, which we're going to keep an eye on as the conversion cost of natural gas into ammonia and also ammonium nitrate. You can see that current pricing capacity starts to get shut in, in Europe. Chinese export reductions remain in place. There are -- I think ammonia export of about 750,000 tons in the first half. Our outlook is probably going to be around 2 million, 2.5 million for the full year. That's quite a lot down from normal levels of 3 million to 5 million tons. In addition, we're excited about the potential we see in the growth of low carbon. So I think despite the volatility in the first half, I think we see a really good outlook for the second half and beyond. But Jeff, I don't know if you want to add anything?

Jason Newton, Executive

Andrew, I guess specifically, when talking about the outlook on benchmark prices. As you say, we've seen significant volatility in the last couple of weeks with global ammonia and urea prices and even in urea prices coming up in North America. I think if we look towards the fourth quarter of the year, we have sort of typical seasonal improvement in prices in the forecast as is normally the case, and we expect a constrained and tightened market. That said, relative to the current market conditions, that seasonal increase to be relatively modest. And we certainly don't have included in forecast a return to prices as they were in the first half of the year. But if you look at where natural gas prices are today in Europe and the impact that's having on production shutting down, certainly, marginal cost is even above where prices peaked at the first part of the year.

Operator, Operator

Your next question comes from Jacob Bout of CIBC. Please go ahead.

Jacob Bout, Analyst

My question is on potash demand. You're guiding down slightly for potash volumes in 2022. How much of this is a reflection of farmers pushing back to higher prices versus a compressed spring? Maybe you can comment a bit on the U.S. summer fill program. And then what are your expectations for the second half for Brazil, given the rising inventory levels there? Or is the expectation to export more into the lower-priced markets like China and India?

Ken Seitz, Interim President and CEO

Great. Well, thank you, Jacob, for the question. Yes, maybe what we'll do is just sort of go around the world, as it relates to inventories that we're seeing and how we're expecting the potash markets to unfold here. So it is true, yes, that we had, as just mentioned, that strong fall application season in 2021. And then the compressed spring and again, some shift in crop makes, and some prevent plant area, which led to lower application rates. So coming out of the spring, it is true that we had some carryover volumes on potash in North America. And so therefore, down -- Nutrien down some volumes in that region. Now we just are closing our summer fill program and filling up our Q3 order book at the moment. But we don't expect those North American volumes to recover. We expect a strong fall application season and the backdrop with the agricultural fundamentals is strong in North America. But at the same time, we don't expect a recovery of those volumes in North America. That said, when we say it's 61 million to 64 million tons, we believe it's a supply-constrained world. And again, with the backdrop of fundamentals, growers in all parts of the world are still incentivized to maximize yield and lay down the appropriate agronomic level of crop nutrients. As you say, in Brazil, imports were up in that part of the world for the first half, and it's really related to the conflict in Ukraine didn't start impacting things until, obviously, after February. So -- and shipments into Brazil were up 30% -- 37% year-over-year, and we're seeing high port inventories as they prepare for their planting season. We know that those port inventories will be moving inland and are moving inland. And we also know that with those port inventories at the moment, they still only have about 50% coverage for their planting season. So we know that the Brazilians will be back in the market buying for their big planting season. If we go to China, we know that inventories are significantly down. Their imports were down 11% year-over-year in the first half, and we put port inventories at sort of 1.8 million tons. So those are five-year lows for port inventories, and it's really related to the fact that China, as the lowest priced market in the world, is not getting the volumes that it needs. The same is true for India, which, again, shipments down about 37% in the first half compared to last year. Inventories in that country are 550,000, 600,000 tons. They're very, very low, and again, just not getting the volume given where pricing is that. And then finally, I'd just say in Southeast Asia, those prices migrated up. We've seen the first half strong on oil prices. And so we saw actually convergence of price for standard a bit similar to what granular product we're selling for in Brazil. So in other words, strong demand, but we don't believe that Southeast Asia will get the volume they need either this year just due to supply constraints. The last thing I'll say, Jacob, is one of the things we are seeing is for those places that have inventory like North America, albeit due to the delayed spring, like Brazil which has important inventory, we see growers just sort of waiting at these price levels to just-in-time purchasing or last-minute purchasing. Yet again, we know with the strong backdrop of agricultural fundamentals, we fully expect that they'll be compelled to lay down crop nutrients, but that it will be a supply-constrained market.

Operator, Operator

Your next question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel Jackson, Analyst

Staying on potash. If I look at where you think pricing is going to play out and what your book looks like, we've seen some other competitors talk about some expecting a price decrease in the third quarter from a realized perspective as you play around with which on spot prices in the midstream in China, India and other things. What do you expect for pricing in the third quarter into the fourth quarter?

