##### 



Exhibit 99.2 (AGRIUM LOGO) 2004 Managements
Discussion & Analysis of the
Operations and Financial Condition




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis February 9, 2005 This managements discussion & analysis of operations and financial condition focuses on long-term
vision, strategy and growth opportunities, as well as historical performance for the three years
ended December 31, 2004. The discussion should be read in conjunction with the cautionary
statements regarding forward-looking statements on pages 36 to 37 of this managements discussion &
analysis and our 2004 consolidated financial statements and related notes. Dollar amounts refer to
United States (U.S.) dollars except where otherwise stated. Our quarterly and annual financial information and our Annual Information Form are available on
SEDAR (www.sedar.com).  Table of Contents for Managements Discussion & Analysis PageOverview of 2004
    
    3Our business
    
    4Our vision and strategy
    
    4Our industry
    
    5Our operations, products and services
    
    7Our key business sensitivities
    
    12Our business segment performance
    
    16Our consolidated performance
    
    24Our accounting policies
    
    32Forward-looking statements
    
    36Our outlook
    
    37Business risks
    
    39
  2




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis Overview of 2004 Consolidated financial performance in 2004 With strong market fundamentals and a significant increase in our overall production in 2004
over 2003, we achieved record net sales, gross margins and net earnings:  n
    Consolidated net sales grew by 14 percent to $2.8-billion in 2004 compared with $2.5-billion in 2003;n
    Consolidated gross profit was $910-million in 2004 compared with $739-million in 2003; and,n
    Consolidated net earnings grew to $276-million in 2004 compared with a net loss of $(21)-million in 2003. Financial discipline and strong balance sheet position We improved our financial position:  n
    2004 results generated record cash flow from operations in the amount of $449-million;n
    Consolidated cash and cash equivalents were $425-million at December 31, 2004 compared to $200-million at
December 31, 2003; and,n
    Our ratio of debt-to-debt plus equity decreased from 47 percent at December 31, 2003 to 35 percent at
December 31, 2004. Tight supply/demand market fundamentals  n
    As we entered 2004, strong grain markets, good global
economic growth and the resulting tight nutrient supply and
demand conditions continued from 2003. Nutrient prices were
near historic highs in both the international and North
America markets.n
    From late January to early April 2004, shipping difficulties
in the Black Sea resulted in significant volatility in
international nitrogen prices. Domestic nitrogen, potash and
phosphate prices, however, remained relatively stable.n
    By late April 2004, with the planting season beginning in the
Northern Hemisphere and strong grain markets continuing,
international nitrogen prices bounced back close to historic
highs and other nutrient prices continued their ascent
higher.n
    In the second half of 2004, although there was some softening
of grain prices mainly due to record crop yields in the U.S.,
nutrient prices remained strong. The global nutrient supply
and demand balance remained tight due to strong demand in
regions such as Asia and South America, limited new capacity
additions and low producer inventories. Resolution of Alaskan nitrogen facility uncertainties We received an Arbitration Panel award for Unocal Oil Company of Californias (Unocal) failure
to deliver gas in accordance with the gas sales agreement for our Alaskan nitrogen facility. In
2004, we recorded $50-million ($30-million after tax or $0.21 diluted earnings per share) in
liquidated damages under this award. We also settled our long-standing dispute with Unocal over obligations, including Earn-out
obligations, under the Purchase and Sale Agreement (PSA), pursuant to which we acquired this
facility. A $36-million gain ($21-million after tax or $0.15 diluted earnings per share) was
recorded in the fourth quarter of 2004 as a result of the settlement.  3




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Agrium Inc. 2004 Managements Discussion & Analysis The settlement agreement
establishes a definitive gas supply obligation from Unocal to the
Kenai
facility until October 31, 2005. It is our expectation the Kenai facility will close in November
of 2005 unless we can obtain alternate economic gas supplies. Our business We are a major retailer of agricultural products and services in both North America and
Argentina and a leading global producer and wholesale marketer of nutrients for agricultural and
industrial markets. We believe that our North America and international wholesale distribution infrastructure and
retail operations will play an increasingly important role in our future as world trade of nitrogen
gradually increases in response to declining North America and European production. With this
belief, we are positioning ourselves for the future:  n
    We plan to further develop our already extensive North America
wholesale distribution and storage infrastructure, retail
operation and marketing expertise to enhance our ability to have
agricultural and industrial products in the right place at the
right time; and,n
    We plan to capitalize on our production expertise to successfully
expand our production in regions where low-cost raw materials are
available. Our vision and strategy We compete in the global agribusiness and we remain committed to our long-term vision of
becoming: A top tier globalcorporation providing diversified agricultural and industrial products
and servicesin a manner that maximizes growth in shareholder value The key implications of our vision are that:  n
    We do not view ourselves as just a commodity fertilizer company in which our products and services are not
differentiated; we look for opportunities in related fertilizer markets including those in the supply chain such as
distribution, retail and industrial applications;n
    To grow, we need to locate our nitrogen production facilities internationally, where low-cost production inputs are
available, and we need to build our distribution infrastructure to move product to key markets;n
    We will nurture our relationships with existing customers so we can grow with them. We plan to be the easiest company
to do business with; and,n
    We will strive to adhere to the highest standards of corporate governance in order to protect and grow shareholder
value. Our critical priorities for 2005 include:  n
    Aggressive pursuit of our growth strategy: ¡
    Our growth objectives include acquisition opportunities in the fertilizer supply chain; and,¡
    Incremental expansion in those areas of our business identified as growth
areas. Proposed growth areas include investment in offshore low-cost production
facilities, a potash expansion, our controlled release nitrogen product (ESN®) and a
Profertil urea debottlenecking project. n
    Continued improvement in our Environment, Health and Safety (EH&S) performance;n
    Limit controllable cost increases (including general and administrative costs) to one-half of the inflation rate,
excluding foreign exchange and one time initiative effects;n
    Deliver operational excellence through flexible plant operations in periods of high gas prices. This continued
emphasis on buy versus manufacture is in support of our continued evolution from a production driven to a market driven
organization; and,n
    Ongoing focus on corporate governance and, in particular, implementation of a sustainable process across our global
operations ensuring compliance with Section 404 of the Sarbanes-Oxley Act.  4




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Agrium Inc. 2004 Managements Discussion & Analysis To ensure we remain focused on our strategy, we have implemented performance management and
incentive programs requiring employees to set individual goals that are linked to corporate
strategies. These goals are supported by measurable Key Performance Indicators (KPIs), which are
monitored throughout the year. Incentives are based on the extent to which predetermined
thresholds for these KPIs, as well as corporate or divisional targets, are met or exceeded. In addition, senior management and certain other key employees, including our Chief Executive
Officer, receive part of their compensation by way of Performance Share Units that are tied to our
total shareholder return in relation to a group of 20 peer companies. Our industry Fertilizer prices are determined by a variety of demand and supply factors. Although global
demand for nutrients tends to grow at a relatively stable rate over time, it is impacted by such
factors as grain prices, farm income, weather and the rate of economic growth with the latter also
influencing industrial demand. However, significant changes to supply and trade levels often have
a larger impact on prices than total change in overall global demand. These supply changes result
from increases to global fertilizer production capacity, variances in world operating rates, and
significant changes to raw material costs or the impact of government policies. Demand
for nutrients Factors influencing the demand for our products and services include:  Grain and oilseeds
In the long-term, world nutrient and other crop input demand is driven by grain and
oilseeds supply and demand fundamentals. Grain includes wheat, rice and coarse grains, which
include corn and barley. Oilseeds include soybean, cottonseed, canola and palm oil. Grain and
oilseed fundamentals drive crop prices, which influence planting intentions, crop mix, farm
incomes and nutrient application rates. Approximately 80 percent to 85 percent of global
nitrogen, phosphate and potash demand is used for grain and oilseed production.Long-term grain demand is created by population growth and by rising living standards that
increase both the quantity of food consumed per capita and the quality (protein content) of food
consumed. Total grain consumption continues to grow, and global grain production has struggled
to keep up. The current 2004  2005 growing season is expected to be the first season since
1999  2000 that global grain production has met consumption.
 (GRAPH)
    Industrial-end uses
In addition to grain and oilseed fundamentals, industrial-end uses of nitrogen, phosphate
and potash also drive demand. Industrial applications account for approximately 12 percent to
20 percent of total nutrient consumption. Growth in industrial demand for nitrogen, phosphate
and potash is generally tied to overall economic growth.Industrial uses of nitrogen include explosives for the mining industry, resins and glues for the
forest products industry and animal feed supplement. A rapidly growing use for nitrogen is the
removal of greenhouse gas emissions from combustion engines and power plants. Industrial uses
of phosphate include animal feed, effluent treatment and fire retardant. Potash is used as an
animal feed supplement, an ice-melting agent and as a table salt substitute.  5




