Mosaic Q2 2021 Earnings Call Transcript

Participants

Corporate Executives

• Laura Gagnon, Vice President of Investor Relations
• Joc O'Rourke, President and Chief Executive Officer
• Clint Freeland, Senior Vice President and Chief Financial Officer
• Jenny Wang, Vice President, Global Strategic Marketing

Analysts

• Adam Samuelson, Goldman Sachs & Company
• Mark W. Connelly, Stephens Research
• PJ Juvekar, Citi Investment Research
• John Ezekiel Roberts, UBS Securities
• Luke Washer, Bank of America Co.
• Adrien Tamagno, Berenberg Bank
• Michael Piken, Cleveland Research
• Joel Jackson, BMO Capital Markets
• Rikin Patel, Exane BNP Paribas

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to The Mosaic Company's Second Quarter 2012 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. After the Company completes their prepared remarks, the lines will be open to take your questions. Your host for today's call is Laura Gagnon, Vice President of Investor Relations of The Mosaic Company. Ms. Gagnon, you may begin.

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

Thank you and welcome to our second quarter 2021 earnings call. Opening comments will be provided by Joc O'Rourke, President and Chief Executive Officer, followed by a fireside chat, as well as open Q&A. Clint Freeland, senior vice president and chief financial officer; Jenny Wang, vice president, global strategic marketing and other members of the leadership team will also be available to answer your questions.

We will be making forward-looking statements during this conference call. The statements include but are not limited to statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results. Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release furnished yesterday and in our reports filed with the Securities and Exchange Commission.

We will also be presenting certain non-GAAP financial measures. Our second quarter press release and performance data attached as exhibits to yesterday's Form 8-K filing also contain important information on these non-GAAP measures.

Now, I'd like to turn the call over to Joc.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Good morning. Thank you for joining our second quarter earnings discussion. I hope you've had a chance to review our post commentary and slides, as well as our earnings release and performance data, all made available on our website. Today, I will provide some additional context before we respond to questions we received last quarter and then we'll conclude with a live Q&A session.

Mosaic delivered excellent financial performance in the second quarter and the second half of 2021 is set up to be one of the strongest periods in over a decade. Our earnings are driven by two key factors. First, strong underlying agricultural markets coupled with [Technical Issues] demand dynamics are driving fertilizer prices higher. Second, and just as important, are the results of our effort to optimize our business to fully realize the benefit of these market trends.

Throughout our long-term and ongoing work to reduce costs, we've created significant earning leverage that this quarter's performance demonstrates. Looking ahead, we expect further upside. Our third quarter, order book is now 90% committed and priced. As a result, we expect a sequential increase of $90 to $100 per tonne in realized phosphate prices and $25 to $35 per tonne in realized potash prices. Beyond the third quarter, we are seeing buyer appetite for fourth quarter commitments as well. All of this implies higher earnings in the third quarter and very strong results in the fourth and into 2022.

The dynamics fueling the agricultural markets point to a period of strength that we believe will extend well beyond 2021. Grain stocks remain limited and global corn and soybean demand is growing, driven in part by surging Chinese demand and biofuels. As a result, agricultural commodity prices remain high and the outlook is promising for continued strong [Technical Issues]. The world's farmers have solid incentive to maximize yields from every acre and that is what drives higher fertilizer demand.

Demand in the Americas is considerably stronger than we expected at the beginning of the year. Brazil is expected to once again set records for fertilizer shipments. Across the Americas, we saw a big recovery in 2020 and expected the demand growth to moderate this year, the opposite has happened. Demand for potash and phosphates is up substantially compared with last year and nearly all of the fertilizer delivered this year has gone to the ground, which means channel inventories in most regions remain below historic norms.

In North America, demand continues to be strong. Following the completion of our CVD petition, U.S. phosphate prices now trade at parity with global benchmarks and the domestic market is benefiting from elevated imports from a more diverse pool of suppliers. This is reflective of a healthy market that's responding to the market signals. In India, farmer demand remains very strong, but the importer economics have negatively impacted available supply in the country because of the disconnect in government subsidies. As a result, it is difficult for the Indian farmer to get the phosphates they desire. It is clear that more work needs to be done to rectify the imbalance.

