We saw extremely strong demand emerge in the second half of 2023. And I think, again, important is that we would estimate the majority of that increase on a year-over-year basis went to the ground. Domestic consumption was estimated to be at record levels, and we do believe that Chinese inventories were up by about 750,000 tons to start the year. But to put that in context, we would look at imports being up by 3.7 million tons. So again, consumption was very strong and we believe there continues to be a strong policy incentive and economics incentive supporting potash demand in China. Given the comfortable inventory levels that we see in that market and the trade flow shifts, we’ve observed over the past 12 months to 18 months, we would expect limited engagement in the near term on a new contract and the midpoint of our shipment and volume guidance doesn’t assume an imminent settlement in China.
So overall, we would say that the Chinese shipments we expect at our midpoint would decline by about two million tons in 2024. But we do expect consumption to be strong in that region. And then lastly, just to round things out in North America, North America, like some of the other markets we’ve talked about, entered 2024 with historically low inventories, following very strong demand in both the spring and the fall of 2023, where that product went primarily to the ground. And this set us up for what was a very positive response to our fill program in the first quarter of 2024 here and we’ve been very pleased with what we saw and as a result, we would expect, as Ken mentioned in his opening remarks, to see stronger domestic shipments in Q1 of 2024 versus Q1 of 2023.
So with the values of potash relative to nitrogen and phosphate at attractive levels, combined with solid expectations for U.S. acreage, we see North America as a constructive backdrop and shipments relatively similar to 2023 and 2024. So we step back from each of these markets and overall we see a setup for demand to grow again in 2024 and a backdrop of more normalized and balanced supply, which should incentivize further recovery and growth in global consumption.
Ken Seitz: Great. Thanks, Mark. With respect to your second question then, Andrew, on curtailments. We have sized our network for 2024 to meet our range, our guidance range, in other words, our expectation of the needs of our customers and we’ll always meet the needs of our customers. So we’ll always look at where we plan to land within that range, depending on how the year unfolds and everything that Mark just described. And we have obviously well-established channels all over the world. We’re in touch with those customers every day. And so, yes, we will set up our network, our six minds in a flexible way to meet the needs of our customers. And that’s based on reliance on the needs of grade splits as well, whether it’s standard grade markets, as Mark just described, and what’s going on in China, or whether it’s granular markets in places like Brazil and North America.
So we’ve got the flexibility to shift back and forth between those two as our customers call for volume. But again, we’ll always seek to meet the needs of our customers.
Operator: Your next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is now open.
Vincent Andrews: Thank you. Good morning, everyone. Wondering if we can just speak a little bit more on the potash supply as well as the potash price outlook. Obviously, all your points are well taken on the demand and shipping side of the equation, but we continue to see potash prices drifting lower in most markets. So what do you think causes the price to start flattening out? And is there an opportunity for prices to actually increase in 2024 or should we be anticipating this just to be a year of strong volumes, but prices continue to leak lower?
Ken Seitz: Yes, thanks, Vincent. And yes, we do see potential for firming of potash prices. And a lot of it has to do with, we estimate that the marginal cost of production for potash is up about $50. And there’s inflationary pressures for potash producers. But there’s also just increased challenges with logistics. And, of course, what they are, whether it’s, rail in through Russia and the North of China. We’re now with some of the challenges shipping through the Red Sea. That’s all adding cost. And so, again, we look at the cost curve. We say that last ton to produce that last ton could be up by about $50. We’re also in some markets experiencing some just some seasonal weakness. So you combine the seasonal weakness with the notion that it’s just more expensive these days to move potash around, to produce and move potash around.
And yes, we do think that there’s potential opportunity for some strengthening here in 2024. Obviously, demand returning this year – to trend levels or on trend levels 68 to 71 million tons. And if we look at how that’s going to get supplied, it’s really owing to three parts of the world. It’s FSU production, which, those volumes are for the most part back in the market. And we expect to some incremental volumes from FSU coming back in in 2024. We expect some additional tons coming out of Laos, which, we’ve assumed is going to be in the market in 2024 as well. And then there’s Canadian production, our own production, which we think, is going to make up some of the difference as well. So it’s really those three producing regions, are going to play the role in meeting demand, increasing demand here in 2024.
Overall, for all those reasons, we call it a relatively balanced and stable market.
Operator: Your next question comes from the line of Richard Garchitorena from Wells Fargo. Your line is now open.
Richard Garchitorena: Thanks and good morning. My question is on the CapEx reduction. So this year, you’re going to be spending roughly $400 million to $500 million less than 2023. It looks like the bulk of that is going to be cut from the investment for growth CapEx. So just wondering, what was the change this year versus last year? Is it a function of your budget scheduling for the expansion plans for the mid-cycle scenarios? Or are you tweaking the budget down just to conserve cash? And also just going forward, is $2.2 billion to $2.3 billion a good level to think about going forward in a normalized environment? Thank you.
