Greetings, and welcome to Nutrien Ltd. Q2 2018 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Richard Downey, VP of Investor and Corporate Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to Nutrien's conference call to discuss our second quarter results and outlook. On the phone with us today is Mr. Chuck Magro, President and CEO of Nutrien, Mr. Wayne Brownlee, our CFO, and the heads of our business units. As we conduct this conference call, various statements that we make about future expectations, plans, and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts, therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders, as well as our most recent annual report, MD&A, and annual information form filed with Canadian and U.S. Securities Commissions, to which we direct you. I will now turn the call over to Mr. Chuck Magro.
Thanks, Richard. Good morning, everyone, and welcome to Nutrien's second quarter earnings call. Today, I will recap our performance for the quarter and the first half of the year, which highlighted the value of our integrated business model. I will also provide an update on the outlook for the remainder of the year and the significant progress we have made on our strategic priorities. I am particularly pleased with how well the merger has progressed across many fronts. I want to take a moment to thank all of Nutrien's employees for the commitment they have demonstrated in so many ways. It's truly been impressive and rewarding to watch how the company has gelled in the past seven months, how much we've accomplished in a very short period of time, and we see great promise for the rest of 2018 and beyond. Now turning to our second quarter and first half performance.
Nutrien Ag Solutions, our retail business, delivered excellent results both on second quarter and first half basis, with gross margins higher for all major retail categories this year. Retail EBITDA was up 17% for the second quarter and 10% for the first half, with most of this improvement driven by organic growth. This included strong performance from our proprietary product lines. On a geographic basis, U.S. retail EBITDA in the first half of 2018 was up 6%. Both crop protection and seed margins in the U.S. exceeded the previous year, and we saw excellent demand for all crop inputs, despite some pressure from the delayed application season. The Australian market has been impacted by severe drought conditions this year, but our business continues to perform extremely well. In the first six months, Australian retail EBITDA reached a record $99 million, up 23% over the same period last year.
The importance of having a world-class logistics and distribution system was evident in a compressed season, clearly demonstrating Nutrien's competitive advantages. To give you a sense of this capability, in the two-week window starting April 29th, we delivered CAD 1.2 billion in products and services from our North American retail sites to the grower. This equates to almost CAD 90 million delivered every day through the peak of the spring season, with many of these products and services requested by our customers with just a few hours' notice. Meeting this demand requires a significant infrastructure investment across the value chain and a substantial dedicated workforce. Turning to our wholesale business, we delivered another strong quarter in potash, with EBITDA increasing 32% year-over-year. Our average realized potash price was up CAD 27 per ton compared to the second quarter of 2017, a reflection of improved prices in all major spot markets.
We achieved higher offshore sales as we benefited from strong demand, tight global supply, and a greater Canpotex allocation. Our potash cash cost of production declined to CAD 60 per ton in the first half, supported by network optimization and the realization of merger synergies. Nitrogen EBITDA increased by 29% in the second quarter due to improved market fundamentals and lower production costs. We had lower gas costs across our network of nitrogen facilities, and it is important to point out the significant advantage we had at our Alberta nitrogen plants with AECO gas costs this past quarter under CAD 1 per MMBtu. Our nitrogen plants operated very well, with utilization rates at 93% through the first six months, up 3% compared to last year. Phosphate prices remained strong and more than offset higher sulfur input costs, supporting a 42% increase in EBITDA compared to the second quarter of 2017.
We benefited from strong demand and higher plant utilization rates, providing for a significant increase in our phosphate fertilizer sales. With improved results across all business units, Nutrien's adjusted net earnings for the quarter was CAD 1.48 per share and CAD 1.66 per share for the first half, which is at the top end of our earnings guidance range we provided in May. Adjusted EBITDA totaled CAD 2.2 billion in the first half, up 15% from the comparable period in 2017. These results demonstrate the strength of Nutrien's integrated business, the realization of merger synergies, and our leverage to improving market conditions. With a strong first half behind us, we now turn to the outlook for the remainder of the year. Global agricultural fundamentals remain generally positive, we have seen pressure on most crop prices over the past quarter. Favorable U.S. crop prospects is one reason for the weakness.
