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Mosaic (MOS) Q3 2021 Earnings Call Transcript

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MOS earnings call for the period ending September 30, 2021.

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Mosaic (MOS 2.14%)
Q3 2021 Earnings Call
Nov 02, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen and welcome to The Mosaic Company's third-quarter 2021 earnings conference call. [Operator instructions] Your host for today's call is Paul Massoud, vice president, investor relations of The Mosaic Company. Mr. Massoud, you may begin.

Paul Massoud -- Vice President, Investor Relations

Thank you and welcome to our third 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; and Jenny Wang, vice president of global strategic marketing 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.

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We will also be presenting certain non-GAAP financial measures. Our third 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

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

Mosaic delivered excellent financial performance in the third quarter, with EBITDA reaching its highest level in more than a decade. Our business continues to benefit from the strong markets we've been discussing since the second half of 2020. With our North America production recovery and a strong order book, we expect the momentum to continue through the end of the year and into 2022. Before we get into our strong outlook, I want to briefly give you an update on the production issues we faced during the third quarter.

As you'll remember, in June, our Esterhazy K1 and K2 potash mines experienced accelerated brine inflow and we made the decision to stop operations approximately six months ahead of schedule. To help mitigate lost production, we further expedited the ramp-up of K3 and restarted Colonsay. The second shaft at K3 is now operational, which paves the way for us to reach full production in the first quarter of 2022. And at Colonsay, we hit our target run rate in October.

In phosphates, the damage from Hurricane Ida and the equipment failure at New Wales resulted in a 300,000 ton reduction loss in the third quarter. Thanks to the efforts of our team, the fourth quarter production shortfall has been reduced to 100,000 tons and operating rates should be normal by the end of the year. In both phosphates and potash, our team has worked diligently to ensure any shortfalls resulting from issues outside of our control were temporary. As we head into the end of the year and into 2022, we are well positioned to take advantage of the current market.

Shifting now to agricultural markets. We continue to see strength extending well into 2022. Grain stocks remain limited and global corn and soybean demand is elevated, driven in part by surging Chinese demand and rising global biofuel demand. As a result, agricultural commodity prices remain high and farmer income remains well above historic norms.

That strength in crop markets, combined with global industry supply constraints, are the key drivers pushing fertilizer prices higher. In the Americas, demand is considerably stronger than we expected at the beginning of the year. Brazil is expected to once again set a record for fertilizer shipments in 2021. Grower economics remain profitable despite the latest surges in nutrient prices and this has been reflected in the significant order book into the end of the year and into the first half of 2022.

In North America, demand continues to be strong and prices have followed reflecting a healthy domestic market benefiting from imports from a diverse group of suppliers. Grower economics remain favorable in North America, although not quite as favorable as during the first half of the year. However, persistently low inventories and capacity constraints are underpinning the tight supply demand balance as well as pricing. In India, while farmer demand remains strong and the government has recently acted to improve importer economics for phosphates, availability is still lagging.

Recent moves by the governments will likely help in the recovery of Indian imports which lagged most of 2021 because of the disconnect between domestic subsidies and global prices. Given how depleted Indian inventories are, we see India as a source of pent-up demand, which should return to the market in 2022. In Southeast Asia, fertilizer demand is benefiting from the strength in palm oil prices and China is incenting its farmers to maximize yields through subsidized crop prices. New supply of phosphates is limited.

Chinese exports are expected to decline significantly in the fourth quarter and in the first half of 2022, reflecting the directive from China's National Development and Reform Commission that major producers halt all phosphate exports to ensure adequate domestic supply. In potash, demand growth continues to exceed new supply from higher operating rates announced by producers and prices continue to rise. Putting this all together, we expect further upside in realized pricing for phosphates and potash. Our fourth quarter order book is now about 90% committed and priced.

As a result, we expect to see a sequential increase of $55 to $65 a ton in realized phosphate prices and $110 to $130 a ton in realized potash prices. We are seeing buyer appetite for first quarter commitments as well. All of this implies higher earnings in the fourth quarter and a very strong results continuing into 2022. Our earnings are leading to substantial free cash flow generation, which has allowed us to make significant progress toward several commitments we've made.