Ken Seitz: Great. Thanks, Richard. So, a lot of it has to do with just ongoing and increasing focus on our high conviction opportunities. We’ve made investments in our wholesale business that provide us with flexibility and capacity now to meet the needs of customers, and to continue to grow. And we feel good about that. And we continue to target those high conviction opportunities in retail, proprietary, network optimization, digital, and of course, again, always looking at top-end opportunities. I’ll maybe hand it over to Pedro just to provide some more color on how we think about CapEx levels going forward.
Pedro Farah: Yes, I think, and good morning, Richard. I think what we are looking at, of course, we kind of mentioned before, there were a few investments in sustained capital that were related to end of life. And we are continuing those for a couple of years, but we think those are already kind of baked in into this year. And we continue with the strategies that Ken just mentioned in terms of primarily in retail. One of the uses of our CapEx in the past as well has been the expansion of network in Brazil. We decided to put that on pause as we integrate the past acquisitions that we have made, as well as the further maturing of all the acquisitions we have made in the U.S. here. So, we think that this level of CapEx not only provides us the opportunity.
To sustain all of our assets and deal with, some of the end of life situations we mentioned before. But also gives us the opportunity to invest in the critical areas, particularly in the proprietary products in the future.
Operator: Your next question comes from the line of Steve Byrne from Bank of America. Your line is now open.
Steve Byrne: Yes, thanks. I would like to get back to Jeff Tarsi’s comment about gross margins in crop chems on nearly 25%. Your revenues of crop chems are almost $7 billion. I mean, that is nearly a Corteva of business. And I am just curious, with respect to those margins, what fraction of your crop chemical sales are your proprietary brand? And within that, is there a portion of it that you are starting to get your own registrations where you can import the active ingredients and really have a nice margin on it? Just curious on your outlook for that gross margin in coming years.
Ken Seitz: No, thank you, Steve. And I’ll hand it over to Jeff Tarsi. But, yes, we are pretty pleased with the role that proprietary plays in those margins, and that has been growing for us. But overall, for 2024, as we think about that 25%, and the split then between proprietary and our branded products, yes, Jeff Tarsi can certainly provide more color on that.
Jeff Tarsi: Yes, Steve, good morning. And as our proprietary business has always been a very strong part of our retail business environment. And from a crop protection standpoint, we run somewhere, between 30% to 35% from a proprietary line of products versus our branded product line. And we haven’t seen that. I mean, we kind of kept that pretty much in line. If you look back in ’23, and of course, a lot of those products, as you would know. A lot of those products in our proprietary level of products line, would be products that are all patent or post patent. And so, if you look in ’23, we would have seen a lot of pressure actually in that side of the business, especially around products like glyphosate, glufosinate, paraquat, and clethodim.
We expect to see a really nice recovery in that area coming back in ’24. And you’re right, we do have a very large crop protection, but we still think that we have – we think that we have room for growth in that crop protection line. You’ve heard Ken and you’ve heard Pedro mention the importance of our proprietary product business for us. And as a matter of fact, in our ’24 budgets, we’ve got about 17% increase in gross margin projected for ’24. And some of that have come in the crop protection side of the business. Probably more importantly is what we plan to do in our crop nutrition and our biostimulant sector of that business as well. Whereas Ken said we’ve had double-digit growth. I think crop nutrition were up 10% last year, and our biostimulant business, was up over 20% last year.
So yes, crop protection is very important for us. It’s also very important from a standpoint that it’s a carrier for our adjuvants and surfaces, which are high margin products for us. And we saw just under a 10% increase in that in that segment of our business last year as well. From a registration standpoint, we’ve got some registrations in our portfolio. I don’t know that we’ve got a strategy right now, greatly increasing those registrations going forward. As we work very closely with the multinationals and from a lifecycle standpoint, as some of those products start to come out patent health, then we’ve got an opportunity, to bring those products into our proprietary portfolio.
Operator: Your next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is now open.
Jeff Zekauskas: Thanks very much. When logistics costs for shipping potash rise, who’s penalized by that? That is net, do your profits decrease, because you’re responsible for the shipping costs? Or do you split it with your customers? Or if you had to quantify what the effects were, what would they be? And secondly, are you hedged in natural gas prices for the first quarter and for later in the year or no?
Ken Seitz: Yes, thanks, Jeff. So as it relates to logistics costs, I’ll hand it over to Jason Newton. But, we really think about our business in terms of the cost curve. And we think about that on a delivered cost basis and in a commodity space that we’re in. So, yes, as you would look at the supply and demand fundamentals, and we’ve talked a lot about that. But ultimately, you know, you look at the floor in our industry in this commodity space and again, that last time that needs to get produced, that marginal ton, all that ton includes we think about that on a delivered basis, what’s happening with logistics costs. But Jason, over to you to provide more color.
Jason Newton: Yes, thanks. Good morning, Jeff. Yes, when we’re looking at logistics costs, I’d say there’s short and medium term implications of that, and both from a supply and demand, and pricing perspective, to Ken’s point on the cost curve. So in a market like we’re in today, where we’re pressing down and certainly in the Asian markets and in Brazil, to prices that are near the cost base floor, any increase in the cost of freight from marginal regions is going to support the cost floor and ultimately provide support to floor prices. The other impact that Ken see, especially as freight rates increase, and as we’re seeing today with the issues in the Red Sea, you see differentials change. And so it impacts trade flows. And we know when fertilizer trade flows are disrupted, that tends to tighten supply demand balances.