The second factor is related to the uncertainty over escalating trade restrictions, particularly between China and the U.S. While it is difficult to predict the magnitude and duration of these potential trade restrictions, we believe it is unlikely there will be a long-term impact on North American agriculture. We have seen U.S. growers continue to invest in plant health and nutritional products to enhance their yields. We also anticipate solid demand for fall application this year, as we expect an early start to the harvest and strong removal of nutrients associated with what should be excellent yields. Farmers will be watching crop prices and trade developments closely, particularly post-harvest, and are likely to become more concerned if there is not a resolution on the trade front by that time.
In potash, we expect strong global demand in the second half and have increased our forecast for global shipments slightly to between 65 and 67 million tons. Canpotex is fully committed until October, and we expect strong domestic volumes in the third quarter with a large order book committed to our summer fill program. As contract negotiations continue with China and India, our position is clear: The new price must be reflective of increases seen around the world. Given the continued improvement in market conditions, we have increased our potash sales outlook for 2018 to 12.3 million-12.8 million tons and increased our potash EBITDA guidance to $1.4 billion-$1.6 billion. Nitrogen prices have remained relatively firm in the third quarter, supported by strong global demand and reduced supply from key export regions such as China.
Higher energy prices for marginal producers in Europe and China have also provided additional support to the market. With higher nitrogen prices and lower gas costs compared to last year, we see an opportunity for strong nitrogen margins through the remainder of 2018 and beyond. Phosphate prices have held up better than anticipated, supporting an improved earnings outlook for our phosphate business. Based on these conditions, we have raised our adjusted annual earnings guidance to $2.40-$2.70 per share and adjusted EBITDA guidance to $3.7 billion-$4 billion. The earnings-per-share guidance includes approximately $100 million in additional annual depreciation related to the conversion of our Redwater Phosphate facility to produce ammonium sulfate. We expect our second half EBITDA to have a similar quarterly profile to our combined 2017, with third quarter accounting for up to 45% of the second half total.
The final item I would like to cover is the progress we've made on integration and our capital allocation priorities. First, on synergies. We achieved a run rate of $246 million as of June 30th, which means we've almost reached our initial year-end target of $250 million for 2018, well ahead of schedule. Therefore, we have raised our 2018 run rate synergy target to $350 million. The total target remains the same, which is $500 million in run rate synergies by the end of 2019. The advanced realization of synergies has been achieved across all four of our major synergy buckets, as outlined in our quarterly earnings release. We achieved distribution and transportation optimization synergies through the first six months by selling incremental volumes through our retail network and eliminating 900 rail cars and 16 distribution points.
We have also reduced fixed costs across our portfolio of wholesale assets and eliminated nearly $50 million in sustaining CapEx redundancies at our potash and phosphate sites. In early July, we announced that our small Geismar Phosphate facility will close by the end of 2018. This, combined with the previously announced conversion of our Redwater Phosphate plant, means that all of our phosphate rock contracts will be complete by year-end, with Nutrien no longer requiring any offshore phosphate rock imports. This is consistent with our phosphate integration plan and will allow us to reduce costs by increasing operating rates at our integrated phosphate facilities in Aurora and White Springs. We also made significant progress on the sale of our equity stakes, finalizing an agreement to sell our SQM Series A shares to Tianqi Lithium and completing the divestment of our SQM Series B shares through an auction process.
In July, we signed an agreement to sell our Arab Potash stake to SDIC Mining Investment. Along with the sale of our ICL stake earlier this year, we expect to realize net after-tax proceeds of approximately $5 billion and complete all divestitures by the end of 2018. With market conditions improving, synergy capture progressing ahead of schedule, the expected proceeds from equity sales, our net debt to EBITDA ratio could fall below two by the end of 2018. In this position, Nutrien has a lot of flexibility to return capital to shareholders and invest in growing the business. Maintaining a steady and growing dividend remains a top priority and is underpinned by the growth and stability of our retail business. We've also moved aggressively on our share buyback program that was implemented in February.
Far, we have invested $1.5 billion to purchase 29 million shares, and we'll look to complete the remaining 10% in 2018. Retail remains a top priority for allocating capital, and we have a number of avenues to grow our business. First is the expansion of our existing footprint through tuck-in acquisitions and select greenfield builds. These opportunities remain highly accretive, and we see a strong pipeline of acquisition opportunities in both North America and Australia. The second element is to continue to grow our proprietary products line as we are able to generate higher margins from these products while bringing value to our grower customers. Third, we are focused on expanding our footprint in Brazil due to the tremendous growth potential of this market and the opportunity to leverage our retail distribution proprietary products model and our leading digital ag platform to generate significant long-term value.