But we continue to see the region's absorbing fertilizer supply. Given how depleted Indian inventories are, we see India as a source of pent-up demand for the future. Southeast Asian fertilizer demand is benefiting from the strength in palm oil and China is incenting its farmers to maximize yield. While the demand dynamics for potash and phosphates are similar, driven by the strong underlying agricultural markets, the supply outlook is slightly different for the two products. In phosphates, new supply is limited and any new Greenfield supply addition for several years from completion.

Recently Russia requested producers prioritize domestic demand to stabilize in-country pricing and while supply from Chinese phosphate exports during the second quarter was elevated to meet global demand, Chinese exports are expected to decline in the second half of the year as in-country seasonal demand increases. This was reinforced by news last week, the Chinese National Development and Reform Commission has begun requesting the export of fertilizers to ensure adequate domestic supply.

In potash, demand growth continues to exceed new supply from higher operating rates recently announced by producers. As a result, prices continue to rise. In fact, price increases have largely offset the financial impact of our early closure of K1 and K2 shafts with Esterhazy. We recently resumed production at Colonsay and now expect our net production loss to be approximately 700,000 tonnes per year, down from our original 1 million tonne estimate. This also brings the sales impact down to approximately 500,000 tonnes as we drawdown available inventory.

Our earnings are leading to significant free cash flow generation, which has allowed us to proceed with the early retirement of our $450 million in long-term debt later this month. We are currently evaluating additional options for capital deployment. Capital expenditures are expected to total $1.2 billion in '21. This includes accelerated K3 spending to speed up our ability to bring K3 to full production, as well as approximately $75 million in additional high returning opportunities within our businesses.

Given the strong cash generation, we continue to evaluate opportunities, but also allow us to further strengthen our balance sheet for all the business and share with our investors. Overall, Mosaic continues to execute and perform very well in this robust fertilizer market and we expect to continue building momentum from here.

With that, we will move on to your questions.

Questions and Answers

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

Joc a number of analysts including Adam Samuelson from Goldman Sachs and Isaacson from Scotia and Rikin Patel from Exane BNP are asking about fertilizer affordability, specifically globally are you seeing any demand destruction due to affordability? Are there any regions or areas you're watching?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thank you folks. The way we look at is actually it is the grain prices and higher grain demand that's driving the fertilizers. So, from our perspective, it's demand for grains and oilseeds and the price of that's creating is driving fertilizer demand, which is of course driving fertilizer pricing. So, we see the supply and demand balance the other way around if you will. Now, we may see at some point the impact of higher prices. Today, tight grain and oilseed markets are going to be tight for a while. They're not going to loosen in just one growing season. So, this should last a while and with global prices up, it seems that most growers have been comfortable with the prices we're seeing for fertilizer. Now the one area of concern, we've talked about, this is India and this is not an affordability issue for the farmers, but an affordability issue for the importer because of the Indian subsidy system. But sooner or later, Indian inventories will mean that they have to buy fertilizer.

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

A handful of analysts including Andrew Wong from RBC, John Roberts from UBS and Steve Byrne from Bank of America have asked about Mosaic's realized price progression. It appears that a price realization has lagged in potash when comparing spot pricing trends to the third quarter guidance, but spot prices and guidance appear to be fairly in line in phosphates. Can you discuss the underlying dynamics and what that means for price realization into quarter 4?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

The light between the potash prices we're seeing at the mine gate today and the actual international prices are driven by a couple of things, first of all, when we look at international shipments through Canpotex, Q1 we had delays due to port issues; in Q2, we're now seeing delays due to wildfires and rail impacts as we go through the British Columbia Interior. So this is starting to push shipments back, so there is a long life period that works for it, plus you have to consider that these prices are the Asian prices which are lagging as well from the Brazilian and North American prices.