So as we’re looking at the flows East-West from the Baltic into Southeast Asia, for example, we know those costs have increased. And especially from Belarus, the cost production and inland logistics relative to pre-sanction levels are significantly higher. And we’re pressing down toward those costs landed into Southeast Asia today.
Ken Seitz: Thank you, Jason. Yes with respect to our hedge position on gas, it continues to be the case that we enjoy our cost advantage when you look at the delta between European gas pricing, which albeit has come off significantly from previous highs. And today we put it sort of $8 to $9. But back here in North America, $2 to $2.50, we’re paying for natural gas. So again, that advantage cost position given our geography. But in terms of our hedge position, we’re laying the hedge at the moment. But I’ll turn it over to Pedro.
Pedro Farah: Yes, thanks, Jeff. What we do with the hedging, we tend to be very more contractually into hedging. So, we are looking at to kind of basically firm up some of our contracts with hedges for the remaining of the year. But we have some firm commitments and taking advantage of the existing low prices in the market. But we’re not adopting a multi-year hedge kind of a position on that point. So those are more contractually related for the balance of the year.
Operator: Your next question comes from the line of Edlain Rodriguez from Mizuho. Your line is now open.
Edlain Rodriguez: Good morning. Thank you, everyone. I mean, just a quick one on corn prices, again, below $5. Is that a concern for the industry in terms of whether farmers will be willing to pay higher fertilizer prices? I mean, I understand that the corn price is higher than historical norms, but I also understand it’s a psychological number for farmers. How do you think this plays out if corn prices stay at those levels?
Ken Seitz: No. Thank you, Edlain for the question. And we’re obviously watching corn prices very closely, but I’ll hand it over to Jeff Tarsi to provide some color on your question.
Jeff Tarsi: Yes, Edlain, thanks for the question. And look, while crop prices have declined on the same side of the sheet, input prices have declined as well, especially as it relates to corn. When I look at know number one, if you look in the North American market, the U.S. market, most of our corn in the Midwest, is on a rotational basis. It’s a corn followed by soybeans. And those growers don’t break out of those rotations. Secondly is they’re planting the best germplasm. And this germplasm takes a lot of horsepower to produce the type yields that it’s able to produce. And so, when growers commit, if I look at our seed bookings today, as Ken mentioned earlier, they’re very healthy, and growers still want to plant the best genetics, the best trait packages.
They’re not going to put that seed in the ground and not give it the horsepower and nutrient it needs to produce a full yield. Because when you get in these situations, like we’re in right now, with lower prices on it, then without a doubt, yield now becomes king. You have to produce yield in order to make it work. And I think it’s pretty reflective as well. As we went into our fall, our fall fertilizer application was up 15%, very heavy fall, and that’s very strong indication of grower sentiment and what they’re thinking. And our pre-pay was very strong as well. And a lot of that prepay went toward purchasing fertilizer for ’24. So I think once the seeds in the ground, growers are going to be committed to giving it all the inputs it needs, because, again, it’s going to be really key to produce high yield in this type of environment.
Jeff Holzman: Operator, we have time for one more question.
Operator: Thank you. Your last question comes from the line of Aron Ceccarelli from Berenberg. Your line is now open.
Aron Ceccarelli: Hello. Hi, thanks for taking my question. I would like to ask you if you can be a little bit more specific on supply, on potash. I was looking at your Q3 press release, and you were mentioning that Belarus, we’re expecting to be down approximately 4 million tons compared to 2021, and Russia to be down approximately 2 million tons to 2021 for 2023. What do you expect for 2024? Do you expect this county to be back now to the level of 2021 or actually even above 2021? And where do you see these countries directing volumes these days? Thank you.
Ken Seitz: Thank you, Aron. And, yes, so a couple of questions there. On times returning to the market and where they’re going, we do not see in 2024 volumes out of the FSU returning to 2021 levels fully, but certainly for the most part. But I’ll hand it over to Jason Newton to walk through that.
Jason Newton: Sure. Good morning, Aaron. Yes, I guess just to start on where we ended up in 2023, we think shipments in 2023 estimated between 67, 68 million tons, so above the high end of our previous range. And that was facilitated by higher-than-expected shipments from both Russia and Belarus, both still down. So Russia down close to 2 million tons in 2023 compared to 2021 levels. And Belarus still down in the range of 3 million tons versus 2021, for the region as a whole. We’d expect somewhere in the range of a million, and a half tons of additional production in 2024 versus 2023. So for both Russia and Belarus, not back to 2021 levels, but again, we’ve seen relatively stable shipments from those regions since late 2023.
Operator: There are no further questions at this time. I will now turn the call back to Jeff Holtzman for closing remarks.
Jeff Holzman: Thank you for joining us today. The investor relations team is available if anyone has follow-up questions. Have a great day.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