The final point on our retail strategy is the significant progress we've made to advance our digital capabilities. In July, we launched our integrated digital platform and made two strategic acquisitions that will greatly enhance and accelerate our digital capabilities in interaction with our customers. One of the acquisitions is Waypoint, the largest agriculture laboratory group in the U.S., where we see opportunity to combine their sampling, testing, and analytics capabilities with our new digital platform. The second acquisition was Agrible, a company that has an impressive set of agronomic and sustainability tools which can be immediately incorporated into our existing digital platform. Nutrien has an unmatched opportunity to combine this digital capability with the independent knowledge from our local agronomist network, our extensive distribution system, and proprietary portfolio to create superior value for our customers and our shareholders.
In summary, Nutrien delivered solid operational performance during the first half and made significant progress on its strategic priorities. There's more work to come, but I believe we demonstrated the capability of our world-class fertilizer production and retail distribution network, not only meeting the crop input demands of our customers but exceeding them in what was an extremely tight application window. We think the investment thesis for Nutrien is clear. The fundamentals of our business are improving, and no one in our industry has the leverage to the upside with every $25 per ton increase in crop nutrient prices, contributing approximately $650 million in additional EBITDA. Our leading retail business provides protection on the downside and the ability to provide shareholders a solid and growing dividend. We expect to have $6 billion to $8 billion in cash to redeploy over the next three years.
That will provide tremendous opportunities to grow the company and return cash to shareholders. Thank you for listening. We'll now be happy to take your questions.
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Please limit to one question per participant. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Ben Isaacson with Scotiabank. Please proceed with your question.
Thank you. Good morning. Congrats on a great quarter. I was hoping to talk a little bit about the investment dollars or the amount of capital that you're allocating to the digital integrated platform. Is this an investment where you can measure a return, or is it just a new cost of business? Perhaps put another way, in a year from now, when we look back at your progress versus your actual spend, how do we know and how do you know if you're doing a good job?
Good morning, Ben. Yeah, great question on our digital capability. I'll have Mike Frank, our President of Retail, give you some of the more specifics of the plan and how we measure the value that we're going to create for all stakeholders, our customers, but our shareholders. Look, I think when I look at the strategy, the world is heading to a more digital platform in almost everything. We believe that having the digital capability, coupled with what we consider to be the world's best distribution network, the best agronomist services organization that we have, I think it's going to help us just set ourselves apart. Really our goal is to become the best crop advisor and the easiest to deal with.
We're going to combine the physical assets, the people assets that we have on the ground working with farmers every day with the digital capability. There is a clear return on investment. I'll have Mike just talk about the strategy that we're invoking and how you're going to see the return on the investment.
Yeah. Thanks, Ben. When we look at the recent acquisitions, we really like what both Waypoint Analytical and Agrible bring to us. We really believe now that we have the capacity and the capability to build the leading digital agronomy platform in the industry. We launched our platform on July 1st. A lot of the Agrible tools will be immediately put into our platform, which we think will improve the customer experience. To your question, in terms of how do we measure success, obviously, there are a number of areas where we do charge for the service on the platform. Variable rate fertilizer, variable rate seeding applications are two examples of that. We do believe that there will be some discrete line items that we can measure and quantify from a value generation standpoint.
Look, I think we're in a unique position from a digital standpoint because we are in retail. We believe that by leveraging the data science capabilities that we have to bring true solutions to our growers, we will earn more of their business, and we'll earn some new business from new customers. We're in the unique place in the value chain where we think we can grow our business through having the leading digital platform in the industry. I think we'll see it on our base business, and we'll also see it specifically in some line items in our digital platform.
Yeah. Ben, just a couple other comments. We don't feel we need to do any large, expensive acquisitions in this space. The investments that we made on a relative basis are quite modest. They were quite strategic to build some specific capabilities we were looking for. That's not to say we might not have other bolt-ons, but we don't think we need to have some very large, expensive acquisitions in this space. I think how we're going to measure the return will be in multiple facets, but share of wallet and reduced turnover of customers, I think, is two of the key KPIs that we're measuring certainly internally right now.
Our next question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.