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Agrium Inc. 2004 Managements Discussion & Analysis Supply of nutrients The supply fundamentals of nitrogen, phosphate and potash commodities are more difficult to
predict than the long-term demand fundamentals. Supply is affected by changes to production
capacity as a result of plant closures, the start-up of new facilities and by changes to the
operating rates of existing facilities. It is also affected by government policies and local
market conditions affecting producers raw material costs, distribution costs and environmental
requirements. In potash, there have been no world-scale production facilities built in a number of years. The
surge in demand for potash over the last three years has been met by increased operating rates,
especially from the Saskatchewan and Former Soviet Union producers. During 2004, global potash
prices responded to the tight supply and demand market by reaching record high levels. In phosphate, increased production capacity in China has reduced their reliance on imported
phosphate products over the past three years, putting pressure on the key exporting regions,
including the U.S., to reduce operating rates. However, growth in demand in other regions, such as
Latin America, supported the market in 2004 and led to some price improvement. The largest market is nitrogen and typical growth in global nitrogen consumption suggests that
three to five world-scale facilities need to come into production each year. However, new plant
construction does not usually follow this pattern. Cyclically high nitrogen prices often lead to a
number of new facilities receiving approval and financing at the same time. Conversely, cyclically
low nitrogen prices discourage new plant construction. From 2002 to 2004, there were relatively
few new nitrogen facilities brought into production following the cyclical downturn in nitrogen
prices that began in 1997. In addition, there was a shift to sustained higher North American
natural gas prices during this period, accompanied by substantially higher gas price volatility.
This forced the permanent closure of a number of U.S. nitrogen facilities. Retail and distribution A number of developments in recent years have heightened the importance of the retail and
distribution component in our industrys supply chain. These include:  n
    The trend to greater North American reliance on imported nitrogen;n
    Larger volume and more efficient farm equipment that can put greater demands on the wholesale distribution and retail
system for spring seeding and nutrient application;n
    The increasing importance of environmental regulations in the transportation, storage, handling and application of
fertilizers and chemicals, and the need to meet these regulations efficiently;n
    The need to plan for and respond to government policies and legislation that affect the market. Consolidation of the retail and distribution business is occurring in North America. The trends
identified above are some of the factors that have contributed to this consolidation as businesses
make decisions about threats and opportunities.  6




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Agrium Inc. 2004 Managements Discussion & Analysis Our operations, products and services We manage and report our business through three operating segments and a fourth non-operating
segment for corporate and inter-segment eliminations. Each operating segment is further divided
into major product or revenue streams. The three operating segments are: Retail, North America
Wholesale and South America Wholesale. In 2004 we integrated our North and South America Retail segments into one Retail segment. Prior
periods have been restated for comparative purposes. The relative gross profit contributions of each operating segment in 2004 is illustrated in the
following graph: (PIE CHART) Retail operations  Our Retail operations in the U.S. conduct operations through our wholly owned subsidiaries,
Crop Production Services, Inc. (CPS) in the Midwest and Northeast and Western Farm Service, Inc.
(WFS) in the West. In Argentina, operations are conducted through our wholly owned subsidiary,
Agroservicios Pampeanos S.A. (ASP). Our Retail segment sells agricultural products and provides a variety of agronomic services to our
customers. As of December 31, 2004 these operations comprised 206 retail centres in the U.S. and
21 retail centres in Argentina. In February 2005 our Retail segment acquired 18 retail centres in
Chile, Argentina and Bolivia that are not reflected in Agriums Retail Locations map. We manage our Retail operations independently from our Wholesale operations. Our Retail operations
in North America and South America purchase approximately 33 percent of their fertilizer from our
Wholesale segments in, respectively, North America and South America. Purchases and sales of
products between our Retail segment and Wholesale segments are made on arms-length terms.
 (MAP)
    7




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Agrium Inc. 2004 Managements Discussion & Analysis The relative 2004 net sales contribution of each major product and service category in our Retail
segment is illustrated below: (PIE CHART)  Retail products and servicesOur Retail business has developed relationships with growers by differentiating its
products and services. We recognize that our existence is based on the success of our
customers. We must provide value to retain customer loyalty. A description of our products and
services follows.  Fertilizers
We offer a complete range of liquid and dry fertilizer products including nitrogen,
phosphate, potash and minor elements.Our crop advisors work with growers and recommend nutrient programs that are specific to the
crop and soil conditions. Soil tests determine the initial fertilization program and tissue
tests provide information to make in-season nutrient corrections.Based on the crop and soil test results, a blend of various commodity fertilizers is
prepared to deliver the exact amount of nutrients required to produce the desired yield.
The fertilizer may be applied over the ground (broadcast application), injected into the
soil (root-zone application) or applied as the plant is growing (foliar application). This
application may be by conventional methods or by using variable rate technology. Our value
to the grower is to increase yields, which equates to increased profits.Crop protection chemicals
The primary crop protection chemicals are herbicides, insecticides and fungicides. These
product categories address the major crop pests: herbicides for weed control, insecticides
for insect control and fungicides for plant diseases. Our experienced crop advisors must
consider application restrictions, days to harvest and future planting intentions before
recommending a chemical application. Company software assists in the evaluation of the
appropriate chemical treatments.Seed
In recent years, the most dramatic area of change has occurred in seed technology.
Genetically modified seed has changed chemical programs for the large-acre commodity crops
such as corn, soybeans, cotton, canola and, beginning this year, alfalfa. The technology
has almost reduced herbicide programs to one chemical, glyphosate. These large-acre crops
are generally grown in the Midwest U.S. Our Midwest facilities have radically changed their
business model to include seed sales as a primary activity. Almost two-thirds of our Retail
business occurs in California, Arizona and the Pacific Northwest, and business in these
regions is essentially unaffected by the seed technology.Until now, most of the seed genetics have addressed crop inputs, herbicides and
insecticides. Future innovations will address crop output traits. These new traits are
expected to increase crop prices for these special uses, resulting in even more input value
being shifted to seed.  8