Ken Seitz, Interim President and CEO

Yes, thank you for the question. Yes, what I would say is potash among crop nutrients, and certainly compared to nitrogen, has been a little bit more stable in terms of pricing. We have seen some slight softening, again just some seasonal softening here and a place like Brazil. We're heading into the Northern Hemisphere into a fall application season, which we expect to be wide open. As we head into Q3 and Q4, we're looking at pricing in all these markets and saying that's probably -- there's some stability there at the moment and forecasting that prices will remain in and around these levels into the balance of 2022. I mean, that's not true necessarily for India and China with those very low in-country inventories. They will be compelled to negotiate a contract sooner rather than later in 2022, that could be possible, but for the spot markets, like I said, we're sort of forecasting in and around these levels for the balance of the year.

Operator, Operator

Your next question comes from Steve Byrne of Bank of America. Please go ahead.

Steve Byrne, Analyst

Yes. I'm interested in what level of fertilizer buying your retail business has made for this next crop year. Clearly, the wholesale side of your business is pretty bolded up about pricing for nitrogen and potash in the fall. Is your -- the retail side of your business in agreement and loading up and aggressively buying to capture that margin this fall and next spring? It seems like there was some of that captured in the first half of this year and maybe a similar comment on crop chemicals, you clearly on the retail side of the business, clearly captured margin on crop chemicals, was that because of purchasing well in advance of the inflationary run earlier in the year?

Ken Seitz, Interim President and CEO

Right. Well, thank you, Steve, for the question. And yes, our retail group has been successful strategically procuring in this rising price environment, as reflected in our first half results. Now heading into the second half, we see perhaps some moderation on that as you say, given some leveling off of crop nutrient prices. But at the same time, the retail business is procuring for what they see is an open window for a fall application season. It's also true that we very strategically secured some crop chemistry in the fall of last year, and that's part of the success in the first half of 2022 as well. But I'll hand it over to Jeff Tarsi to provide -- he has more color on that. So Jeff, over to you.

Jeff Tarsi, Retail Executive

Steve. And -- yes, I'll take it into two categories. Maybe we'll start with fertilizer purchasing and with the late start that we got to the spring, one of the fears I had was we were going to have a really tight window for fall application this fall. But with the weather developments we've seen over the last month, this crop is progressing really nicely, and we're seeing the maturity dates move up quite a bit. So I'm much more encouraged that we could have a lot more open window for fall application than I had anticipated when we got this crop planning for this year. As you know, we move a significant volume of nutrients throughout the year, and we're always layering product, and we're starting to fill our sheds now in anticipation of the fall. We think that growers are more -- number one, land prices remain very high, so balance sheets are extremely strong right now. We think that cash margins are going to be good again, what yield puts out to. And these growers are really adapted now to want to get a real hedge start on their nutrient applications. Most of them don't want to put it off to the spring if they can help it. So if we get a good open fall, I'm going to anticipate that we're going to have a lot of movement as it relates to NPK. And what our indications today are, and I don't put a lot of weight on crop acreage intentions today, but everything points that we could see another 2 billion to 3 billion acres of corn next year. That’s going to put more emphasis on, I think, wanting to get some fall nutrients applied. As it relates to the crop protection side of the business, as you mentioned, we had a tremendous first half with our crop protection business. Our revenues were up 16.5%. Our gross margins were remarkable at up 43%. A lot of that, Steve, and we were very public about that in our past calls, but we started layering product in last year as quickly as we got out of the crop chemical summer season to anticipate a lot of supply chain constraints. And I think you'll see us do something fairly similar to that this fall as well because if we're talking to our strategic suppliers, there's going to be a number of products that will be constrained again going into the '23 season. So, we've got -- as you know, we've got an excellent supply chain asset base. We're able to move product and quickly back out -- but we'll use some of those same strategies that we had last year and get ourselves positioned to be able to service our growers going into the season. And again, the same way around our proprietary business, we had an extremely strong proprietary plant first half. We got a lot of momentum going with that side of the business. I can't even tell you how many supply chain constraints we hit during this past year in keeping our manufacturing plants going and such. But we feel like we're going to position ourselves nicely for the upcoming season as well.