Earlier this year, we raised our regular dividend target by 50% to $0.30 a share. In October, our board approved an additional regular dividend target increase of 50% to $0.45 per share effective in 2022. In August, we repaid $450 million in long-term debt toward our target of $1 billion of debt reduction. Also in August, we announced an expanded share repurchase program of $1 billion.

Since that announcement, we have repurchased more than 950,000 shares. In addition to strengthening the balance sheet and returning capital to shareholders, we continue to evaluate further investments in the business. Capital expenditures are expected to total $1.3 billion in 2021, of which roughly $450 million is growth-related. We continue to evaluate every opportunity that allows us to further strengthen the balance sheet, grow the business and return capital to our investors.

Now, before I conclude my opening remarks, I want to take a moment to recognize the many contributions of Laura Gagnon and what she has made at Mosaic. As head of investor relations for the last decade, Laura has been an invaluable advisor to me and to the entire leadership team. We are very grateful for her service and wish her all the best in her retirement. Paul Massoud has been promoted to lead IR and Laura will stay on through the end of the year to help with the transition.

Please join me in wishing her well. With that, let's move on to questions. Paul?

Paul Massoud -- Vice President, Investor Relations

Joc, with continued strong nutrient pricing, we've received a number of questions on affordability and risk of potash and phosphate demand disruption. First, in what geographies are you seeing signs of potential demand destruction? And how do you think about the risks for both phosphates and potash?

Joc O'Rourke -- President and Chief Executive Officer

Thank you. Let me start by saying the areas where consumption has been lower, has been more about availability than it has been about demand destruction. And here, in China, because of strong pricing early in the year, the exports were high. However, now the Chinese government has stepped in and restricted exports and we expect the exports to go very low in the last quarter and into quarter 1 of next year, which will allow for a better supply in the domestic market.

In terms of India, the inability to secure P&K has not been about farmer demand but importer economics. The inability or inadequate subsidies have really been what's driven the inability of the importers to economically bring product into that jurisdiction. However, what we do expect to see based on those two is pent-up demand in both China and India for early next year and into the spring season. So with that, I'm going to throw it over to Jenny to really talk about the details of fertilizer affordability in our key markets.

Jenny Wang -- Vice President of Global Strategic Marketing

Thanks, Joc. I think you covered India and China. The reduced demand in 2021 is going to be the pent-up demand for 2022. We feel very confident that two markets will come back with a very strong demand in 2022.

In the rest of the world, we have not really seen a major size of demand destruction. Even in Brazil, the barter ratio is less favorable than the previous years. We still have seen demand from the growers and we actually have sold over 10% of the summer crop nutrient already.

Paul Massoud -- Vice President, Investor Relations

Can you compare and contrast 2021 with 2008 in terms of affordability, inventory, soil levels?

Joc O'Rourke -- President and Chief Executive Officer

Yes. Thank you. Let me start with soil levels. We don't have perfect insight into the soil inventory per se.

But what we do have is we have some studies by the likes of the University of Illinois that show that over the last 10 years, actual soil inventories have decreased. And that's particularly as we've used more precision agriculture, which allows you to put the right amount of fertilizer down. But it also means you have to replace it every year. And of course, in Brazil, with the depleted soil, that has to be replaced every year.

So there is definitely on-ground demand that will be there next year. In terms of channel inventory, we see that as being low in almost every jurisdiction. There is no place around the globe where we see any kind of buildup of channel inventory. And that's fundamentally different than it was 10 years ago where you had large amounts of inventory, not only of the fertilizers, but large inventories of crops like grains and oilseeds.

So this turnaround is quite different. And so as we look forward, we see affordability fine right now and we expect that affordability will be good because either price will have to go up for grains and oilseeds, which will drive long-term fertilizer or they will plant less, which means that prices for grains and oilseed will go up. So in other words, the cure for high prices is high prices.

Paul Massoud -- Vice President, Investor Relations

Joc, how are India's subsidies impacting affordability?

Joc O'Rourke -- President and Chief Executive Officer

Well, at a farmer level, it's a controlled market. So it's very difficult to compare affordability at the farm level. Certainly, we know that on-farm demand for both phosphates and potash is very strong. At an importer level, the gap between global pricing and the retail price has been such that the importer economics are poor, which means they're not importing, which means that the product isn't available to the farmer.

And really, that goes for both potash and phosphate. Let me add, as we move into 2022, there is a lot of pent-up demand in India. And we fully expect that the government will have to act and increase subsidies to allow the farmers to get the product they're going to need.