Good morning. Now that you've executed on the SQM, ICL, and APC transactions, can you just walk us through your updated thoughts on the M&A pipeline in retail across the Americas? Maybe comment on whether or not you'd be interested in expanding your nitrogen portfolio, either domestically or abroad. Just any sense on how you're evaluating those opportunities versus a buyback would be very helpful. Thank you.
Good morning, Chris. I think to the gist of your question is the priorities for capital now that at least all of the equity stakes of the deals have been announced. Obviously, we're working hard to get the remaining ones closed. As I mentioned in my prepared remarks, we think that that'll happen by the end of the year. If you look at that, we are expecting net after-tax proceeds of approximately $5 billion. The base business, and even in today's market fundamentals, are generating significant free cash flow. If you look at the next two to three years after we pay our sustaining capital and the dividend, we still will generate significant free cash flow. We think that that will be somewhere between $6 billion and $8 billion in the next three years that we'll have to redeploy.
The next logical question is, okay, well, what are those priorities for that capital? One of the fundamental growth priorities, of course, is retail. We have a lot of opportunity to grow retail. We can grow the retail business through the traditional network in North America and Australia. We will most likely allocate somewhere between $1 billion and $2 billion of capital in Brazil, I'd say over the next five years or so. As well as investment backward integrating into the Loveland Products portfolio, which has been just wonderful investments for us and has driven a lot of our margin enhancement that you've seen in the retail business. Compare that to, say, a buyback. Well, what I would tell you there is we're not even complete the first buyback yet.
We still have a remaining 10%. We will complete that, as I mentioned, this year. We're always looking at what's the best use of long-term capital to grow shareholder value. We'll make those decisions in due course. I think just the sheer nature of having $6 billion-$8 billion over the next 3 years or so, I believe we'll be able to do a lot of different things with it. We're going to balance growth with shareholder returns. I really can't say much more than that at this point. I think we'll have enough capital to do both.
Our next question comes from Andrew Wong with RBC Capital Markets. Please proceed with your question.
Hi, good morning. Yesterday there was a bit of an announcement, a small capacity reduction at Vanscoy. Obviously, there's some new capacity that eventually will be coming online from the other competitors, so it makes sense to offset that. The demand's also pretty strong right now. Just wondering, is the closure just Nutrien trying to get ahead of the curve a bit to make sure the markets remain balanced and healthy? What's the longer-term outlook for potash production? Thanks.
Good morning, Andrew. I'll give you a strategic overlay on what we announced yesterday. I'll just have Susan Jones, our head of the potash business, just to give you a little bit more of the specifics and the outlook. Look, yesterday's announcement was really the result of several months of pretty intensive analysis and planning. This is where we landed for what I would call our go-forward operating strategy based on what we can see today in the markets. We think that the announcement that we communicated earlier this week on the workforce reduction, it really does allow us to optimize our network. The six mines in Saskatchewan, of course, reduce some costs. It does improve our overall global competitiveness, which I think is important. More than that, it does allow us to maintain sufficient ramp-up capability if and when needed.
The markets are improving. The potash markets, as you can see today, we even increased our overall global shipments up by about 500,000 tons. That's the strategic overlay, and the rationale is to continue to optimize our network, drive our competitiveness, but have sufficient ramp-up capability if needed. I'll just have Susan talk about the specifics of the Vanscoy announcement and then just talk about the outlook.
Yes, Andrew, great question. I think the announcement yesterday was more about rebalancing the product between our facilities as opposed to taking volumes out of the market. As you mentioned, we are seeing very good demand. What I should mention is that this whole shift of production volumes from Vanscoy to other sites will contribute to our overall synergy plan. You're going to see by the end of 2019, we'll have annual run rate synergies in potash that we'll be delivering of approximately CAD 80 million-CAD 100 million. Some of that will be production allocation, and some of that will be sustaining capital. That's really what you're seeing with that announcement yesterday.
Our next question comes from PJ Juvekar with Citigroup. Please proceed with your question.
Yes, thank you and good morning.
Good morning, PJ.
Good morning. Yeah. Chuck, your seed sales were up. Can you just break that down between price and volume? The reason I ask is that there were some reports that seed prices were under pressure before some of these big mergers took place. Given all these mergers, have you seen any behavioral changes from your suppliers in terms of seed pricing and defending market share? Thank you.