If we turn to North America, a lot of the times that we're delivering now we'll through quarter 3 are tonnes that were sold in early May for August shipment that meets summer field demand. And of course those are doing further due to the K1, K2 closure, which a lot of the main volume won't be priced or shipped into October. And so the pricing lag is higher than it would normally be. But it will emphasize that we are in our distribution business seeing and selling that the $600 plus price that we're talking about being the spot market. Joc, Steve Byrne, Rikin Patel and Adrien Tamagno from Berenberg are asking questions about the impact of increase in ammonia volumes delivered under the CF contract. What do those increases mean for spot purchases and are there any volume-related discounts provided or premiums required under the contract? Thank you. Historically, our ammonia tonnes have been split roughly evenly between produced spot and CF. With the increased CF supply in the second half, it means with the full year in the range of 75% of our total margin needs will be based on a natural gas price and be below today's market. This reinforces our competitive advantage in ammonia and the effectiveness of our hedging program to make sure that we have a number of supplies that buffer against times like this.

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

In another raw material related questions, John Roberts and Ben Isaacson are asking about the potential for future sulfur supply disruptions through 2021 and into 2022. What risks do we see and how are we managing them?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thank you. Today, our position on sulfur is much better than it was quarter ago. At this stage, you can see by the sulfur price which just settled about $195 per tonne versus $192 in the second quarter, but the refinery rates and the demand balance for sulfur has really equalized. Now, it's a little too early to forecast quarter 4, but what I can tell you is, Gulf no refinery operating rates stabilize and gone to normal rates. We have really done a lot of work to get a good inventory of sulfur in our system, which we did not have coming out of quarter one. And if you remember the issue we ran into in quarter one was low operating rates in the refineries some turnarounds in our refineries and then freezing weather that shut down a lot of the Gulf refineries. So the combination of the three are normally tight situation was exacerbated quite a bit. So at this stage, we see the risk is significantly lower.

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

Joc, we had a number of analysts acknowledge accelerating cash flows. These analysts including Seth Goldstein at Morningstar, Mark Connelly at Stephens and Jeff Zekauskas from J.P. Morgan. We'll do with it. How we will allocate it aside from debt reduction and small growth capital and looking for specific insight into how we are thinking about share repurchases and dividend increases?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thank you, gentlemen. [Technical Issues] our strategy is and always has been that we will balance our capital allocation between debt repayment and working on our balance sheet. Projects that offer a great return to us through growth and then returning money to shareholders. In terms of the specifics, let me hand it over to Clint, because I think he can give you a little more color on that.

[Clint Freeland, Senior Vice President and Chief Financial Officer at Mosaic]

Yeah, thanks, Joc. I think as we go further into the year, I guess one thing to note is that as we generate free cash flow and cash builds on the balance sheet, we're not going to let it just sit idle. I think we've got -- we've got options and whether that is additional debt reduction through some of the maturities that are coming due. We've got existing share repurchase authorizations, we can always take a fresh look at the dividend. We also have a program in place to review some of them, some really high returning internal projects like our opportunity capex, relatively small dollars, but very high returning projects that will continue to look to invest in. But I think again, I think as we look forward, I think we have a number of options. And again, I don't see us generating cash and letting us sit idle on the balance sheet. And I would expect it further end of the second half of the year that will add more clarity on what that allocation program is going to look like.

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

Andrew Wong and Adrien Tamagno [Phonetic] are interested in more detail on our opportunity capital spending. Clint, can you elaborate on the new $75 million gross spending allocation? Would phosphate capacity expansion ever be on the agenda and what can we expect to be allocated to the new soil health initiative?

[Clint Freeland, Senior Vice President and Chief Financial Officer at Mosaic]

Thanks, Laura. I think when we look at our opportunity, capex investments for this year. And overall, I would say that's about one-third in North America, about two-thirds in Brazil. There is a more a focus in Brazil. But I would say that those investments are generally being made in a number of different areas. But I would include the following, a number of these investments are around automation and we've spoken about some of the next-gen investments that we're making in our production assets. And that is ongoing as part of this program. Another example is down in Brazil where we're looking to increase gypsum sales and we need to make some investments in infrastructure to be able to accommodate that.

In potash, we're looking to increase some of the Aspire capacity, but again as we look at these investments, they're all relatively modest investments typically single-digit million-dollar investments, but with very, very significant returns -- in the triple-digit type of return on an after-tax basis. From a phosphate capacity expansion standpoint, I would say that really the things that we've focused on and talked about is along the lines of potentially increasing MicroEssentials capacity in the future. Demand for that product continues to increase in to the extent that we need to expand capacity there, you could see that.