Paul Massoud -- Vice President, Investor Relations

Another topic that generated quite a few questions, including from Adam Samuelson at Goldman Sachs and Vincent Andrews from Morgan Stanley, China's phosphate market, especially given the recent change in China's export policy. First part of this question is what are our expectations for exports this year and next year? And how is that being impacted by changes in China's production volumes?

Joc O'Rourke -- President and Chief Executive Officer

Well, thank you. This year, we're expecting China's total exports to run just over 10 million tons. But as we've seen recently, that has led to fairly large deficits domestically. So the government has stepped in, put on export restrictions, which are now taking effect.

We don't expect a whole lot of Q4 exports or probably first quarter 2022. After that, we do expect things to return to normal. So for this year, we're expecting a little over 10 million tons of exports. Next year, we think that will return back to the, say, 9.5 or 9.3 that we've had in previous years.

But year-over-year, we should be down about 1.5 million tons from where we were this year. Now, we also see a long-term decline in production of phosphate fertilizers for agricultural use. That means that the phosphoric acid is starting to find its way into a lot of other industrial products, including these lithium iron phosphate batteries and a number of other areas. So what we see is a declining production over time and probably a restriction of availability into the phosphate fertilizer market.

So that means that over time, we should see a decrease of exports from China.

Paul Massoud -- Vice President, Investor Relations

Chris Parkinson from Mizuho and Michael Piken from Cleveland Research both asked about the impact of ammonia on our phosphate business and how much spot ammonia we'll need to purchase in the fourth quarter.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, gentlemen. So let me just start by reminding everyone, our ammonia is sourced from three different sources. First, our Faustina ammonia plant, which is obviously at cost, including the cost of Henry Hub natural gas; our CF contract, which we've maximized at the 800,000 short tons per year at this stage. And then, of course, open market purchases.

This quarter, we're looking at approximately 20% to 25% will probably come from open market purchases. As such, what we expect to see is about a $5 to $10 increase per ton of our raw materials. And that's based on market changes in ammonia plus a relatively flat sulfur pricing environment.

Paul Massoud -- Vice President, Investor Relations

We had a handful of questions asking about our potash production assets, including questions from Seth Goldstein of Morningstar and Andrew Wong at RBC. Both asked details on how K3 will ramp and how total production volumes and costs will evolve in 2022.

Joc O'Rourke -- President and Chief Executive Officer

Thank you. Let me start by saying that the ramp-up of K3 is going very well. We have just handed over the south hoist system to operations, so that is now operational. So we have both hoists operational.

And as we increase the number of 4-rotor miners between now and first quarter, we will hit full production by the end of first quarter. So that means that very soon, we'll be running that mine at full production again. Now, in terms of the other piece, I just want to highlight is we've also been very successful at starting up our Colonsay mine. That operation is now running at its expected rate of 100,000 tons per month-ish to about 1 million tons a year.

We expect between the two of them, we will have actually more incremental production by the first quarter of next year.

Paul Massoud -- Vice President, Investor Relations

Steve Byrne from Bank of America and Adrien Tamagno from Berenberg as well as others are asking about our product pricing strategy, how we think about forward sales, how far ahead have we sold and how much of our first half volumes might already be committed.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, gentlemen. Well, let me start by saying availability is a big concern across a number of our regions. And what we're seeing today is actually a lot of inbounds, but we're being very careful about which geographies we're selling into and the amounts we're forward selling. So while the demand is there, we're still being cautious.

I'm going to let Jenny give you the details on that.

Jenny Wang -- Vice President of Global Strategic Marketing

Sure, Joc. We have seen a strong demand from customers, especially in North America and Brazil. We began to sell some modest amount of the tons for Q1 and even we've started to sell the tons into Q2 as well. These are all good indications of continuous strength of the market and we feel good about that.

Paul Massoud -- Vice President, Investor Relations

Joel Jackson of BMO and John Roberts of UBS are asking about Mosaic Fertilizantes. Given the strength of our margins over the past few quarters, is this being driven by distribution or production? And how much are co-products like gypsum sales contributing to this?