A good question, PJ. I'll have Mike Frank answer that question for you.
Yeah. Good morning, PJ. As you saw, our margins are up on seed overall, all driven really by volume. Our gross margin percents are really flat year-over-year, and we believe we've gained share in the marketplace. When we look at our market research would indicate that the entire US seed market is probably flat to down a little bit and we're up. Your question in terms of what are we seeing from suppliers, look, I think this market's been highly competitive for the last several years. It continued to be competitive this year. In soybeans, we have now about half of our mix in dicamba, that continues to be a growth opportunity for us. The market continues to be competitive, and I would say we haven't seen any shifts in behavior due to the mergers that have taken place.
Our next question comes from Adam Samuelson with Goldman Sachs. Please proceed with your question.
Yes, thanks. Good morning, everyone. Question on the outlook for potash and understanding the shipments and pricing year-to-date has been strong. Wondering if you could comment a little bit on how you think about the back half and later into the year, given the crop price outlook. Are you seeing any concerns about affordability? Palm oil prices in Southeast Asia have come off pretty considerably. The Chinese contract, as you alluded to in the prepared remarks, has not been resolved yet. Just trying to think about the run-up that you've seen in potash prices and I guess phosphate prices as well relative to the crop price environment that we're in and the currency environment that we're in that seems to be a little less beneficial.
Yep. Good question, Adam. Thanks. I'll have Jason Newton, our Chief Economist & Head of Market Research, give you a view of what we're seeing globally, and then I'll give you a couple of comments at the end.
Good morning, Adam. Yeah, good question. I think really if you look at our global potash shipment forecast, I think the agricultural fundamentals really differ depending on what geography you're in. Absolutely, I'd say within North America, we've seen crop prices come off versus where they were during the spring season. Crop prices are the biggest contributor to grower margins. Obviously grower margins at current prices are being squeezed although current prices don't really mean a lot if there's no crop being sold. That said, current potash prices within North America remain highly affordable and low by historical standards. From a North American perspective, we've seen the crop is well ahead of normal progress in terms of maturity. Typically the biggest driver of the fall season is the length of that season and how weather cooperates.
The outlook for the second half of the year looks pretty positive. In Brazil, we did see some logistical bottlenecks in May and June driven by the trucker strike and that dispute. As we look towards the second half of the year, we think that those issues are resolving themselves. From a grower perspective, the soybean prices are very strong and we expect an increase in acreage, which should support demand there. Good point on Southeast Asia. We have seen palm oil prices are lower definitely year-over-year, but the economics remain really positive even at the lower prices, and we continue to see strong demand in that market. From a potash shipment standpoint, we're maintaining a flat outlook for that market in 2018 versus a record in 2017. That continues to be really positive.
I think the uncertainty is with China and India in the back half of the year and driven by the contracts, and that I think is one of the bigger drivers of the range in our potash shipments forecast at this point.
Adam, from my perspective, you've got potentially an early harvest in the U.S., excellent yields, so the application window will be open and the product will be needed. The summer fill program that Nutrien had was highly successful, so there is good demand for our products right now. Canpotex, as we mentioned, it is sold out until October. When we look at the global market, you're right to call out India and China, but we also know that they need the product. I don't know exactly when we're going to have a settlement, but we do know that they need the product for their markets, and so it will come to a conclusion at some point.
We do think that, given everything we see around the world when it comes to the supply-demand fundamentals, that we are fairly bullish that we're going to have a fairly strong second half of the year for all those reasons that Jason and I just mentioned.
Our next question comes from John Roberts with UBS. Please proceed with your question.
Thank you. Chuck, at the start of your call, you highlighted your retail business ability to handle surge conditions like we had here in the spring. Could you remind us, on an annual basis, what % of your retail sales you actually apply for farmers, and how big is your fleet of equipment now?
Okay. Yeah. Mike Frank can answer that question for you.
Yeah. Good morning, John. About half of our products are put down by our own custom application. Of course, it depends on the area. In some areas, we have our own equipment. In some areas, we partner with other third parties as well. It's an important part of our business, and again, every part of the market is a little bit different in terms of whether the farmers have their own equipment or whether they need those services from us. Look, we have the largest application fleet by far in the industry. We have the seventh-largest fleet of vehicles in the U.S., and so we have a lot of capacity to deliver products on farm. Today, most of the products that we deliver are delivered right to the farm gate.