Operator, Operator

Your next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson, Analyst

I was hoping to maybe keep going on the discussion on application rates and demand. Looking at your retail crop nutrient business in North America, the first half of your volumes were down 21% year-over-year. If we do kind of look back twelve months, they're down 14%. How much do you think applications, especially on PNK but even on maybe nitrogen in some cases because of the way the spring played out were below normal? Do you think that's a pretty accurate representation of the market over the last 12 months? Also, considering the rising price environment for the last year, those price increases have kind of abated for now. How should we think about the per ton margins on crop nutrients in the back half and into next year if we have a little more stability on the pricing side?

Ken Seitz, Interim President and CEO

Adam, thank you for the question. Yes, we would characterize the first half more as just the compressed season and again, a strong fall in 2021 in terms of application rates. And again, it's a compressed spring, which we just didn't see as many crop nutrients go to ground and therefore, some carryover. That's really the story of the spring in North America. I will just hand it over to Jeff. Jeff, if you can just carry on with the discussion that we just had as it relates to application rates and then heading into the balance of the year here regarding certainly perhaps some moderation in margins on crop nutrients, but I mean, we haven't grown organically as well, and you can see that reflected in retail's results concerning our supply chain and our expansion of sales to our digital channel and, certainly, our proprietary products. But Jeff, over to you to provide some more color.

Jeff Tarsi, Retail Executive

Yes, Adam, thanks. The story actually goes further back than just a strong fall of '21. Remember that we had two record falls from an application rate standpoint, both '20 and '21. I know in my career in this business, I've never seen two falls as strong as those two back-to-back. When you look at coming into -- and we have an ability in North America, we don't have the same ability in Latin America or Australia. But you have an ability to bank some nutrients with the soil types that we have here in North America. So when you look at coming into the '22 planning season, and I think we said we even forecasted our tonnage would be back in the spring of '22. When you look at the fact that you got into a late planting season, lots of these growers had their crops forward contracted. They got urgency, and most of them don’t want to put it off to the spring if they can help it. The other factor as you look at crop shifts and when I look at crop shifts, I look specifically geographically where those crops take place. If you look at corn, where we lost corn to soybeans, we lost that in a big percentage basis in the South, and we have a tremendous retail network in that area. You shift a couple of million acres of corn to soybeans, from a nutritional demand standpoint, that changes significantly. We came into this season thinking we would plant somewhere between 92 million and 93 million acres of corn; but looking at what USDA has today, we’re more around 89 million acres of planted corn. There are multiple factors involved. Although, once you get in season, many growers cut some rates back, but they cut the rates back because they felt like they had carryover in soil. One thing I always point out with growers today is, look, just on the seed, if they take corn, they have $150 an acre invested in seed and seed treatment. There are no growers out there who are going to make that kind of commitment to cost on a per acre basis and then come in and say, well, I will greatly reduce my end PNK levels, no one that's going to affect yield at the end of the day. So our growers so much more sophisticated in that manner, and we do a lot of soil testing. It's pretty standard for how we proceed concerning our applications today based on science. I think you also asked about margins. We had tremendous -- while tonnage was down, I think our gross margins on a per ton basis were up by $68 year-over-year which was amazing. When I look even deeper into that, our proprietary nutritionals contributed significantly to that.

Operator, Operator

Your next question comes from Steve Hansen of Raymond James. Please go ahead.

Steve Hansen, Analyst

I just wanted to follow up on some of the remarks earlier around potential contract discussions through the back half of the year here. Do you want to perhaps elaborate a little bit more on sort of the timing and expectations around contract discussions with China and/or India and maybe the timing of those and just any general sense you came on price now, that's a harder one.

Ken Seitz, Interim President and CEO

Yes. Well, thank you, Steven. And -- yes, we're just -- I think as everyone is watching inventories in those parts of the world. And -- it's true that certainly in a place like India we're seeing demand rationing, where potash is simply not going to ground based on availability. So it's not sort of traditional potash application rates dwindling the inventories in-country. That said, in a place like India, as I mentioned earlier, it's only 550,000 tons sitting on the ground in that country. So very close to zero. It's hard to say exactly when India will be back in the market. If we say there will be some reasonable nutrients going to ground, as referenced in the deck we provided for this call, well then you would expect that sometime this fall, and maybe later fall, India would be back talking about the new contract. With regard to China, where again, port inventories are at sort of a five-year low. When we say 1.7 million tons sitting at port, 1.5 million of that is the so-called strategic reserve. So very low inventories in China, and we do expect that China will lay down some volumes as well in this fall season. Like India, again, we expect it's a 2022 event where they'll have to come have some discussions about new volumes at a new price. What that price will be in those contract markets? It's a great question, Steve. If we look around the world and see where general grade markets trading today, we’ve seen Southeast Asia trade up to $1,000 a ton; that's moderated somewhat, but those are some of the biggest markets in the world. I expect the China and Indian contracts will have to come up significantly.