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Agrium Inc. 2004 Managements Discussion & Analysis  The growing importance of seed sales accompanied by a decline in chemical sales has
presented special challenges. However, these developments can be positive to the
progressive retailer. Seed unit prices will continue to increase as the seed value
increases. Since this technology is patented, a new market has been created. In the past,
soybean seed was saved from the previous harvest. Now this patented seed must be purchased
every year. In addition, we are marketing seed under our own label. This unique seed
provides excellent value to the grower and enhanced returns to the retailer.  Other products and services Our Retail business also offers a full complement of services, including product
application, soil testing, tissue testing, crop input recommendations and follow-up yield
analysis.Net sales of our other products and services category primarily consist of application
services. These services include liquid and dry fertilizer application, fumigation, chemical
spraying and field listing. This application may be by conventional methods or by using
variable rate technology. Our own equipment applies the majority of the fertilizer and
chemicals we sell. This allows us to better control the quality and to improve the results
of our fertility and chemical crop protection programs.The soil and tissue tests may be processed by our Madera, California lab or by third-party
labs. Our Crop Monitoring Program (CMP) in the Western U.S. involves weekly tissue testing
to fine tune nutrient applications to be consistent with changing plant requirements.  Weather can significantly disrupt or delay field agricultural operations, which may result
in reduced or delayed crop input applications. Our extensive fleet of well-maintained
application and transportation equipment allows us to address a variety of application
challenges. Our large number of facilities also allows for the timely transfer of equipment
to season-shortened markets.The geographic diversity of our retail locations and customers, the diversity of our retail
products and services and the crop diversity of our customers are important elements of our
Retail business strategy. These elements help to insulate us from both poor growing
conditions that may occur in any single area and poor economic conditions that may occur for
a particular crop.
 (SLIDE)
   Wholesale operations Our Wholesale operations in North America manufacture, market and distribute the three primary
nutrients: nitrogen, phosphate and potash, mainly to agricultural customers in North America,
Northeast Asia and Mexico and, to a lesser extent, industrial customers in North America. In South
America, we are the joint-owners of the Profertil nitrogen production facility with Repsol-YPF S.A.
that markets primarily to agricultural customers in Argentina.  Wholesale products
Our Wholesale operations product mix approximates global consumption patterns. Both our
potash sales and our product sales to industrial customers provide a base level of stable cash
flows and returns on a significant part of our business. This solid base of performance is
leveraged by our nitrogen and phosphate operations, which are more
cyclical, however they have
greater potential to contribute significant growth to our earnings and cash flow. Within our
markets, North and South America have complementary growing seasons that serve to reduce the
impact of seasonality on our consolidated earnings.  9




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Agrium Inc. 2004 Managements Discussion & Analysis  The relative 2004 net sales contribution of each major product category in our Wholesale
segments are illustrated below: (PIE CHART)  Nitrogen
We have the annual capacity to produce over seven million tonnes of nitrogen in liquid and
solid form from our
11 facilities in Canada, the U.S. and Argentina.  Our North American facilities, excluding our Kenai, Alaska facility, have an annual capacity to
produce approximately 4,867-thousand tonnes of nitrogen. Our Kenai facility has an annual
capacity to produce 1,740-thousand tonnes of nitrogen. The Profertil nitrogen facility in
Argentina has the annual capacity to produce 1,170-thousand tonnes of nitrogen, which includes
our 50 percent share and our joint venture partners 50 percent share.Our primary nitrogen markets are located in the U.S., Western Canada, Argentina, Mexico, Brazil
and South Korea. The key to serving these markets efficiently is our well-established
distribution and storage infrastructure comprised of a network of owned, leased and third party
storage facilities and our transportation arrangements.
 (MAP)
    The location of our Profertil facility makes it particularly well suited to supplying Brazil,
one of the largest and fastest growing agricultural economies in the world.Natural gas is the primary raw material used in the production of nitrogen-based fertilizer.
Almost 89 percent of our North American gas requirement is used in the production of ammonia,
the building block of all nitrogen-based fertilizer. With each facility operating at full
capacity, total natural gas consumption by Agriums nitrogen operations is approximately as
follows: North American nitrogen facilities, excluding Kenai, Alaska
    
    270,000 MMBtu/dayKenai, Alaska facility
    
    155,000 MMBtu/dayProfertil, Argentina facility(1)
    
    90,000 MMBtu/day
 (1)
    Includes our 50 percent share and our joint venture partners 50 percent share  Agriums natural gas requirement for its North America nitrogen operations, excluding the
Alaskan facility, is purchased from a number of suppliers under contracts that contain mainly
one-year terms, with nominal longer-term contracts in place with major suppliers. Natural gas
prices under these contracts are generally market indexed with some hedging employed to reduce
the impact of the volatility of gas prices. Small amounts of spot market gas are used to meet
peak requirements. Our advantage in our North America Wholesale segment, excluding the Alaskan
facility, is due to lower cost of gas in western Canada, our primary production area,
representing the transportation differential between the U.S. and Alberta (referred to as the
AECO basis).  10




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Agrium Inc. 2004 Managements Discussion & Analysis  The natural gas requirement for the Alaskan facility is purchased under a low-cost supply
agreement with Unocal. As a result of our settlement agreement with Unocal, which terminates
our low-cost gas supply after October 2005, we anticipate closure of this facility in November
2005 unless we can obtain alternative sources of economic gas.The natural gas requirement for the Profertil facility is purchased largely under four firm U.S.
dollar denominated contracts wherein two contracts expire in 2012, one contract expires in 2013
and one contract expires in 2017.For further discussion of the gas costs by operating segment, see page 15 of this managements
discussion & analysis.  PhosphateOur two phosphate facilities in Redwater, Alberta and Conda, Idaho have a combined annual
capacity of approximately 1,324-thousand tonnes. We are the only producer of phosphate in Western
Canada.Our primary phosphate markets are in Western Canada and Northwest U.S. Our facilities supply
regional markets close to our operations. We have a delivered cost advantage in these markets
relative to the export-oriented producers in central Florida due to transportation and
logistical factors.Phosphate rock, sulphur, sulphuric acid and ammonia are the principal raw materials in the
manufacture of phosphate. Price and supply aspects of phosphate rock, sulphur and sulphuric
acid are as follows:
 (MAP)
    Phosphate rock Our two phosphate facilities are supplied with phosphate rock ore from mines that we own and
operate and together require approximately four million tonnes of rock ore annually in the
production of phosphate.It is expected that our Ontario phosphate rock mine reserves are sufficient to satisfy the
Alberta phosphate facilitys phosphate rock requirements for approximately 17 more years
based on current production capacity. It is expected that our Idaho phosphate rock mine
reserves, including only permitted reserves, supplying our Idaho phosphate facility will
continue to supply that facilitys requirements for approximately 13 more years based on
current production capacity. There are an additional 15 years of reserves in close
geographic proximity to our existing mines in Idaho, which have a reasonable probability of
being brought into production. Our phosphate unit costs are not significantly affected by
changes in international ore prices because we own and operate the mines that supply the ore
to our facilities.  Sulphur and sulphuric acid Our Alberta facility consumes approximately 400,000 metric tonnes of sulphur annually in the
production of phosphate. The facility is supplied with low-cost sulphur from nearby oil
refineries, natural gas processing plants and the oil sands in northern Alberta. Our
sulphur sources are diversified with multiple suppliers, a variety of source locations and
both spot and long-term contracts. The excess quantities of sulphur available to us minimize
price volatility and provide a major cost advantage. The facilitys cost of sulphur in 2004
was approximately 17 percent of the Tampa, Florida sulphur index.Our Idaho phosphate facility uses, on an annual basis, approximately 360,000 long tons of
sulphur equivalent, which is 40 percent sulphur and 60 percent sulphuric acid. While the
cost of sulphur to our Idaho facility is higher priced than to our Alberta facility due to
the limited supply, it is lower than the cost to our Florida-based competitors. We also
maintain a diversified sulphur supply source for our Idaho facility with multiple suppliers
and both spot and long-term contracts. Our sulphur cost is offset by a low-cost sulphuric
acid supply contract that further helps the Idaho facilitys competitive position. The
facilitys blended average cost of sulphur equivalent in 2004 was approximately 27 percent
of the Tampa, Florida sulphur index.  11




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Agrium Inc. 2004 Managements Discussion & Analysis  Potash
Approximately 35 percent of the worlds potash requirements are produced in Saskatchewan,
Canada. Our potash mine and mill at Vanscoy, Saskatchewan has the capacity to produce
approximately 1,790-thousand tonnes of potash each year and is among the lowest-cost producers
in the world. Our potash facility is supplied by the adjacent potash mine, which we own and operate. It is
expected that the mine has sufficient ore reserves to satisfy the mill for well over 50 years
based on current production capacity.Our primary potash markets are in Southeast Asia, U.S., Brazil, China and Canada. Our potash is
marketed overseas by Canpotex Limited (Canpotex), an offshore marketing agency for Saskatchewan
potash producers and marketed in North America by our North America Wholesale segments
marketing team.
 (MAP)
   Our key business sensitivities Our business risks are discussed on pages 39 to 42 of this managements discussion & analysis.
Our financial results are sensitive to a number of factors that affect day-to-day operations. The
following table sets out the impact of changes in key measurable variables on our earnings and
diluted earnings per share based on levels of activity in 2004. These levels of activity may differ
in 2005 and future years, and the impact of one factor may compound or offset others. These
sensitivities should not, therefore, be used to forecast future results. Impact of change on:Amount of
    