Joc O'Rourke -- President and Chief Executive Officer

Well, thank you, gentlemen. First of all, let me say, Mosaic Fertilizantes is an integrated business, though it is the combined benefit of distribution with production that has really driven our results there. Part of the strength has obviously been in the markets, but we've also made tremendous progress ourselves of transforming the business, first of all, in the $300 million of synergies we found and then more recently, we've just exceeded our $200 million EBITDA improvement target through transformation. So remember, the pro forma at the time of purchase was about $60 million EBITDA per year and we just did $300 million in a quarter.

So you can see where we've extracted significant value and has dropped straight to the bottom line. And in terms of co-products, they are making a significant contribution, I think, certainly in the level of $50 million to $60 million of sales a year from those co-products.

Paul Massoud -- Vice President, Investor Relations

A number of analysts, including Andrew Wong from RBC and Rikin Patel from Exane have asked about capital allocation. We'll break this up into a couple of questions. First, can you discuss what to expect for capital expenditures going forward in terms of new growth or major investments and sustaining capital?

Joc O'Rourke -- President and Chief Executive Officer

Thank you. I'm going to start by giving a little bit and then hand it over to Clint for some of the detail. But over the next five years, we do expect capex to trend lower. Growth capex will certainly decrease at the end of K3.

But again, as part of our capital allocation, we do expect to reinvest in the business over time. So there will be some reinvestment that we will make. And I'm going to -- with that, leave it over to Clint to talk about capital.

Clint Freeland -- Senior Vice President and Chief Financial Officer

Thanks, Joc. Like Joc said, I think over the next five years, we would expect capex to trend lower. Certainly, K3 -- the K3 investment will be ramping down and is in the process of ramping down. Also recall that some of the capital investments, particularly over the next two, three years, from a growth standpoint, will be made in extending our reserve down in Florida.

We also have had a number of regulatory changes, particularly down in Brazil, around some of our dams. That's going to promote or require some additional spending. And one of the things we've also been looking at is we have a number of assets that, over the long term, have been leased. And as we've looked at how core those assets are to our underlying operations, I think there is a portion of those assets that probably make more sense for us to own instead of leasing.

And so that also will be part of our capex program going forward. But I think with all of that taken into consideration, certainly, over the next five years, we would expect total capex to come down. And as Joc said, we'll continue to look for opportunistic investments in the business that are high-returning like the ones that we see today, we'll look for those opportunities to continue to invest as we go forward.

Paul Massoud -- Vice President, Investor Relations

As a follow-up on this topic, how do we expect to deploy excess capital between incremental debt paydown, share repurchases, dividend policy and the type of growth projects that were just mentioned?

Joc O'Rourke -- President and Chief Executive Officer

Thank you. We remain focused on a balanced capital allocation approach between three key pillars. First, our balance sheet. We've demonstrated that by paying down $450 million of long-term debt this quarter.

We intend to continue to pay down debt to the target of $1 billion over time. In terms of growth investments, we've invested or will have invested $450 million in our business this year, including our spend on K3 and our spend on reserve extensions in Florida. And then finally, the returning capital to shareholders. Here, we've raised our target dividend for the second time by 50% to $0.45 per year in 2022 and we've started a share repurchase program based on an authorization of $1 billion of share repurchases over time.

And in that, we've already repurchased approximately 1 million shares on the open market. So we've demonstrated that we continue to use a very balanced approach and that's what we will do going forward.

Paul Massoud -- Vice President, Investor Relations

Thank you. That concludes the prepared portion of this event. I would now like to open the line to Q&A.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of John Roberts from UBS. Your line is open.

John Roberts -- UBS -- Analyst

Thank you. Maybe, Joc, talk a little bit about more of your capital return strategy. And do you have a targeted dividend yield that you want to get to?

Joc O'Rourke -- President and Chief Executive Officer

Thanks, John. Let me start by saying our capital return strategy is based on two pieces we expect. We expect to be giving a regular target dividend that is affordable through the cycle. One of the things as a cyclical we want to be careful of is that we don't put out a dividend too early that we may have to change if the market completely changes.

So we are looking at affordability of the dividend. And beyond that, we're looking at methods like share repurchases to continue to reward shareholders or their holding our shares and for investing with us. So we do expect not to have a huge dividend that's necessarily targeted as a percent, but one that is well affordable, conservatively affordable through the cycle and augmented by share repurchases. Clint, did you want to add anything to that?