We're uniquely positioned when it comes to a tight application window like we've seen this year, to be able to use our supply chain to satisfy our customer needs.
Our next question comes from Steve Byrne with Bank of America Merrill Lynch. Please proceed with your question.
Yes, thank you. What fraction of your crop chemical sales through the retail business is represented by the Loveland brand, what would you view as a targeted percentage of that mix being Loveland? Do you drive that by just pushing more of your suppliers into these types of agreements where you can use their product in your private label brand, or do you need to develop new formulations to do this?
Good morning, Steve. Mike Frank can answer your questions.
Yeah, good morning, Steve. Specifically on crop protection products, this year about 27% of what we sold in the crop protection category would be Loveland Products. Last year we were just a bit over 25, and we've seen some nice growth in that area. Of course, it also means that we're selling three-quarters of the crop protection products from third parties. I would say our relationship with our key suppliers is getting stronger and stronger as the industry's consolidated. They need us more, and we need them to take their new technology to help our growers. We believe we can do both. We can drive our Loveland Products portfolio and partner strategically with the R&D companies that are bringing new technology. On the seed side, it's about the same.
About 26% of what we sold this year will be proprietary Dyna-Gro or Proven Seed brands, and that's also growing year-over-year. We see nice growth in proprietary. Again, we're partnering very closely with the R&D companies that are bringing new technology as well.
Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.
Thank you, good morning, everyone. Just thinking about the tariffs a little bit, maybe you could just discuss specifically if they remain in place through the fall application season and what you think the farmer may do if there's a significant level of concern. Sort of second to that, it would seem like Latin America is going to plant a lot more soy this year, obviously given where prices are, also the tariff situation, I guess that's kind of the same thing. Presumably, that leads to more corn acres in the U.S. versus soy going into next year. Can you just remind us how much more favorable a greater corn mix is for you versus a soy mix, and how we should think about that?
Yeah. Good morning. I'll answer your first question on trade, then I'll have Mike Frank answer the specifics around soybeans versus corn. Look, as we said this morning in the prepared remarks, like anybody else, we're not sure how this is going to unfold. Obviously, a trade war isn't good for anyone. I think the difference in agriculture, though, when it comes to farmers is we are completely focused on the financial health of our North American farmers. Farmers can't really afford to have sort of one bad year. In fact, that would be quite impactful across this entire value chain and be seen, I think, in the broader economy. That's where our concerns lie. It's the financial health of the farmer. Nobody knows how this is going to play out.
What we do think, just looking at it, is if you step back and you look at the U.S. farmer, they are some of the lowest cost, most efficient producers of food in the world. The acres are going to get planted. Now, the mix could shift to your second question, the world needs the food, and the U.S. farmer is one of the lowest cost, most efficient producers in the world. We think that the total acreage will not be impacted. Now to your second question, which is, okay, well, what could happen from a mix, and what would the impact be on our business? Mike, maybe give your view on corn versus soybeans if that were to happen.
Yeah, absolutely. Vincent, as you probably know, there's a strong crop that's coming across North America, and we continue to see farmers invest in that crop. Even through July, we've seen higher rates of both fungicides and nutritionals get applied on the crop. Farmers continue to invest in this year's crop, which is a good indication. We also know that a lot of the commodity prices have been locked in earlier in the year at higher prices. Really the question becomes, what are the commodity prices coming out of harvest for next year's crop? That'll be a key indicator as to how farmers think about investing. We know that there's going to be a high withdrawal of nutrients coming out of the soil because of the strong crop that's coming.
To your point, Latin America, Brazil in particular, we expect to see probably 7% or 8% increase in soy acres based on the profitability of soy down in Brazil. That could point to more corn acres in the U.S. On average, we generate about twice the margin on a corn acre versus a soy acre, that's favorable. As Chuck mentioned, our complete focus is on helping the farmers succeed. Our read of the situation right now is farmers still have good liquidity. Their balance sheets are strong. Obviously, the federal program, the $12 billion program that was-
Talk quickly about how quickly you can ramp up production if we do get into a deficit market.
Yeah. Good morning, Jacob. I think Jason covered this pretty well. With where prices are at today, and the demand that we're seeing in the potash markets, I'd say around the world, we're still quite a ways away from having any compression issues when it comes to the economic health of a farmer because of potash pricing. I don't have a specific number to give you, but when we look at the numbers and we run them, we are quite a ways away from that happening. That's really the answer to your question. The second question was?