Operator, Operator

Your next question comes from P.J. Juvekar of Citigroup. Please go ahead.

P.J. Juvekar, Analyst

I have a question on seeds. Despite -- with those strong air conditions this spring, seed sales were up only 4%. Can you break that down between price and volume because I think the expectation was that price would be up mid-single digits? And then looking forward, what are your pricing expectations for next year given the input cost for seeds?

Ken Seitz, Interim President and CEO

Great. Well, thank you for the question, P.J. And I'll pass that one over to Jeff Tarsi.

Jeff Tarsi, Retail Executive

Yes, P.J. When you look at it from a revenue basis and again, when you have crop shifts, so if you look at corn, an acre, again, from $125 to $150 an acre when you sell in corn seed. And you shift that to soybean, you're cutting revenue in two when you make those shifts. With regard to our seed portfolio, we're very happy where we are through the first half of the seed business. I might add, this past year, there was very little price increase on seed going into the '22 planning season. Our proprietary business was very strong through the first half. We grew seed margins by 30% on our proprietary business. We were up on revenue and margins across all regions concerning the seed portfolio. We have started our fall seed campaign here in the last week. We’ve got momentum going into that. Now you talked about seed pricing going forward. I think we’ll see most of our seed suppliers make significant adjustments. I think canola will likely be up 5% to 10%, corn could be up as high as 10% going into ’23, and indications are that soybeans will be up from 8% to 10% for '23. So we’re going to see a rise in seed costs going into this new crop year. Should everything finish well this year, we think we'll see a market share increase across our seed portfolio.

Operator, Operator

Your next question comes from Christopher Parkinson of Mizuho. Please go ahead.

Christopher Parkinson, Analyst

Just kind of a corollary of a bunch of these questions on potash, but it seems as though that Russians have figured out how to utilize their port systems and get some product out there, perhaps a little bit better than expected. But prices are still basically holding in. It seems that Belarusians are kind of at the lower end of that in terms of normalized export rates. In terms of everybody trying to evaluate this over the next two to three years in terms of how tight the supply/demand will actually be, what's your updated detailed assessment of that shortfall into next year, into 2023? I mean, how much can both countries really ultimately figure out to get more tons '23 versus '22? What are your major considerations?

Ken Seitz, Interim President and CEO

Yes. Well, thanks, Chris, for the question. Yes, there's certainly a lot of moving parts. We're all seeing reports of various forms of shipment. Out of Russia, our estimate is that for the first half of 2022, Russian exports are down about 25%. That's a pretty significant number, and with Belarus still not having access to tidewater via Lithuania, we estimate that their first half shipments are down 50%. Our assumptions for 2023 show that out of Russia, at least, we'll see more volume coming, and some channels will be developed. After all, Russian potash is not sanctioned. It's just that financing activities in these segments are making it difficult at the moment. For 2023, we think production might be down in the range of say, 5% to 20% from 2021 levels. Out of Belarus, again, much more significant due to challenges in getting to port. Our assumption for 2023 is maybe 30% to 50% of production down from 2021 levels. That’s what's in our assumptions. We see reports of Belarus looking at smaller volumes via containers. We can tell you that, from the experience of Canpotex, that's a real challenge. Even if they manage, it's only around 2 million to 3 million tons, which they would need to meet the bottom end of our range. We maintain our view that the fundamentals for potash will remain strong right through 2022 and into 2023, indicating a supply-constrained market.

Operator, Operator

Your next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Vincent Andrews, Analyst

Wondering if you can just give us an update on your digital strategy in retail. Any new initiatives or benchmarks as well as what you're seeing competitively if your larger competitors are advancing these strategies as well?

Ken Seitz, Interim President and CEO

Great. Thank you, Vince. Here we are, just past the middle of 2022, and we have surpassed the target we set in 2021. We’ve put through over $2 billion, and we’re on track to meet our target of $3 billion of sales through digital. A lot of that has to do with digital agronomy, and success out in the field. But I'll hand it over to Jeff Tarsi to give you more detail and color.

Jeff Tarsi, Retail Executive

Yes, Vincent, thanks. As Ken mentioned, we continue to make a lot of progress with our digital initiative and our digital platform. Our people in the field are engaged in what we call a digitally enabled sales initiative. We’ve put over $2 billion through that category year-to-date. Our teams are getting comfortable with using these tools. What I'm excited about is this fall, we released our Echelon 2.0 around our precision agriculture. That's where the real value capture is for our business and our industry. Our growers are increasingly keen on these digital tools. It allows our agronomists to give customized recommendations based on data and simulations to maximize ROI and also allows us an opportunity to capture margin. So we're seeing it as a work in progress with new technology developments. We've started our fall seed campaign, and a big part is using our seed selector embedded in our digital platform. This technology helps us make the best decisions for our growers, enhancing their potential ROI as well. Our digital platform is also key to our sustainability efforts and will play a significant role in our future plans.