Clint Freeland -- Senior Vice President and Chief Financial Officer

No, I think that's right, Joc. I think we look at the return of capital to shareholders in the form of an affordable dividend supplemented by share repurchases and what does that program look like in total, maintaining a level of fixed return as well as a level of flexibility as we go forward.

Joc O'Rourke -- President and Chief Executive Officer

I will reemphasize John though that we do expect to move that dividend as our earnings potential grows and our -- some of our internal programs come to fruition.

Operator

Our next question comes from the line of Chris Parkinson from Mizuho. Your line is open.

Chris Parkinson -- Mizuho Securities -- Analyst

Great. Thank you so much. On the potash fronts, can you just quickly discuss the evolution of your order books for spot markets, just given the current demand dynamics where you already indicated inventories were? And how that ultimately sets up Canpotex for future contract negotiations?

Joc O'Rourke -- President and Chief Executive Officer

OK. Thanks, Chris. Yes, so where are we at with respect to our order book? I'm going to throw this over to Jenny in a second. But let me say, first of all, demand is very good.

You've probably recently heard Canpotex fully committed for quarter 4. We're probably at least 90% committed and priced for quarter 4, which really sets us up for a real strong position as we move into 2022. And in terms of Canpotex and contract negotiations to the major national contracts, if you will, it also sets us up very well for that. There's a lot of talk about early contract negotiations with China.

That hasn't started. But again, we don't really need that in the near term. So I think time is on our side, not the buyer side in this case. Jenny, do you want to talk a little bit about that allocation?

Jenny Wang -- Vice President of Global Strategic Marketing

Yeah, sure. Thanks, Joc. We, for both North America and capex, we basically have fully committed for the fourth quarter in 2021. Canpotex has started sales into Q1 and which basically are going to reflect the latest spot market prices.

So you will see a lag between the benchmark price, as you are saying today and versus the realized prices, which is likely going to be reflected in Q1. So that's basically the order book standpoint. In terms of the market situation, the inventory level in the contract market in India, it is 60% lower than the same time of last year. In the case of China, that is over 25% lower than the same time of last year.

So with this low inventory situation, we believe that the contract settlement will be needed for this market earlier than all of the previous years. Like Joc mentioned, we don't need this market, but we see that from a market demand point of view, we won't need to have earlier settlement than the previous years.

Operator

Our next question comes from the line of Michael Piken from Cleveland Research. Your line is open.

Michael Piken -- Cleveland Research -- Analyst

Yeah. Good morning. Just wanted to get a little bit of a sense for where we are in Brazil. There's been some talk about the logistics and the ability to get product into Brazil.

I mean I guess from your perspective, given that you have some in-market production and some of these challenges bringing product in, the higher freight rates, like how are the net puts and takes? And do you think the farmers are going to get enough fertilizer to be able to plant the premium crop moving forward a couple of months from now. Thanks.

Joc O'Rourke -- President and Chief Executive Officer

OK. Thanks, Michael. And I think you've hit the nail on the head yourself. We have a great logistics advantage and that was one of the key benefits of investing in country in Brazil.

We are -- we have ownership or part ownership of a port in Paranagua and access to a port in Santos that really gives us an opportunity to get product into Brazil much more effectively than others. And then, of course, in-country production, where we save not only the ocean freight, but the rail or truck freight from the coast. So all of this logistics restrictions are actually working to our competitive advantage right now compared to others who would sell at the coast or -- and others who would have to come in through public ports. So we feel we're in a really good position there.

Overall, Brazil will be tight for fertilizers, particularly I guess as we look forward, there could be some -- with any restrictions on the Belarusians, there could be some restrictions on getting the product to Brazil. And of course, ocean freight has at least probably doubled. So -- but that's going to affect everybody equally. And it does come into our overall calculation of the economics for the Brazilian farmers.

But at this stage, as Jenny mentioned earlier, we believe their economics are still quite strong.

Operator

Our next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.

Adam Samuelson -- Goldman Sachs -- Analyst

Yes. Thank you. Good morning, everyone. Joc, can I maybe follow up on Brazil.

And really, it's two parts. One, on the affordability point. There's been some pretty notable comments from some of the grower and industry associations there, telling farmers not to apply fertilizer at these price levels. Is your view that, that just is not going to have a material impact on actual consumption and offtake? And then second, on your distribution business and this is more for '22, you talked about a little bit some slowdown in demand or more flat demand next year in your market outlook is in that scenario.