Beyond that I think are rock and concentrate capacities are in fairly good balance at this point otherwise. When we look at the new soil health initiatives again those are relatively modest investments, it was typically expensed, as we treat that really more along the lines of R&D and so I would say overall, those are relatively immaterial investments, not additive to capex and again I think that is supplementing our R&D into new products for the future.

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

Joc, we've also had a number of questions related to our potash assets including questions from Adam Samuelson of Goldman and PJ Juvekar of Citi. So this is really a three-part question. One, what was the driver behind changing your volume impacted guidance and how does this change total production expectations for 2022? Second, what are the ARO costs associated with the closure of K1 and K2. And lastly what does the cost structure look like in 2022?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thank you, Laura. Our volume production guidance is adjusted basically because of two things, first of all, the acceleration of our shaft at K3 and being able to move into production areas sooner in that K3 area, which will increase the contribution from [Indecipherable] in the fourth quarter. We also were able to optimize some of our turnarounds at the mills because they aren't being fully utilized.

And then the second part is a successful restart of Colonsay which really has come up very well and we've been very pleased with the rate at which we've been able to get it into production affected by commission the mills just the other day. So, we're fully ready to run there in Colonsay and between the two of them, we've been able to accelerate our ability to produce tonnes at those two operations which has mitigated some of the loss that we had from the early closure of K1 and K2. As part of closure cost for K1 and K2, in the second quarter, there were $158 million, most of which was non-cash write-off, $110 million was fixed asset write-downs, $37 million was ARO adjustments and then [Technical Issues] MRO write offs, $4 million was contractor severance. In terms of the ARO itself, the $37 million brings the total up to $120 million for ARO, of which $70 million to a $100 million let's say will be in the closure of those two mine shafts, of that 40% or so will be spent this year and the rest will be spent next year at final closure of that.

For the third part of the question, our cost structures, if we do the sum of the parts, our K3 mine at 6 million tonne operating capacity will be one of the lowest cost in the world, when said that, we're in the $50 range already. Bell Plaine is also very low cost and we're very well positioned on the cost curve and that's 3 million tonnes of our operating capacity. Colonsay costs are still expected to be at $100 per tonne range as per our previous guidance and we're looking at ways to reduce that amount. So, you can kind of work it out from that 80% to 90% of our cost will be at that very first quartile and then we'll make up the difference with slightly higher costs from Colonsay at $100 a tonne, assuming we actually need those tonnes to meet the market requirements.

Let me emphasize that at these prices, Colonsay tonnes are still very profitable and we would expect that have a very good margin in today's environment.

[Laura Gagnon, Vice President of Investor Relations at Mosaic]

Thank you, Joc. Operator, at this point, we'd like to open it up for follow-up questions from the phones.

[Operator]

[Operator Instructions] Our first question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.

[Adam Samuelson, Analyst at Goldman Sachs & Company]

Yes, thanks, good morning, everyone. I was hoping to maybe ask about the Fertilizantes business a little bit. You called out in the script in the prepared remarks, an increase in inflation there. You seemed like you're moving from a both phosphate conversion costs and rock mining costs away from your 2023 cost targets and I'm just trying to get a sense of kind of what the plan is to maybe bent the curve on inflation and get back down to the 2023 cost targets over the next 18 months or so.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thanks, Adam. Look, yes, Then if you go back to our multi-part analyst presentations, I think you remember, we did say that we would correct the expectations of these cost things based on inflation and over time our expectation is, if there's higher inflation in Brazil that will be offset by a weakening Brazilian real. So, I just want to highlight that we had accounted or we were not expecting to account for inflation, and this was a method of offsetting inflation. So, you have to adjust those cost numbers based on that. But overall, we continue to drive very hard. I think you'll see in our results that we continue to drive very hard with all those transformational benefits as we call them and a big chunk of that is reducing our costs of mining and in that, I just want to highlight that this quarter was exacerbated by lower rates caused by some downtime and that does increase your cost because of the fixed cost absorption.

[Operator]

Our next question comes from the line of Mark Connelly with Stephens. Your line is open.