    
    Net earnings
    
    
    
    Dilutedchange over a
    
    
    (millions of
    
    
    
    earnings perKey variable
    
    
    full year
    
    
    U.S. dollars)
    
    
    
    share (1)North AmericaWholesale selling prices:Ammonia
    
    
    U.S. $10/tonne
    
    
    $
    10
    
    
    
    $
    0.07Urea
    
    
    U.S. $10/tonne
    
    
    
    15
    
    
    
    
    0.10Other nitrogen
    
    
    U.S. $10/tonne
    
    
    
    7
    
    
    
    
    0.05Phosphate
    
    
    U.S. $10/tonne
    
    
    
    6
    
    
    
    
    0.04Potash
    
    
    U.S. $10/tonne
    
    
    
    12
    
    
    
    
    0.08Natural gas cost (2)
    
    
    U.S. $0.10/MMBtu
    
    
    
    7
    
    
    
    
    0.05Exchange rate from C$ to U.S. $ (3)
    
    
    C $0.01
    
    
    
    3
    
    
    
    
    0.02South AmericaWholesale selling prices:Nitrogen
    
    
    U.S. $10/tonne
    
    
    $
    4
    
    
    
    $
    0.03Exchange rate from Argentine Pesos to
U.S. $
    
    
    0.3 pesos
    
    
    
    1
    
    
    
    
    0.01(1) Based on 144-million shares outstanding at December 31, 2004.(2) Excludes Kenai, Alaska facility.(3) Excludes impact of Canadian dollar hedging activities.
  12




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Agrium Inc. 2004 Managements Discussion & Analysis Some of the factors that can affect these key variables are as follows:  Wholesale selling prices
Product prices are primarily determined by the international supply and demand balance.
Regional prices are linked to the international prices with a premium for transportation costs
from key exporting ports.In periods of strong crop prices, demand for nutrients may be unaffected even if fertilizer
prices increase substantially. This demand inelasticity results because the cost of fertilizers
is small relative to the total crop revenue per acre and nutrients can increase crop yields by
as much as 40 percent.Relevant published reference prices for our products are set out in the following table: Our product pricingRelevance ofProduct/Market
    
    
    Product Reference
    
    
    
    
    
    Reference Price toDestination
    
    
    Price
    
    
    Reference Price Graph 2002  2004
    
    
    AgriumNitrogen-based fertilizer /U.S. and Canada
    
    

n  Urea price
at U.S. Gulf Port
in New Orleans,
Louisiana (NOLA)
free on board (fob)
n  Western
Canada urea price
    
    


    
    

n  U.S. Gulf
port at New Orleans
is the primary port
of entry for urea
imported into North
American  NOLA urea
is a commonly used
reference price in
North America.
Western Canada and
U.S. Northern Tier
State urea prices
tend, over time, to
reflect the NOLA
price plus a
transportation
premiumn  Agriums
North American
sales of
nitrogen-based
fertilizers are
mainly referenced
to the Western
Canada and U.S.
Northern Tier State
urea priceNitrogen-based fertilizer/
International
    
    

n  Black Sea
urea prill* price
(*prill represents
a grade of urea)
    
    




    

n  Black Sea
urea prill price
represents the
reference price for
landed product into
Argentina and for
sales to Asia-based
customersn  Nitrogen-based
fertilizer sales
from our South
America operating
segment to
Argentina and
Brazil based
customers are based
on a basket of
international
reference prices,
including the Black
Sea urea prill
reference price,
plus a
transportation
premium
  13




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Agrium Inc. 2004 Managements Discussion & Analysis Our product pricingRelevance ofProduct/Market
    
    
    Product Reference
    
    
    
    
    
    Reference Price toDestination
    
    
    Price
    
    
    Reference Price Graph 2002 - 2004
    
    
    AgriumPhosphate
    
    
n  Central
Florida Diammonium
phosphate (DAP)
pricen  Pacific
Northwest
mono-ammonium
phosphate (MAP)
pricen  Western
Canada MAP price
    
    


    
    

n  The
majority of North
American phosphate
production is
located in Central
Floridan  Agrium MAP has a higher
percentage of
phosphate than DAPn  Central
Florida DAP,
Pacific Northwest
MAP and Western
Canada MAP prices
represent the
product reference
prices in North
American  Agriums
phosphate sales are
mainly in Western
Canada and the
Pacific Northwest
U.S. Prices are
based on the
Central Florida
reference price
plus a
transportation
premiumPotash
    
    

n  Saskatchewan potash
fob pricen  Cornbelt
potash price
    
    


    
    

n  Agriums
potash is produced
in Saskatchewan,
Canadan  Agriums
North American
potash sales are
largely based on
published reference
pricesn  Agriums
potash sales
outside of North
America are
determined by
Canpotex pursuant
to six month to
twelve month
contracts at
negotiated prices
or by spot sales
  14




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Natural gas costs
We consume almost 138-million MMBtus of natural gas in our North America facilities each
year (including our Kenai facility). At a price of $4.32 per MMBtu, this represents almost 84
percent of the total cost of producing a tonne of ammonia. The balance of our natural gas
consumption is for fuel gas at our other manufacturing facilities.The following table summarizes our gas costs for the North America Wholesale segment and
compares them to relevant market indicators. Due to the constraints on the supply of low-cost
gas to our Kenai facility in 2003 and 2004, there has been some ongoing erosion of this
advantage relative to our Kenai nitrogen production. The Kenai gas supply agreement will be
terminated in October 2005 as part of our settlement with Unocal. (U.S. dollars per MMBtu)
    
    
    2004
    
    
    2003
    
    
    2002NYMEX
    
    
    6.09
    
    
    5.44
    
    
    3.25AECO
    
    
    5.23
    
    
    4.74
    
    
    2.60North America WholesaleAverage  unhedged
    
    
    4.32
    
    
    3.79
    
    
    2.36Hedging impact
    
    
    -
    
    
    (0.09)
    
    
    0.28Overall weighted average
    
    
    4.32
    
    
    3.70
    
    
    2.64
  As indicated in the table on page 12, the effect of a change of $0.10 per MMBtu to the cost
of natural gas in North America would be to result in a change in net earnings of $7-million.
This assumes all other variables remain constant.We also have natural gas hedges that do not qualify for hedge accounting treatment and
consequently are excluded from our weighted average gas cost. We realized $3-million in gains
on these non-qualifying contracts in 2004 ($5-million loss in 2003; $5-million loss in 2002).Foreign exchange
The international currency of the agribusiness is the U.S. dollar, and accordingly we use
the U.S. dollar as our reporting currency. We conduct business in U.S. dollars, Canadian dollars
and Argentine pesos, and fluctuations in these currencies can impact our results. We manage our
U.S. denominated working capital in our Canadian self-sustaining subsidiaries to minimize the
impact of foreign exchange rate fluctuations on our consolidated results, and where appropriate,
we use derivative instruments to manage our foreign exchange exposure.The following table sets out the major types and levels of transactions in Canadian dollars and
Argentine pesos that can result in fluctuations in our financial statements due to changes in
exchange rates with the U.S. dollar: Currency/Transaction Type
    
    
    Converted to U.S.$ at:
    
    
    Foreign Exchange ImpactSelf Sustaining SubsidiariesCanadian dollar transactions
    
    
    Transaction rate
    
    
    Included in relevant income or expenseCanadian dollar assets and liabilities
    
    
    Period-end rate
    
    
    Cumulative Translation Adjustment (CTA)Canadian dollar foreign exchange on
U.S. dollar working capital in
Canadian self-sustaining subsidiaries
    
