Food Production Remains A Global Priority
The latter half of 2008 brought unprecedented challenges to world financial markets, and no industry – even those as essential as fertilizer and food – escaped untouched.
This financial turmoil dominated people's attention, while concern about the global food supply – a potentially devastating crisis that earned priority status earlier in the year – was pushed out of the spotlight. The prospect of food shortages has dire implications, and the fact that this has been bumped from the headlines does not mean it has been resolved. The long-term need to increase food production remains a critical issue.
PotashCorp's products are integral to protecting the global food supply, and the need to produce higher yields per acre represents a significant opportunity for your company.
In recent years, we have benefited from growing demand and higher prices for our fertilizer products, especially potash. This helped us achieve a fifth consecutive year of record earnings in 2008.
Yet even with long-term food consumption trends that are hard to dispute, our industry was affected by the widespread loss of confidence in the global economy. Despite robust grain demand and extremely low inventories relative to use, crop commodity prices were caught up in the freefall. Farmers, like other consumers, reacted by holding on to their capital and deferring fertilizer purchases.
Diverting focus and resources away from food production – even in the short term – will result in greater need. When attention returns to the food crisis, the challenges will have grown.
We believe this will further increase the need for and value of the crop nutrients we produce. With this understanding, your company has not wavered from the long-term strategies that led to our success over the past two decades and provide even greater potential for the future.
A Fundamental Issue
The world looks very different in the agricultural regions of China, India and Brazil than it does in headline coverage of financial issues.
With global population growing by approximately 75 million people per year, the food supply is under extreme pressure. Many countries with the fastest growing populations also have the strongest economic growth, enabling more people to improve their diets by adding meat and protein-rich foods.
This requires more grain. In seven of the past nine years, world grain production has fallen short of consumption. As a result, global inventories are low. Current grain stocks would feed the world for just over two months, compared to the greater than three-month cushion averaged over the past 30 years. This reduction puts the world food supply at risk.
Simply put, more food must be produced on a land base that is being squeezed by global development – and the only practical solution is to improve agricultural yields. This has raised interest in and awareness of the essential role of fertilizer in food production. While the financial crisis meant demand for our products was deferred through the fourth quarter of 2008 and the early months of 2009, we expect the need for them will continue to grow.
To prepare for this growth, we continue to build our potash capacity. Adding to previously announced debottlenecking and expansion projects, we have expanded our plans at Allan, Cory and Rocanville to get the most out of our existing operations. In total, we are investing CDN $7 billion to raise our constructed capacity to 18 million tonnes by the end of 2012.
As we have in the past, we will bring on this capacity when it is needed, remaining true to our long-held strategy of matching production to market demand. We demonstrated our commitment to this late in 2008 when we announced plans to curtail 2 million tonnes of production in early 2009 in anticipation of reduced demand during the first quarter.
We will not push our products into markets when there is a lull, but we will be prepared as demand growth returns. We expect a new surge to begin during the second half of 2009 – and we will be ready to capitalize on the opportunity.
Producing Financial Performance
By using our resources, particularly potash, when they have the greatest value, we have continued to improve our financial performance.
In 2008, we earned a record $11.01 per share, or $3.5 billion, more than triple our 2007 net income. Gross margin grew to $4.9 billion – a $3 billion increase over 2007 – as all our nutrients made record contributions.
Significantly higher prices for potash are at the heart of this record performance. Our average realized price of $625 per tonne in the fourth quarter of 2008 was nearly four times our average price of 2007. More importantly, these price gains held up late in the year, even as the financial turmoil triggered a chain of events that led to a sharp decline in phosphate and nitrogen prices.
Potash buyers have recognized that strong and sustainable pricing is required to encourage much-needed long-term investments in capacity. With our unmatched capability in potash, this represents more opportunity for our company.
Pursuing Our Full Potential
As pleased as we are with our 2008 performance, we believe it only hints at what we can achieve. The world will need more fertilizer, especially potash. With no significant greenfield projects underway, and factoring in new production from all announced capacity expansion projects, the global potash supply is expected to be challenged for at least the next five years.
That should support stronger pricing and even greater financial performance. We anticipate higher prices and will soon have the capability to produce up to 18 million tonnes. While this is not a forecast, we believe it is possible that price increases and demand could elevate our annual potash gross margin toward $25 billion in the years ahead.
We believe our potash advantage separates us from other companies in our industry, and we will use this in the pursuit of greater returns for our shareholders.
A Long-Term Commitment
As a company, we remain unfailingly focused on the long-term demand for our products and the potential it holds. Accordingly, we base our business decisions on maximizing value – not quarter by quarter, but over an extended period of time. This includes building strong and lasting relationships with all our stakeholders, as we understand how we nourish each other's growth.
Our Board of Directors has both supported and challenged our vision and plans, ensuring we maintain the high standards and strong reputation that have been established by our performance. The strong leadership we receive is important to our continued success.
We have abundant reserves and will use them to help the world's farmers meet the challenge of feeding an ever-growing population. Not only will this allow us to serve the needs of our customers and communities for generations to come, it will enhance our ability to reward you for providing the capital needed to fulfill the noble cause of food production.
We look forward to continuing on a path of strong financial performance and greater returns for our shareholders.
William J. Doyle,
President and Chief Executive Officer
February 20, 2009