[Mark W. Connelly, Analyst at Stephens Research]

Thanks, John. There's a longstanding perception among investors that more operational hiccups in other producers. We obviously can't control the supply of sulfur and stuff like that, but when you look at all the operating metrics internally and the changes you've made to process, has your Florida system become materially more reliable and I'm sort of curious how you would answer that question on phosphate, potash here?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thanks, Mark. Well, I would say, definitely, yes. We've spent a lot of time and a lot of the area where our cost improvements have come, have come from better operational reliability, better maintenance control, better outcomes of turnaround. There is a high level of unpredictability in any large system and frankly, our system runs very close to its capacity. So, in the case of the sulfur with a very good spring ahead of us, a little sulfur hiccup impacted our tonnage. But I think if you look at it over time, you will see that really we have run very close to our capacity and have made big improvements in that area.

Likewise in potash, I mean if you look back where we were running the three potash mines continuously, you had a lot of flexibility, which we don't have any more. So, we do need those plans to run consistently all the time. And for the most part, we believe they do now and I think those have been big improvements to how we can keep our costs at a much lower level.

[Operator]

Your next question comes from the line of PJ Juvekar from Citi. Your line is open.

[PJ Juvekar, Analyst at Citi Investment Research]

Yes, hi, good morning. A question on phosphates. As phosphate prices moved up, China maybe opportunistically raised exports and we've seen that in other fertilizers as well in ammonia [Indecipherable] urea as Chinese exports went up. What is your confidence level that Chinese exports would decline in second half, which is what you said in your remarks.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Yes, thanks, PJ. I'll talk a little bit about this, but I'm going to hand it to Jenny, because I think, she's got a pretty good I&D on the world supply and demand and some of the forces here. But let me say the Chinese do need to get their domestic phosphate to their farmers for the growing season in the next quarter and as such internal demand is going to be high. But one of two things basically has to happen, either the price has to go up internally in China or they will put restrictions on exports. Either way, our expectation is from a supply and demand perspective. That demand is there internally in the country and these exports should slow down. Jenny, do you want to talk a little bit about, particularly some of their government interactions.

[Jenny Wang, Vice President, Global Strategic Marketing at Mosaic]

Sure. Joc. PJ you are right. We have seen the Chinese exports of phosphate, probably urea as well, increase in the first half of the year, driven by very strong international market. The demand was so strong and it's a pure economic driven. As a result of it, the Chinese government has been growing concerns over the supply availability for the domestic market as well as the raising prices for the domestic market as well. So, as a result of this concern, the NDRC they called the super -- the Ministry in China called the development net -- the National Development and Reform Commission has required the major producers of nitrogen and phosphate to meet basically -- the guidance of NDRC to the major producers were you guys need to stop exports and you need to [Indecipherable] supply to the domestic market and also stabilize the price. We know why they do it. They need to maximize potash production in China. So, that's their part.

So, at this moment, NDRC passed kind of a soft regulation. So, the requests are mainly to the state-owned enterprises. How this major producers are going to comply and follow the guidance from NDRC, the government is closely watching it and they are looking at whether the domestic supply is being improved and if the prices have been stabilized. And if the situation is not believed to be improved over the next period of time, we may see a very hard of measurements to be taken by NDRC.

The reason that we have that confidence. One is coming from the other industry if you pay attention to the steel industry, which are the Chinese government imposed exports are taxes in May and then that was not strong enough at the time and yesterday they hiked exports tax again. So that's one of the measurements that NDRC has taken to the steel exports. Whether they're going to do the same to phosphate and possibly to urea will really depending on how much export is coming up over the next two months. We foresee the significant slowdown were coming from September and Q4 because other export in July and [Technical Issues] probably have been committed earlier before this request was sent by NDRC. Over to you, Joc.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thanks, Jenny.

[Operator]

Our next question is from John Roberts from UBS. Your line is open.