    
    Period-end rate
    
    
    Statement of operations  foreign exchange
  15




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis Currency/Transaction Type
    
    
    Converted to U.S.$ at:
    
    
    Foreign Exchange ImpactIntegrated SubsidiariesArgentine peso transactionsIncome and expenses
    
    
    Transaction rate
    
    
    Included in relevant income or expenseDepreciation and amortization
    
    
    Historic rate
    
    
    Depreciation and amortization expenseArgentine peso monetary assets and
liabilities
    
    
    Period-end rate
    
    
    Statement of operations  foreign exchangeArgentine peso non-monetary assets
and liabilities
    
    
    Historic rate
    
    
    No impact
  As indicated in the table on page 12 of this managements discussion & analysis, on a
consolidated basis, a $0.01 increase in the value of the Canadian dollar would have a negative
effect of $3-million on our net earnings while a 0.3 increase in the value of the Argentine peso
would have a negative effect of $1-million. Our business segment performance Retail In 2004, our Retail operation continued to demonstrate its importance to our overall strategy
of growth and stability of earnings, recording its sixth successive year of record net sales. The main elements of change in the year-over-year EBIT compared to 2003 and 2002 are summarized in
the following table: Year ended December 31
    
    
    Variance Analysis2004 v.
    
    
    2003 v.(millions of U.S. dollars)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002FertilizersNet sales
    
    
    556
    
    
    
    468
    
    
    
    419
    
    
    
    88
    
    
    
    49Cost of product
    
    
    425
    
    
    
    351
    
    
    
    296
    
    
    
    74
    
    
    
    55Gross profit
    
    
    131
    
    
    
    117
    
    
    
    123
    
    
    
    14
    
    
    
    (6
    )ChemicalsNet sales
    
    
    416
    
    
    
    416
    
    
    
    381
    
    
    
    -
    
    
    
    35Cost of product
    
    
    298
    
    
    
    297
    
    
    
    281
    
    
    
    1
    
    
    
    16Gross profit
    

    118



    119



    100

    
    
    (1
    )
    

    19Seed and other products and servicesNet sales
    
    
    142
    
    
    
    131
    
    
    
    129
    
    
    
    11
    
    
    
    2Cost of product
    
    
    75
    
    
    
    69
    
    
    
    66
    
    
    
    6
    
    
    
    3Gross profit
    

    67



    62



    63

    

    5

    
    
    (1
    )Total Gross profit
    

    316



    298



    286

    

    18

    

    12Selling expenses
    
    
    222
    
    
    
    214
    
    
    
    191
    
    
    
    8
    
    
    
    23General & administrative
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    -
    
    
    
    -Depreciation & amortization
    
    
    18
    
    
    
    19
    
    
    
    21
    
    
    
    (1
    )
    
    
    (2
    )Royalties & other expenses
    
    
    (13
    )
    
    
    (9
    )
    
    
    (11
    )
    
    
    (4
    )
    
    
    2EBIT
    

    81



    66



    77

    

    15

    
    
    (11
    )
  16




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Fertilizers
Fertilizer sales reached record levels in 2004 due to both price and volume increases. The
cost of product purchased, however, also increased significantly for reasons discussed under our
Wholesale business segment. We nevertheless substantially maintained our margins and reflected
most cost increases in our selling prices because of the strong demand that resulted from
increased grain prices and farm incomes.In the latter part of 2004, the U.S. Department of Agriculture (USDA) estimated that world
soybean and corn inventories would be above expectations mainly due to record U.S. harvests.
These moderated expectations for grain prices led to some erosion in grain prices. However,
with grain stocks as a percentage of use remaining low compared to historical levels, strong
farm incomes and significant nutrient uptake from the soil in 2004, we continue to expect strong
fertilizer demand in the spring of 2005.Crop protection chemicals
Chemical sales and gross profit in 2004 were largely consistent with 2003 and increased
over 2002. The insect and disease pressure in the California market that was experienced in
2003 subsided slightly in 2004. Demand for chemicals in 2003 and 2004 was also supported by
higher farm incomes, favorable growing conditions in our U.S. market and higher glyphosate
prices in the South America market.Seed and other products and services
Seed sales are a rapidly growing product line in our retail business. They were
$57-million in 2004, which represents a 14 percent increase from 2003. Seed sales in 2002 were
consistent with 2003 seed sales. This increase is due to the development of genetically
modified seeds. The input traits of these seeds reduce chemical costs and the output traits
improve crop value though enhanced product performance. Because the genetics in the seed are
patented, the grower cannot save seed at harvest to be planted the next year. This situation
resulted in a significant increase in seed sales, especially for soybean seeds.Other products and services include mainly application services. Application service revenues
remained relatively stable and were $42-million in 2004 (2003 
$45-million, 2002  $42-million).Expenses
Our Retail business is labor intensive, and, during times of peak activity, we employ
almost 2,500 full-time employees in our 206 North America retail centres and 21 South America
retail centres. Our selling expenses include salary and wages, employee medical insurance and
fuel for our service vehicles and equipment. These expenses tend to fluctuate with activity and
were therefore correspondingly higher than the two prior years. As a percentage of net sales,
however, 2004 selling expenses remained relatively consistent with 2003 and 2002 selling
expenses.Most other expenses in 2004 remained comparable to the previous two years. These include office
overhead, depreciation and amortization and equipment rental expenses.Key operating developments
At year-end 2004, we operated 206 retail centres in California and the Midwest, Northeast,
and Pacific Northwest regions of the U.S. This is consistent with 2003 and 19 fewer than in
2002. We continually evaluate the performance of each retail centre, and if performance is below
our expectations, we may consolidate, sell or close these outlets. We are also continuing to
acquire additional centres.  17




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis North America Wholesale 2004 was the most successful year for our North America Wholesale segment since 1996 as
measured by net sales and gross profit and the second highest EBIT on record since 1995. The main
elements of improvement in the year-over-year EBIT compared to 2003 and 2002 are summarized in the
following table: Year ended December 31
    
    
    Variance Analysis2004 v. 2003
    
    
    2003 v. 2002(millions of U.S dollars, thousands of tonnes)
    
    2004
    
    
    2003
    
    
    2002
    
    
    Change
    
    
    Price
    
    
    Volume
    
    
    Change
    
    
    Price
    
    
    VolumeNitrogenTonnes sold
    
    
    5,159
    
    
    
    5,156
    
    
    
    5,556
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (400
    )Net sales
    
    
    1,180
    
    
    
    1,044
    
    
    
    775
    
    
    
    136
    
    
    
    135
    
    
    
    1
    
    
    
    269
    
    
    
    325
    
    
    
    (56
    )Cost of product
    
    
    865
    
    
    
    790
    
    
    
    683
    
    
    
    75
    
    
    
    (75
    )
    
    
    -
    
    
    
    107
    
    
    
    (156
    )
    
    
    49Gross profit
    
    
    315
    
    
    
    254
    
    
    
    92
    
    
    
    61
    
    
    
    60
    
    
    
    1
    
    
    
    162
    
    
    
    169
    
    
    
    (7
    )Selling price per tonne
    
    
    229
    
    
    
    202
    
    
    
    139Cost of product per tonne
    
    
    168
    
    
    
    153
    
    
    
    123PhosphateTonnes sold
    
    
    1,181
    
    
    
    1,090
    
    
    
    1,129
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    (39
    )Net sales
    
    
    309
    
    
    
    261
    
    
    
    239
    
    
    
    48
    
    
    
    26
    
    
    
    22
    
    
    
    22
    
    
    
    30
    
    
    
    (8
    )Cost of product
    
    
    238
    
    
    
    217
    
    
    
    202
    
    
    
    21
    
    
    
    (3
    )
    
    
    (18
    )
    
    
    15
    
    
    
    (22
    )
    