And if prices ever did correct, how do we think about the profitability of the distribution business in a falling price environment?

Joc O'Rourke -- President and Chief Executive Officer

OK. Thanks. Well, let me start with affordability. Again, with the rise in commodity prices and the Brazilian currency devaluation over the last couple of years, the Brazilian farmers had the benefit of extremely good profitability.

Now that has certainly decreased this year. And because of rising not just fertilizer, but fuel prices, seed prices, everything has gone up. And so not surprisingly, it squeezed them more than they're used to. However, I mean, our own belief is farmers like to farm.

They're not going to sacrifice yield by not fertilizing, that just is not a good economic solution to the problem. A matter of fact, if anything, that would exacerbate their profitability issues. So we think that, that will continue as normal. Do we expect growth to be as strong in the next year or so? No, we would expect that growth would be more moderated than it has been.

And a matter of fact, our longer-term growth numbers, we're looking at that being slightly lower than what the history has been. But overall, we think that it will continue. And Brazil will continue to be a great market and ultimately will be one of the big red baskets for the world. In terms of our distribution business, I think we have a very strong customer base.

We are well respected in the market. Our brand has a very good name down there. Plus, we have great growth in our MicroEssentials, which is a good pull for that market. So they want our products specifically.

So we have a very stable customer base. So even in a declining market, I would expect we would do as well or better than any of the others in that situation. So I worry less about the margins in distribution. They're very good right now, but I suspect we'll be able to keep those over time.

Operator

Our next question comes from the line of Steve Byrne from Bank of America. Your line is open. Hello, Steve. Your line is now open.

Our next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is open.

Joel Jackson -- BMO Capital Markets -- Analyst

Hi, good morning, Joc. Morning. Maybe a longer-term question. Obviously, LFP is taking off more in the capital market to resurge in the last few years.

Can you give us a sense of where you think LFP could be in 2030 in terms of incremental demand for either phosphoric acid or MAP and I believe like companies like Prayon, Nutrien, Israel Chemicals are the big leader in the purified phos acid market. Do you need to upgrade some of your phos acid production? What would it cost and what are you looking at doing?

Joc O'Rourke -- President and Chief Executive Officer

Yeah. Thanks, Joel. Well, I'm going to turn this over to Jenny to talk about the growth of the lithium iron phosphate battery market. But you may be aware that I think Elon Musk just committed to using the -- those batteries in the cars, the Model 3 in China and has talked about building an LFP plant here in the U.S.

So there's no question that is coming on. In terms of purified phos acid, you are absolutely right and we are absolutely doing research into how we can create purified phosphoric acid, although I would say it's a little early for us to tell you either the cost or the capital. But Jenny, can talk to you about the LFP market.

Jenny Wang -- Vice President of Global Strategic Marketing

Sure, Joc. Actually, Joel, the increasing demand of LFP battery has been one of the drivers changing the Chinese phosphate industry. This year alone, we are saying around 300,000 tons of purified phos acid already shifted to LFP, which equals to 0.5 million tons of DAP. And I saw some questions related to the production of phosphate fertilizer into 2022, we believe the trend of shifting P205 to LFP will be the trend and will be the structure change.

And that will profoundly change the phosphate industry in China. Coming into the U.S., as Joc mentioned, we have seen the announcement made by Tesla, are working with some other parties of building up LFP factories in the U.S. and building up the U.S. owned supply chain.

We are looking into this area as well. So as the major phosphate producers, like Joc mentioned, we are doing our own study. This is going to be a long-term driver in terms of phosphate industry, starting from China and we believe it will have impact around the growth, especially in the U.S.

Operator

Our next question comes from the line of Adrien Tamagno from Berenberg. Your line is open.

Adrien Tamagno -- Berenberg Capital Markets -- Analyst

Hello. Good morning. I have two questions on the potash please. First, since you're restocking Colonsay, how should we think about the cash cost of production per ton target for 2023? And can you just please recall me the run rate of K3 expected for 2022 annually?

Joc O'Rourke -- President and Chief Executive Officer

OK. Thanks, Adrien. Let me start with Colonsay. We expect Colonsay to ramp up to its 100,000 tons per month as we mentioned in the earlier comments.