[John Ezekiel Roberts, Analyst at UBS Securities]

Thank you. Could you talk a little bit about the Belarus potash sanctions and maybe compare and contrast that with the earlier U.S. sanctions on phosphates?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Yes, thanks, John. Your interest [Technical Issues] I guess the Belarus sanctions or I'm going to call them relatively to [Indecipherable]. They didn't have very [Indecipherable] in the basis and they didn't include what were the most of the main grades of potash. I think they only affected about 20% of the industrial potash that Belarus might have sold. So, other than slap on the wrist, it really wasn't much of a restriction to the Belarusians. And with food security concerns in the mix, I'm not surprised by that. Compare that to the CVD, which was -- I mean the countervailing duty case was all about unfair subsidies and really taking advantage of those, there are subsidies to impact the market and particularly harm, the U.S. producers. So, I think very, very different sort of situations and drivers, but what I would say about the CVD, and I think as I've said this in my opening remarks is now with the CVD, what we're seeing is we're seeing a number of new countries and companies importing into the U.S. and we're seeing the market run at essentially parity to other major markets, which I think is what we expect. In the case of the Belarusian, I mean it was simply a political statement to hopefully put pressure on Lukashenko to do something about some of their -- well, some of their human rights issues.

[Operator]

Our next question is from Steve Byrne from Bank of America. Your line is open.

[Luke Washer, Analyst at Bank of America]

Hi, good morning, it's actually Luke Washer on for Steve. I wanted to ask about your Chinese or your thoughts on Chinese port inventories of potash, where do they from what you can tell, relative to history and when do you think, China has started looking to renegotiate a potash contract?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Yeah. Thank you, Luke. Again, I'm going to hand a little of this over to Jenny. But I can you right now that the potash inventories at port and probably country as well are starting to get fairly depleted. And I think you're starting to be at a place where they will have to get into their national reserve if they're going to continue to supply the NPK producers and the internal market. So from that perspective, this is getting pretty tight for China. And I expect that they will not -- the producers, because I don't think the producers are in a position of needing to ship those tonnes, but I think China will have to start looking at negotiating our next round of purchases sooner rather than later. Jenny, any comments on port [Phonetic] inventories.

[Jenny Wang, Vice President, Global Strategic Marketing at Mosaic]

Sure. Joc, specific inventory as of today, we see it is below 2.3 million tonnes. This is not 35% lower than the same time of last year. So, if you recall the national reserve itself is $1.5 million. So the valuable accounts really is very minimal. So that's just to support earlier comment. With a very strong demand, domestically, in China, strong brand has brought down the inventory and also we believe imports in the second half will be largely slower now. So we foresee the buyers, the importers will have to come to the table for a negotiation of a new contract sooner than many would have expected.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Just like to highlight that the Chinese contract is probably $100 lower than the Asian price, so that really makes it difficult for them to receive the product they need at these prices at those prices.

[Operator]

Our next question is from Adrien Tamagno with Berenberg. Your line is open.

[Adrien Tamagno, Analyst at Berenberg Bank]

Hello, good morning. Thanks for taking my question. So question on Brazil. So you mentioned low channel inventories across the globe. And I would like to ask you a bit more specific things, that's also the case in Brazil, and your expectation for Q3 volumes in the country.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thank you, Adrian. Well, our belief is that yes in fact, the volumes are relatively low inventories in Brazil. Obviously, with the price is what we shop on our books will be slightly higher than normal because of the price of the product. But yes, the prices are - the inventory is lower than usual, although it is of course built up for expectations of a strong third quarter where we do deliver most of our product.

So our expectation for the third quarter will be very strong in Brazil. What we expect to see there is with the drought conditions, planting maybe a little later. So it might push the purchases back slightly, but there will be higher prices and pretty strong demand for fertilizer in this third quarter and probably heading into fourth quarter.

[Operator]

Our next question is from Michael Piken with Cleveland Research. Your line is open.

[Michael Piken, Analyst at Cleveland Research]

Yeah. Hi. Good morning. Just wanted to follow up a little bit more on Brazil. And specifically looking at kind of the distribution business. And just trying to understand you mentioned that some of those sales took place at $600 potash. When we think about kind of the timing of when your distribution business typically purchases inputs, is there the margins maybe be a little bit higher than normal on the distribution side. And then also, just wanted to understand on the production side, how much of a freight advantage you might have with some of your in market, phosphate production. Thanks.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Yeah, thanks, Michael. Great couple of questions. The way we report the earnings and our distribution business, of course we're purchasing from Canpotex and within the market. So what you can expect there is us to have an ongoing position, if you will. And so in cases of a rising market like we see today, there's no question we will have a positioning game. And our product management team is very efficient at making sure that we understand the market so that we take the positions and can realize as much greater margin as possible. And certainly in this environment, we're able to execute on that and take advantage of that distribution margins.