    
    7Gross profit
    
    
    71
    
    
    
    44
    
    
    
    37
    
    
    
    27
    
    
    
    23
    
    
    
    4
    
    
    
    7
    
    
    
    8
    
    
    
    (1
    )Selling price per tonne
    
    
    262
    
    
    
    239
    
    
    
    212Cost of product per tonne
    
    
    202
    
    
    
    199
    
    
    
    179PotashTonnes sold
    
    
    1,796
    
    
    
    1,662
    
    
    
    1,598
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    64Net sales
    
    
    214
    
    
    
    160
    
    
    
    158
    
    
    
    54
    
    
    
    40
    
    
    
    13
    
    
    
    2
    
    
    
    (4
    )
    
    
    6Cost of product
    
    
    108
    
    
    
    99
    
    
    
    91
    
    
    
    9
    
    
    
    -
    
    
    
    (8
    )
    
    
    8
    
    
    
    (4
    )
    
    
    (4
    )Gross profit
    
    
    106
    
    
    
    61
    
    
    
    67
    
    
    
    45
    
    
    
    40
    
    
    
    5
    
    
    
    (6
    )
    
    
    (8
    )
    
    
    2Selling price per tonne
    
    
    119
    
    
    
    96
    
    
    
    99Cost of product per tonne
    
    
    60
    
    
    
    60
    
    
    
    57Total Gross profit
    
    
    492
    
    
    
    359
    
    
    
    196
    
    
    
    133
    
    
    
    123
    
    
    
    10
    
    
    
    163
    
    
    
    169
    
    
    
    (6
    )Selling expenses
    
    
    17
    
    
    
    15
    
    
    
    13
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2General & administrative
    
    
    22
    
    
    
    20
    
    
    
    11
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    9Depreciation & amortization
    
    
    116
    
    
    
    99
    
    
    
    102
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Royalties & other expenses
    
    
    74
    
    
    
    39
    
    
    
    30
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    9Asset impairment
    
    
    -
    
    
    
    235
    
    
    
    -
    
    
    
    (235
    )
    
    
    
    
    
    
    
    
    
    
    235Kenai award and settlement
    
    
    (86
    )
    
    
    -
    
    
    
    -
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    -EBIT
    
    
    349
    
    
    
    (49
    )
    
    
    40
    
    
    
    398
    
    
    
    
    
    
    
    
    
    
    
    (89
    )
  Nitrogen gross profitPrices
Except for volatility in international nitrogen prices in the first quarter of 2004 largely due
to temporary shipping problems, international and domestic nitrogen prices increased
significantly throughout the year mainly due to good economic growth and strong demand from
regions such as South America and Asia. Although there were no significant supply restrictions
in 2004, supply could not keep pace with this strong demand.We were able to be particularly responsive to peak regional demand conditions due to our
marketing and distribution infrastructure. As a result, our net sales price during 2004
averaged $229 per tonne compared to $202 per tonne in 2003 and $139 per tonne in 2002. In
Canada, demand was negatively affected by early winter conditions that impacted crop harvest
progress throughout the fall and limited the fall fertilizer application season. Below normal
fall application rates, however, traditionally benefit the following spring application season.  Sales volumes
With strong demand and pricing, we operated our production facilities at higher operating rates
overall in 2004 as illustrated in the table below. Sales volumes in 2004 were similar to
volumes in 2003 and lower than in 2002 due to early winter conditions in the fall of 2004. In
the prior two years certain facilities were operated at less than capacity due to high gas costs
and weaker demand.  18




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis Nitrogen Production and Sales Volumes (in thousands of tonnes)2004
    (1)
    
    2003
    
    
    2002Annual Capacity(2)
    
    
    6,607
    
    
    
    6,607
    
    
    
    6,607Production Volumes
    
    
    5,360
    
    
    
    4,827
    
    
    
    5,286Sales Volumes
    
    
    5,159
    
    
    
    5,156
    
    
    
    5,556(1)
    Effective November 2005, contributions from the Kenai facility will cease as we expect to close the facility. In 2004, annual capacity
of the facility was 1,740-thousand tonnes, production volumes were 1,169-thousand tonnes and sales volumes were 1,162-thousand tonnes.(2)
    We have an additional 300-thousand tonnes of ammonium sulphate capacity and 27-thousand tonnes of micronutrient capacity.
  Unit costs
Unit production costs for nitrogen for 2004 averaged $172 per tonne, compared to $154 per tonne
in 2003 and $105 per tonne in 2002. Key factors behind this increase in costs over the
three-year period include the following: n
    Natural gas accounts for almost 84 percent of the cash cost of producing ammonia. The
overall weighted average cost of natural gas supplied to our facilities in North America
has increased from $2.64 per MMBtu in 2002 to $3.70 per MMBtu in 2003 and $4.32 per MMBtu
in 2004. While our natural gas costs increased, compared to prevailing average natural gas
costs per MMBtu on the NYMEX of $3.25 in 2002, $5.44 in 2003 and $6.09 in 2004, we have a
significant cost advantage compared to other North American producers; and,n
    Approximately 71 percent of our nitrogen production capacity is located in Canada, and,
other than natural gas, which is referenced to U.S. dollars, costs at these plants are
denominated in Canadian dollars. Compared to the U.S. dollar, the Canadian dollar has
strengthened from an average of C$0.64 in 2002 to C$0.71 in 2003 and to C$0.77 in 2004
resulting in substantial cost increases in U.S. dollar terms.  One of our main focuses is cost control, and aside from the two key factors described above and
the impact of changes in production volumes, our controllable costs remained steady.Nitrogen key operating developments
In 2005, we announced plans to proceed with detailed engineering for a proposed expansion
of production for our process-patented controlled release urea fertilizer product
Environmentally Smart Nitrogen (ESN®) from 30-thousand tonnes to 150-thousand tonnes annually,
at our Carseland, Alberta nitrogen facility.Phosphate gross profitPrices
In the first half of 2004, strong export demand led to higher international prices. The
hurricanes in Florida disrupted Florida phosphate production in the second half of 2004, which
led to lower U.S. production and inventories and supported prices. Higher prices also resulted
from the significantly higher production costs in 2004. Both ammonia and sulphur input costs
rose substantially for most global phosphate producers. Our realized prices for the year
averaged $262 per tonne compared to $239 per tonne in 2003 and $212 per tonne in 2002.Sales volumes
Both our Alberta phosphate operation and our Ontario phosphate rock mine achieved monthly
production records in 2004, and overall, together with our Idaho facility, our phosphate
facilities operated at 95 percent of capacity compared to 85 percent in 2003 and 89 percent in
2002. As a result of this additional production and strong demand, we increased sales volumes to
1,181-thousand tonnes compared to 1,090-thousand tonnes in 2003 and
1,129-thousand tonnes in 2002.Unit costs
Similar to nitrogen, unit costs increased from $170 per tonne in 2002 to $195 per tonne in 2003
and $199 per tonne in 2004. The main reason for this was the increase in the cost of ammonia,
described previously under Nitrogen gross profit, which is one of the key inputs in the
manufacture of our phosphate product, MAP. The strengthening of the Canadian dollar has also
impacted the costs at our Alberta phosphate facility and our Ontario phosphate rock mine.  19