At that point, now, I guess, the cost of Colonsay will start coming down. I mean, right now, we've been going through a transition. Overall, I would expect Colonsay to make up about 15% -- 10%, 15% of our total production. And as such, I guess, it's going to move our cost maybe $4, $5 a ton overall.

So it's not a big cost changer and that will be offset by as we move. Esterhazy K3 tons up, but they'll really start coming in at lower cost. So overall, I don't see a really significant increase in cost because of Colonsay, the overall market because of the offset of lower cost at K3. You asked about the 2022 ramp-up of K3.

Again, as I mentioned earlier, we've just handed over the south shaft hoisting to operations. And so we have, I believe, three or four miners left to build, which takes a couple of months each. And then we'll be up at full production on K3 by the end of the -- basically by the end of the first quarter. So what you'll see now as we go forward is a slow move up to full production at K3, which will mean that our K1 and K2 mills will be fully utilized by the end of the third quarter, giving us approximately million tons of new capacity.

Operator

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

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Yes. Sorry about my technical problem earlier. I wanted to drill in a little bit on where do you see the greatest returns on investing new capital in growth? Would it be in Brazil? And if so, would it be to expand production capabilities or extending potash mine life or something on the end of being more productive in the country or would it be to invest in more distribution assets to expand your network throughout the country.

Joc O'Rourke -- President and Chief Executive Officer

Yeah. Well, thanks, Steve and we're glad we got you back. We were worried about you. So as we look at new capital and you asked what -- how we would prioritize it, I guess there's probably a couple of areas that I'd like to highlight.

We're not there yet, but we are coming close to where our MicroEssentials production capabilities are matched with our sales book. And so it won't be too long until we'll be looking at MicroEssentials expansion. And right now, we're asking ourselves a question, how and where do we expand MicroEssentials? Do you expand it in North America? And you still -- the growth is still in Brazil, but is it more efficient to expand it in North America or do you expand it in Brazil? So that question is being asked. Another area of -- we think growth opportunity and you mentioned it, is distribution in Brazil, whether that be organic or whether that be a purchase, we think there's good opportunity in Brazil.

It's a relatively lower capital -- lower cost, lower capital intensity. Though we see that as good, we've looked at a couple of opportunities to grow production in Brazil. And then the other one, I would say right now, we're extending our reserves in Florida. That might not increase our production, but it certainly extends the mine life and the quality of the product as we go forward.

So between MicroEssentials, reserves, extensions, we're not really looking at expanding potash as, I think, might have been the one you were asking. I just don't see that being required at this stage as we've just started Colonsay. So those are kind of the areas we're looking at, but they have to be high return, fairly quick payback. The one other one I just want to mention is there's -- I think there's a real opportunity investing in technology.

So our next-gen transformation work, we think is going to pay back really well. And I'd encourage any of you to come and see some of the work we're doing around automation because it's great. So new products, distribution, reserves and automation would be the kind of the summary.

Operator

Our next question comes from the line of Andrew Wong from RBC Capital Markets. Your line is open.

Andrew Wong -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my question. I just wanted to go back on fertilizer affordability and any impacts on fertilizer demand. And just looking at it from a different angle, if we do see any sort of reduction in application rates or anything like that, could you talk about what that might do to crop yields? And how -- what does that do to crop balance sheet projections going out into the next couple of years? Thanks.

Joc O'Rourke -- President and Chief Executive Officer

Yeah. I'm not sure I didn't quite catch the last piece of that, Andrew. Do you want to just maybe repeat the last piece of that about...

Andrew Wong -- RBC Capital Markets -- Analyst

Yes. I just want to understand like if we do see a reduction in application rates because that's what people are concerned about today, what could that do to your crop balance sheet projections and crop yields and what would that mean for crop pricing going forward?

Joc O'Rourke -- President and Chief Executive Officer

Yeah. So let me start by saying today, affordability is OK. I think we all are kind of on the same page there. And I think the big question for most is, well, what happens if affordability gets to a point where people start rationing fertilizers.

And I could easily see where marginal crop land, particularly here in the U.S. or something, may not get planted or whatever. But what I would expect to have happened in that case? I mean, today, we're looking at under 16% carryout for foreign. So stock-to-use ratio of under 16%, which is down to, what, a month? And so if you're looking at a month of supply, any kind of disruption or anything is going to cause a run-up in the price of corn or soybeans or whatever it is.