Related to ramping up.
Oh, the ramp up. Yeah, sorry. Your second question on ramp up. Susan, why don't you take that question?
Jacob, excellent question. We are, and this is also linked to our outlook for rise in demand, as we're seeing tight supplies this year. You're seeing exactly that in terms of our expected demand. We're able to ramp up, and this is a time where Nutrien's potash network can really shine. We'll always ensure that we have adequate supply so that if markets are tight and we're seeing good demand, we can move product into the market on fairly short notice. Great question, and I do think that you're seeing that as well this year on our outlook.
Our next question comes from Joel Jackson with BMO Capital Markets. Please proceed with your question.
Hi. You've been able to raise your guidance a fair bit on the nutrient side. You didn't raise any guidance for retail and your observation is that retail margins for retail or fertilizer margins for retail are lower this year. Maybe talk about that. Why didn't you raise the outlook for retail, and why are fertilizer margins lowering?
Morning, Joel. Mike can answer your question on retail margins. Look, from a guidance perspective, what I'd say is you're right. The guidance is being driven by two factors. One is faster delivery of the synergies, and improving market fundamentals when it comes to our wholesale businesses. We're just seeing higher volumes and prices. Retail's guidance range, if you think about it and you step back year-over-year, it's up about nine or 10%. Going into the year, and retail is a bit more ratable when it comes to its earnings profile. That's what we like about the retail business, is it's more stable, it's more resilient, and you won't see just because commodity prices are moving up, that we're going to be able to raise guidance because of retail. That's not how the retail business is built, as I think you understand and know that.
Look, I think that the beginning of the year, we had a healthy increase in retail's earnings of 9% or 10%. It's not related to crop pricing and demand for nutrients. That's why. On retail margins, what I would say is when I look at the overall shelves and the margins across the shelves, I think the business has held up brilliantly. It's been extremely resilient. If you just think about the pressure that we were under in the early second quarter because of the compressed spring season, for retail to hold its margins in a season like that just shows the strength and stability of that business model. Mike can give you a little bit more color.
Sure. Joel, good morning. We're pleased that we've seen growth in all regions where we have retail, North and South America, and nice growth in Australia, as Chuck mentioned earlier. We believe that the retail market overall is probably flat, we're growing on the EBITDA line at 10% year to date in probably a very flat market. In fact, in Australia with the significant drought in New South Wales, it's a very tough market in that area as well. On fertilizer, our margins are roughly flat. Look, our average cost of good increase this year was about $15. We covered all of that other than $0.23, we're roughly flat on margins, we grew volume significantly. Going into the second half, we still expect to see growth. We expect the market to be tough.
As you would recall, last year in Q4, we had a very strong Q4 because the window stayed open, especially in the U.S. from a fertilizer standpoint. We're expecting not only to repeat the strength we had last year in the second half, but to grow on top of that. When we do that'll still put us in the range that we're forecasting here.
Our next question comes from Steve Hansen with Raymond James. Please proceed with your question.
Hey, guys. Just a quick one for me. You probably don't want to get too far out over your skis here on your synergy targets, but given the pace that you've been trending at, have you started to think beyond the $500 million run rate target? If so, I'm sure you don't want to put a number on it just yet, but if so, are there buckets where you think you could potentially exceed that opportunity set that you initially described? Thanks.
Good morning, Steve. I'll have Steven Douglas, who's looking after our synergies and integration, answer your question.
Yeah, thanks. Good morning, Steve. Look, what you've seen in us
Raising our guidance for run rate for the current year is really a great work performed by the business units in terms of assessing what it is they could pull back out of 2019 into 2018. There have been some puts and takes on what we're seeing. The lion's share of that is really just pulling back future synergies back into the current year, which I think is laudable given the fact, a dollar today is worth more than a dollar tomorrow. In terms of exceeding the $500, aspirationally, I think we've talked about always wanting to do that. We're constantly weighing other opportunities, and we're very cognizant of the fact that these synergies have to be firm, tight, repeatable, and capitalizable. We're not ready to expand past the $500 million, but I can tell you we're constantly exploring ways to continue to grow that.
Our next question comes from Michael Piken with Cleveland Research. Please proceed with your question.