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Phosphate key operating developments
In March of 2004, we concluded a transaction with Astaris Production LLC (Astaris), to
acquire certain Astaris assets located at our Idaho phosphate operation. As part of this
agreement, we acquired Astaris equipment at our site together with various mining assets and
phosphate rock reserves in Southeast Idaho. This acquisition extended the life of our phosphate
rock supply to the plant from six years to an estimated 13 years.In August 2004, our Alberta phosphate facility received regulatory approval for the extension of
its existing gypsum storage area. This approval contained some conditions, which we expect to
meet but should allow for continued operation of the facility and ensure a continuing and
reliable supply of phosphate products to growers in Western Canada.Potash gross profitPrices
Strong global potash demand resulted in significant price increases in 2004. Despite increased
ocean freight rates relating to our international sales, our average realized price increased
from $99 per tonne in 2002 and $96 per tonne in 2003 to $119 per tonne in 2004.Approximately 33 percent of our potash sales are marketed internationally through Canpotex.
Our international sales through Canpotex in 2004 were 65 percent higher than 2003
and 78 percent higher than 2002. Our sales in North America in 2004 were 22 percent higher than
2003 and 21 percent higher than 2002.Sales volumes
The operating rate at our potash facility of 103 percent in 2004 was comparable to 2003 and 2002
and the production volume in 2004 of 1,698-thousand tonnes did not vary significantly from the
prior two years. The increase in sales volumes to 1,796-thousand tonnes in 2004 from
1,662-thousand tonnes in 2003 and 1,598-thousand tonnes in 2002 was supported by approximately a
50 percent reduction in the volume of potash inventory at December 31, 2004 over year-end 2003.Unit Costs
Unit costs increased from $33 per tonne in 2002 to $38 per tonne in 2003 and $41 per tonne in
2004. Potash production costs are mainly Canadian dollar denominated and the strengthening of
the Canadian dollar against the U.S. dollar was the major contributor to increased production
costs.Expenses
Selling, general and administrative expenses have increased in both 2004 and 2003 compared
to 2002. This increase in both years was primarily a reflection of our improved financial
performance that translated into increased performance incentive payments to our employees.
Incentives were not paid in 2002, as our financial performance in that year did not meet the
incentive plan targets. Costs also increased due to the impact of strengthening Canadian dollar
on our Canadian dollar denominated expenses.Depreciation and amortization increased in 2004 by $17-million over 2003 and $14-million over
2002, primarily due to accelerated depreciation at our Kenai and Kennewick plants. Kenai will
be fully depreciated by November 2005 at which time our depreciation charges are expected to
decrease significantly.Royalties and profit taxes were $22-million in 2004 compared to $11-million in 2003 and
$13-million in 2002.
The increase in 2004 was largely related to the higher province of Saskatchewan potash resource
taxes on increased potash margins.  20




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Other expenses comprise both recurring and non-recurring items. The level of expenses will vary
year-over-year due to the dollar amount of recurring items and the number of one time
non-recurring items. Other expenses were $52-million in 2004 compared to $28-million in 2003
and $17-million in 2002. Generally, other expenses increased in 2004 and 2003 over 2002 due to
increased costs associated with our dispute with Unocal. In 2004, significant other expenses
included: n
    Earn-out costs and additional litigation costs relating to our dispute with Unocal over
our Kenai facility. Prior to 2004 Earn-out costs were capitalized; and,n
    Foreign exchange losses related to the impact of the stronger Canadian dollar on
Canadian dollar denominated working capital.  As a result of our settlement of all Kenai related issues, we anticipate other expenses will
decrease in 2005 compared to 2004 by the amount of Earn-out and related interest expense
($34-million in 2004) and by the elimination of related litigation costs ($13-million in 2004).Special ItemsKenai asset impairment
In the fourth quarter of 2003, we recorded an impairment of the Kenai facility of $235-million
($140-million after tax) due to reduced gas supplies.Kenai arbitration award and settlement
During 2004 an Arbitration Panel awarded us liquidated damages for Unocals non-delivery of gas
obligations under our gas supply agreement. Up to the end of 2004, we recorded $50-million in
liquidated damages.We settled our long-standing dispute with Unocal over obligations under the Purchase and Sale
Agreement (PSA) pursuant to which we acquired our Kenai, Alaskan nitrogen facility.The settlement agreement established a definitive gas supply obligation from Unocal to the Kenai
facility up until October 31, 2005. It is our expectation that we will close the Kenai facility
in November of 2005 unless we can obtain alternate economic gas supplies.In addition to resolution of gas supply issues, the key financial components of the agreement
were: n
    We received $47-million in recognition of early termination of the existing gas sales
agreement (which originally ran until June 2009), environmental claims and other
liabilities; and,n
    We paid $22-million in settlement of all contingent Earn-out obligations due to Unocal
under the PSA.  The net gain of $36-million ($21-million after tax or $0.15 diluted earnings per share),
recorded in the fourth quarter of 2004, was calculated as follows: Net cash received
    
    25-millionEarn-out
adjustment (2001  2004)
    
    81-millionAdjustment related to termination of gas supply
    
    (70-million)Net gain
    
    36-million
  This settlement is in addition to $50-million of liquidated damages recorded under the
Arbitration Panel award.  21




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis South America Wholesale 2004 has been another record year of production, net sales, gross profit and EBIT for
Profertil, our 50 percent owned Argentine nitrogen facility. A reconciliation of the change in
EBIT for our 50 percent share of Profertil is as follows: Year ended December 31
    
    Variance Analysis2004 v. 2003
    
    
    2003 v. 2002(millions of U.S. dollars, thousands of tonnes)
    
    2004
    
    
    2003
    
    
    2002
    
    
    Change
    
    
    Price
    
    
    Volume
    
    
    Change
    
    
    Price
    
    
    VolumeNitrogenTonnes sold
    
    
    614
    
    
    
    634
    
    
    
    517
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    117Net sales
    
    
    137
    
    
    
    111
    
    
    
    61
    
    
    
    26
    
    
    
    30
    
    
    
    (4
    )
    
    
    50
    
    
    
    36
    
    
    
    14Cost of product
    
    
    38
    
    
    
    31
    
    
    
    26
    
    
    
    7
    
    
    
    (8
    )
    
    
    1
    
    
    
    5
    
    
    
    1
    
    
    
    (6
    )Gross profit
    
    
    99
    
    
    
    80
    
    
    
    35
    
    
    
    19
    
    
    
    22
    
    
    
    (3
    )
    
    
    45
    
    
    
    37
    
    
    
    8Selling price per tonne
    
    
    223
    
    
    
    175
    
    
    
    118Cost of product per tonne
    
    
    62
    
    
    
    49
    
    
    
    50OtherTonnes sold
    
    
    20
    
    
    
    19
    
    
    
    14
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    5Net sales
    
    
    6
    
    
    
    5
    
    
    
    3
    
    
    
    1
    
    
    
    1
    
    
    
    -
    
    
    
    2
    
    
    
    1
    
    
    
    1Cost of product
    
    
    3
    
    
    
    3
    
    
    
    2
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1
    
    
    
    -
    
    
    
    (1
    )Gross profit
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    

-
    
    
    
    1
    
    
    
    1
    
    
    

-Selling price per tonne
    
    
    300
    
    
    
    263
    
    
    
    214Cost of product per tonne
    
    
    150
    
    
    
    158
    
    
    
    143Total Gross profit
    
    
    102
    
    
    
    82
    
    
    
    36
    
    
    
    20
    
    
    
    23
    
    

    
    (3
    )
    
    
    46
    
    
    
    38
    
    
    
    8Selling expenses
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    -General & administrative
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    -Depreciation & amortization
    
    
    15
    
    
    
    15
    
    
    
    18
    
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Royalties & other expenses
    
    
    -
    
    
    
    -
    
    
    
    16
    
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    (16
    )EBIT
    
    
    83
    
    
    
    63
    
    
    
    (2
    )
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    65
  Nitrogen
gross profitPrices
Our primary market for production from Profertil is Argentina, which accounts for 69 percent of
Profertils sales. This compares to 52 percent in 2003 and 46 percent in 2002.The price of our sales in Argentina is based on the concept of import parity wherein the price
is referenced to a basket of international reference prices and includes the cost of
transportation, storage and distribution. The average price of both
urea and ammonia fertilizer sales to our
customers in Argentina rose by approximately 19 percent in 2004. This increase reflects both
the stronger global nitrogen prices resulting from tight global supply and demand and the higher
international bulk freight rates experienced in 2004.International sales to Brazil and other South American countries accounted for approximately 29
percent of Profertils sales and were made at international
prices. Average prices for both urea and ammonia export sales rose by
approximately 25 percent and 75 percent, respectively in
2004 due to tight market fundamentals.Sales Volumes
Production levels at Profertil in 2003 and 2002 were constrained by mechanical problems with a
heat exchanger in the urea plant. Repairs were completed in the second quarter of 2003, and,
for the balance of 2003 and throughout 2004, the plant ran consistently above capacity.With the increase in production and strong demand factors, our 50 percent share of nitrogen
sales volumes rose from 517-thousand tonnes in 2002 to 634-thousand tonnes in 2003 and
614-thousand tonnes in 2004. The slight decline in sales volumes from 2003 to 2004 resulted
from lower export sales and resulted in higher year-end inventory volume.  22