And so you look around the world right now, palm oil prices more than doubled. Corn prices are sitting in the $5.50 range or something like that. Bean prices are good. So -- and the availability of all of them is low.

So it's kind of a precarious spot for crops. So if people do plant less and that gets even tighter, I would expect you could start seeing price spikes. Likewise, if they plant more, the price may moderate, but then to do that, they're going to have to use more fertilizers. So in either case, I don't see a huge downside going forward from an affordability perspective because to get good yields, you need the fertilizer and we need the crops.

So you put the two together and you say, one of two things has got to happen. You've either got to use a lot of fertilizer on a few acres or you've got to plant a lot of acres. In either case, we should be in pretty good shape going forward.

Operator

Our next question comes from the line of PJ Juvekar from Citi. Your line is open. Hello, PJ Juvekar from Citi, your line is open. [Operator instructions] Our next question comes from the line of Ben Isaacson from Scotiabank.

Your line is open.

Ben Isaacson -- Scotiabank -- Analyst

Thank you very much and good morning, Joc. There's been so much excitement about DAP and MAP that we haven't talked about MicroEssentials or your value-added phosphate or performance products in quite some time. You did mention that a little bit. I was hoping you could dig in a little bit and talk about how is market share in the U.S.

and Brazil? Are you seeing end users downgrade to lower-quality commodity phosphates? And can you talk about the -- I believe the patents come off in 2021 and 2022. Can you talk about what that means for Mosaic? And are you working on new product development? Thank you.

Joc O'Rourke -- President and Chief Executive Officer

Yeah. Thanks, Ben. In terms of market share, I guess, right now, MicroEssentials is amounting to about 35% of all of the phosphate product we make. So it's definitely become a very big piece of our overall market.

In terms of market share, I guess, in the U.S., it probably be around 10%, 20%? So yes, so we're probably up to about 20% in the U.S., which would be about 2 million tons a year. And we're probably approaching 1.5 million tons in Brazil, so it's coming up to a similar size market, I guess, both of 15% and is still growing strong in Brazil. So in both cases, I think we're going to -- as I mentioned earlier, we're going to run up against production limitations before we run up against market limitations. In terms of the actual patent on it, I mean there's two aspects to that.

Yes, we are working on ways to adapt the product to extend the patent and whatnot. But what we're seeing is there's a lot of copycats, but nobody has been yet able to make a product that has the same agronomic benefits, that has the same quality and certainly has the same reputation of 10-plus years of good results. So, so far, it's been very successful, continues to be very successful. Nobody has really penetrated that market very much from us.

So we're very positive going forward. In terms of some of our other performance products, we continue to do market development, as we've talked about before. Our Aspire product is growing well. It seems to be quite successful and particularly in certain markets like Brazil and some of those markets, it has been quite successful.

And we're continuing to find opportunities to modify and work on potash and phosphate, our performance products that can really change the market.

Operator

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

Joc O'Rourke -- President and Chief Executive Officer

Well, I know you folks have all had a very busy morning of listening to fertilizer companies. So thank you very much for your participation. And let me end by saying, here at Mosaic, we've just completed a very strong quarter. And as I look forward, I see that momentum continuing through quarter 4 of 2021 and well into 2022.

Now clearly, strong fertilizer and agriculture markets are providing some pretty good tailwinds for us. But we're also realizing the bottom-line benefit of our own work and the long-term work we are doing to grow our business and to transform our cost structure. We expect to continue to build momentum as we finish the year and well into 2022, as I say and we will maintain our cost and capital discipline throughout. So with that, thank you for joining us and please have a great, safe day.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Paul Massoud -- Vice President, Investor Relations

Joc O'Rourke -- President and Chief Executive Officer

Joc ORourke -- President and Chief Executive Officer

Jenny Wang -- Vice President of Global Strategic Marketing

Clint Freeland -- Senior Vice President and Chief Financial Officer

John Roberts -- UBS -- Analyst

Chris Parkinson -- Mizuho Securities -- Analyst

Michael Piken -- Cleveland Research -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Joel Jackson -- BMO Capital Markets -- Analyst

Adrien Tamagno -- Berenberg Capital Markets -- Analyst

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Andrew Wong -- RBC Capital Markets -- Analyst

Ben Isaacson -- Scotiabank -- Analyst

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