Operator, Operator

Your next question comes from Josh Spector of UBS. Please go ahead.

Josh Spector, Analyst

I was just wondering if you could share some thoughts on China. Specifically, anything you're seeing on nitrogen and phosphate production. We're in an export constrained environment right now given those limitations. But are there any signs of an inventory build or change in production strategy that could foreshadow a shift into next year?

Ken Seitz, Interim President and CEO

Thank you for the question, Josh. I'll pass that one over to Jason Newton.

Jason Newton, Executive

Josh, yes, we've seen, to some extent, the industry in China, both from a nitrogen production standpoint and phosphate, get surprised to some extent by the extended export restrictions that have taken place. The second half of 2022, urea exports are really constrained and restricted by the government, while phosphate export quotas have been put in place, reducing export volumes. In the first half of the year, though, urea production was actually up year-over-year. So, despite exports being down significantly, in the first half of the year, production rates were up, which points to higher domestic use and also to your point, rising domestic inventory. We’ve seen operating rates decline since those added restrictions came into place. Domestic Chinese prices are declining; the spread between the domestic Chinese price and export price has widened. On phosphate, capacity utilization rates have definitely declined to below 50% today. This decline is affecting global sulfur demand, leading to a dramatic reduction in sulfur prices. As we proceed into 2023, a key factor will be how international prices perform against the domestic market in China, as the government appears focused on targeting lower prices for Chinese growers. This situation, with constrained supplies globally, could support international prices.

Operator, Operator

Your next question comes from Ben Isaacson of Scotiabank. Please go ahead.

Ben Isaacson, Analyst

Your competitors are increasingly taking advantage of nitrogen export opportunities and moving product outside of the U.S. Their system has set up a little bit differently than yours. Looking ahead over the next five-plus years, and of course, you're building a new plant in the Gulf. Do you see yourself able to take advantage of export opportunities for nitrogen, not just on the clean ammonia side, but really for overall nitrogen?

Ken Seitz, Interim President and CEO

Thank you for the question. I'll pass that one over to Raef Sully.

Raef Sully, Executive

Yes, Ben, the simple answer is yes. I would point out that we've been exporting more UAN this year than we've done previously. We're also actively looking at opportunities for exporting more ammonia instead of urea and UAN. Part of the work we're doing in brownfield expansions gives us more flexibility to export as those opportunities arise. So the answer is yes, we're actually doing it now, and we're planning on expanding our capability of exporting in the future.

Jeff Holzman, VP of Investor Relations

Operator, we have time for one more question.

Michael Tupholme, Analyst

My question relates to potash demand and the rationing we've seen this year. You narrowed your 2022 global potash shipment guidance, and you're still looking at a meaningful year-over-year decline in global potash demand this year, due largely to the global supply constraints. I know you haven't given guidance for 2023, but I'm wondering if you can share any thoughts you might have on what the supply-driven pullback of potash demand this year likely means for potash demand as we look out to next year and how that might feed into the pricing outlook?

Ken Seitz, Interim President and CEO

Thank you for the question, Michael. Yes, there are a number of moving parts there. As we discussed, the challenges in Russia and Belarus are significant; however, we are increasing production on our side. I could say there are multiple factors. But I will pass it over to Jason Newton to provide a little more detail on our assumptions.

Jason Newton, Executive

Sure. Michael, as Ken touched on earlier, as we look towards 2023, our expectation for Belarusian supplies would be pretty much in line with this year's range given continued port restrictions. For Russia, we think the narrowed range this year may widen into 2023 but stay within that same sort of range. One factor crucial for 2023 is that Nutrien will have additional volume to insert into the market. The anticipated increase may be in the range of 1 million to 2 million tons versus this year’s levels. However, because of demand rationing occurring this year, there’s likely to be pent-up demand. Any surprise to the upside from a supply perspective would likely be absorbed, particularly from agricultural fundamentals showing strength in demand continuing into at least the first half of 2023.

Operator, Operator

There are no further questions at this time. I would like to turn the conference back to Jeff Holzman for closing remarks.

Jeff Holzman, VP of Investor Relations

Okay. Thank you for joining us today. The Investor Relations team is available for any follow-up questions. Have a great day.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.