The second part of your question, I mean, comes to an important piece of our whole investment thesis in Brazil, which is to compete in Brazil, being in country and having that transportation advantage is a great thing, both from a cost perspective. And so if you look at our in country production, it's very competitive on a cost basis. It's also competitive -- our overall is competitive on a logistics basis, because we can really take advantage of moving product more effectively than if we had -- didn't have the assets we have.

[Operator]

[Operator Instructions] The next question is from Joel Jackson from BMO Capital Markets. Your line is open.

[Joel Jackson, Analyst at BMO Capital Markets]

Hi, good morning, Joc.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Good morning, Joel.

[Joel Jackson, Analyst at BMO Capital Markets]

Joc, you talked about liquidity in potash market. I appreciate your commentary earlier on the issues in Western Canada around the wildfires, the ports and rail. Some of your competitors in potash, I've been saying that the benchmarks we're seeing report every week just really aren't real, now getting 600 and Brazil, now I'm getting 500. And then some of the Southeast Asian prices have been interesting last couple weeks, maybe based on one deal or two deal you told me entirely heavy [Phonetic]. So I want to know what is the liquidity right now in the potash market for what you're selling versus normal time. Like are these benchmarks as liquid as usual?

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Joel, thanks for the question. Let me start by saying first of all, the liquidity question is very seasonal. We're not selling a lot in North America right now. I think we had a crew that was at the Southwest Conference recently. And most of our North American customers are probably 70% to 75% supplied for the fall season. So in that sense, there's not a whole lot of activity except for delivering on previous contracts. If you think about some of the other areas, there's liquidity and there's liquidity in Indonesia, Malaysia, in some of the Asian countries, that would be sort of more normal. And then if you look at Brazil again, we're sort of between seasons a little business been a bit slow. So I would say, it hasn't been a particularly liquid market at this stage. But that is not a typical for this time of year.

[Operator]

Our last question comes from the line of Rikin Patel from Exane BNP. Your line is open.

[Rikin Patel, Analyst at Exane BNP Paribas]

Hi, Joc, hi, Clint. Hope you're doing well. And just one more spin on potash demand, you have shipment forecast of 69 million to 71.4 million tonnes for 2021. But just curious into 2022 could you size what you think demands could look like? And you guys flagged obviously the lack of available supply and as sort of constraining demand to an extend at the moment. So we do get that sort of release, potentially next year? What do you think demand could look like in 2020? Thank you.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Thanks, Rikin. I think that's actually quite relevant, I think supply has been a limiter to demand growth, if you will in the year. We had some 6 million tonnes of growth last year, and we really expected to moderate quite this year.

So what this year growing as it has, I think the biggest limitation has just been getting supply. As we go into 2022. It's always hard to look into the future, but I would think we would be returning to more normal growth rates. One of the things to talk about this year though, is I don't think we've built up about a bunch of talent already. So I think channel inventory states low. 2022 will be normal demand growth called million to million and half tonnes in that 2% plus range. And then what the question will be, will there be channel inventory build, in which case -- which ultimately has to happen for this market to be more fluid as per Joel's previous question. So if the channel inventory can build, we could see a higher demand growth in 2022. So, it's going to depend obviously on the ag markets. But we're looking pretty positive for 2022 opportunity for growth. Jenny, anything to add to that?

[Jenny Wang, Vice President, Global Strategic Marketing at Mosaic]

No, I think you get this covered. We believe with the ag commodity prices, not only corn, soybean, but also the palm oil prices for Malaysia, Indonesia, and other crops. We believe the demand to potash next year will continue to grow very strongly. The supply is likely going to be limitations factor.

[Operator]

There are no further questions at this time. Now I turn the call back over to Joc for closing remarks.

[Joc O'Rourke, President and Chief Executive Officer at Mosaic]

Well, I would like to thank everyone for joining us on this call. I will say it has been a strong quarter for us. And as we look forward, we still see strength going forwards. We continue to drive for improvements in our operating performance. The markets continue to be positive for that. And with that, we believe we are well positioned for continued performance as we go forward. So thank you for joining our call. Please have a safe day. Go get vaccinated. Take care.

[Operator]

[Operator Closing Remarks]