Good morning. Just wanted to delve a little bit deeper into where crop protection inventories are in the U.S., specifically, if you could break it out between herbicides, fungicides, and insecticides, that'd be helpful, as well as what you're seeing in terms of farmer consumption this season. Thanks.
Good morning, Michael. Mike Frank will, I think, give you a higher level view on where we think crop chem inventories are, as well as maybe fertilizer.
Sure. Our inventories right now on fertilizer is about flat to last year coming out of Q2. Crop protection inventories are up. Our market research would indicate that in the U.S., the entire crop protection sales to farmers was probably up about 0.3%. We were up over 5%. Again, it's a category where we feel strong that we performed well and gained share. The increase in inventories that we had coming out of Q2, we've actually already absorbed a lot of that with the strong July in the U.S. We feel good about our inventory position across all of our shelves at this point in time.
Our next question comes from Jonas Oxgaard with AllianceBernstein. Please proceed with your question.
Hi, guys. I was wanting to talk a little bit more about the Brazil retail strategy. There are a couple of angles I was curious about. One, the trucker strike that was in, does that do anything to your business case? On the flip side, the tariff seems to make Brazil a better environment. What's the competitive landscape down there? Who are the main competitors, and how does that impact what you're doing?
Good morning, Jonas. Yeah, it's Chuck. I'll give you the strategic overlay, and Mike Frank can give you his perspective on the competitive situation in Brazil. Look, the overall goal here is to replicate what we've built in North America, and I'd say in Australia, in Brazil. We'd like to build a leading retail platform that is backward integrated with Loveland Products. It's a full-service, high-touch model that has all the precision agriculture, agronomic service application, same as North America. We think that that is going to be very unique and value-creating for the Brazilian farmers, which it all has to start with creating value for the Brazilian farmers. That's what we're trying to replicate. As I mentioned, we are going to allocate some capital into Brazil to grow that business.
In time, we'd like the retail business in Brazil to be the second-largest business that we've got in our portfolio of retail businesses. There are many ways to enter the Brazil market. We could certainly look at acquiring a wholesale fertilizer blender and then adding the crop chem, the seed, and the service afterwards. There are traditional retailers. There's not any national presence traditional retailers, but they do exist. Think about a tuck-in roll-up strategy similar to what we do in the U.S. to build it out. Our acquisition in the first quarter, Agrichem, the other way to enter Brazil is through a Loveland Products play, which we've already done, and enter the market with that offering and then understand who they're selling to understand that market, and build the retail model that way.
We're looking at all of those options and weighing multiple opportunities as we speak. There is competition, but I think our offering would be very, very unique and quite competitive. Mike, maybe give your perspective.
Chuck, I think you covered it well. The fundamentals in Brazil are very strong today. Farmer profitability is high. As we mentioned earlier, we expect to see soy acres continue to expand going into this next season. The retail market's very fragmented, we're scanning the market today and having a number of conversations to really develop our strategy around how can we consolidate that industry, which we think there's opportunities to. We've got a handful of greenfields that we're investing in right now. As Chuck mentioned, we also want to have our own proprietary products company, just like we have in the U.S. and other markets. The acquisition of Agrichem was a very good start to that strategy. It's early days, but we think there's a lot of opportunity in Brazil.
Our next question comes from John Chu with Laurentian Bank Securities. Please proceed with your question.
Hi, good morning. Chuck, earlier you mentioned in terms of your retail M&A focus would be the U.S. and Australia. Just on the Australian market, I was under the impression that there's really three main players that have about a 30% market share, and that effectively that market share is more or less capped. How do you intend to grow that market? Or is there something bigger at play where you could take out one of the bigger players there? Thanks.
Yeah, good question, John. You're right. I think the market in Australia, we do have close to 30% of the market share in Australia. There are some other large, what I'd call national players in country. There's still a lot of independent owner-operators, smaller companies that exist. We've been actually rolling up the market similar to the U.S. and Canada in Australia for the last couple of years. Once Australia hit its legs and started to perform well, we started to allocate, I'd say, very small amounts of capital into Australia to continue to roll up that marketplace. I think the results have spoken for themselves. We're certainly at very solid performance over the last two or three years with record performance year after year.
That's what we're thinking, and that's what we're talking about, is more of a tuck-in roll-up strategy in Australia, and then more