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Unit Costs
The average nitrogen cost of product sold per tonne was $62 in 2004 compared to $49 in 2003 and
$50 in 2002, reflecting the impact of higher natural gas costs in 2004, which more than offset
the favorable impact of higher production volumes on the fixed cost base.Expenses
Selling, general and administrative costs, which are denominated in Argentine pesos, have
remained relatively stable with minimal foreign exchange impacts over the three years ending
December 31, 2004.Plant, property and equipment and the underlying depreciation and amortization charges are
translated into U.S. dollars at historic rates. As a result, these charges are not affected by
foreign exchange and have also remained relatively unchanged for the three-year period under
review.Key operating developments
The Argentine government is extending an investigation that began in 2002 into competition
practices in the domestic urea market. The initial investigation found no uncompetitive
practices in the urea market during the period under study. Given that Argentine retailers and
farmers continue to be able to access products at international prices, we anticipate future
reviews will reach similar conclusions. Other Our Other business segment is a non-operating segment that comprises Corporate and
Administrative functions supporting our operating segments, as well as financing, strategic and
business development relating to the evaluation of new opportunities. This segment is also used for the elimination of inter-segment transactions so that the operating
segments can be evaluated and managed on a stand-alone basis with all transactions reflected at an
arms-length amount of consideration. The main eliminations relate to purchase and sale
transactions between our respective retail and wholesale segments and interest on inter-company
loans. Expenses affecting EBIT in our non-operating segment are comprised primarily of general and
administrative costs of our headquarters in Calgary, Alberta and corporate office in Denver,
Colorado and other expenses such as foreign exchange and business development costs. The change in
EBIT from $(51)-million in 2002 to $(59)-million in 2003 and $(46)-million in 2004 was due to a
number of offsetting factors: n
    General and administrative costs increased in 2004 and 2003,
primarily reflecting our improved financial performance that
translated into increased performance incentive payments to our
employees. Incentives were not paid in 2002, as our financial
performance in that year did not meet the incentive plan targets.
Since general and administrative costs are denominated in Canadian
dollars, the strengthening of the Canadian dollar in the last two
years also contributed to the increase;n
    The corporate administration costs attributable to the evaluation
and improvement of corporate governance programs and regulatory
compliance increased in 2004;n
    Business development costs increased in 2004 and 2003 over 2002.
Costs in 2004 largely related to the investigation of the
feasibility of potential opportunities in Egypt, and 2003 costs
primarily related to the investigation of the feasibility of
building a world-scale nitrogen production facility in Australia.
In the second quarter of 2004, we decided to delay indefinitely
the development of the Australian project; and,n
    The cost increases noted above were more than offset by the
increase in 2004 of foreign exchange gains on the translation of
U.S. dollar working capital in our Canadian parent company.  23




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis Our consolidated performance Results of operations The combination of the highest EBIT from all three operating segments in the last nine years,
declining interest charges, and lower effective tax rates resulted in net earnings of $276-million
or $1.91 diluted earnings per share, an increase of $297-million over 2003 and $276-million over
2002 net earnings. Our consolidated net earnings were strong, and our diluted earnings per share
of $1.91 was the highest on record. The following table of selected quarterly and annual information for the years ended December 31,
2004, 2003 and 2002 illustrates the seasonal nature of our business as discussed on pages 25 to 26
of this managements discussion & analysis. (millions of U.S. dollars, except per share amounts)Net
    
    
    Net Earnings (loss) perEarnings
    
    
    share:
    
    
    Total
    
    
    Cash & Cash
    
    
    Long-termNet Sales
    
    
    (loss)
    
    
    Basic
    
    
    Diluted
    
    
    Assets
    
    
    Equivalents
    
    
    Liabilities2004Q1
    
    
    435
    
    
    
    12
    
    
    
    0.07
    
    
    
    0.07
    
    
    
    2,411
    
    
    
    202
    
    
    
    803Q2
    
    
    1,011
    
    
    
    75
    
    
    
    0.56
    
    
    
    0.52
    
    
    
    2,340
    
    
    
    196
    
    
    
    795Q3
    
    
    672
    
    
    
    87
    
    
    
    0.65
    
    
    
    0.60
    
    
    
    2,509
    
    
    
    299
    
    
    
    804Q4
    
    
    720
    
    
    
    102
    
    
    
    0.76
    
    
    
    0.71
    
    
    
    2,656
    
    
    
    425
    
    
    
    797Year
    
    
    2,838
    
    
    
    276
    
    
    
    2.04
    
    
    
    1.91
    
    
    
    2,656
    
    
    
    425
    
    
    
    7972003Q1
    
    
    372
    
    
    
    (6
    )
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    2,431
    
    
    
    136
    
    
    
    831Q2
    
    
    929
    
    
    
    69
    
    
    
    0.53
    
    
    
    0.47
    
    
    
    2,432
    
    
    
    152
    
    
    
    834Q3
    
    
    561
    
    
    
    25
    
    
    
    0.18
    
    
    
    0.17
    
    
    
    2,429
    
    
    
    171
    
    
    
    831Q4
    
    
    637
    
    
    
    (109
    )
    
    
    (0.89
    )
    
    
    (0.89
    )
    
    
    2,273
    
    
    
    200
    
    
    
    795Year
    
    
    2,499
    
    
    
    (21
    )
    
    
    (0.25
    )
    
    
    (0.25
    )
    
    
    2,273
    
    
    
    200
    
    
    
    7952002Q1
    
    
    318
    
    
    
    (36
    )
    
    
    (0.33
    )
    
    
    (0.33
    )
    
    
    2,387
    
    
    
    8
    
    
    
    923Q2
    
    
    792
    
    
    
    23
    
    
    
    0.16
    
    
    
    0.15
    
    
    
    2,267
    
    
    
    32
    
    
    
    926Q3
    
    
    466
    
    
    
    1
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    2,124
    
    
    
    21
    
    
    
    913Q4
    
    
    507
    
    
    
    12
    
    
    
    0.07
    
    
    
    0.07
    
    
    
    2,191
    
    
    
    109
    
    
    
    896Year
    
    
    2,083
    
    
    
    -
    
    
    
    (0.08
    )
    
    
    (0.08
    )
    
    
    2,191
    
    
    
    109
    
    
    
    896
 Significant items affecting the comparability of quarterly and annual earnings include the following: n
    Net earnings and net earnings per share in the third and fourth quarters of 2004 included income of $41-million and
$9-million respectively ($25-million after tax or $0.17 diluted earnings per share in the third
quarter and $5-million after tax or $ 0.04 diluted earnings per share in the fourth quarter) in
liquidated damages from an Arbitration Panel award relating to our Kenai facility;n
    Net earnings and net earnings per share for the fourth quarter of
2004 include a $36-million gain ($21-million after tax or $0.15
diluted earnings per share) on the settlement of all outstanding
legal claims relating to our Kenai facility; and,n
    Net earnings and net earnings per share for the fourth quarter of
2003 included a $235-million impairment charge against our Kenai
facility ($140-million after tax or $0.96 diluted earnings per
share).  24




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Income taxes
Our current and future income tax charge represents an effective overall tax rate of 33
percent in 2004.Excluding the Kenai asset impairment charge in 2003, the comparative effective tax rate would
have been 38 percent. The difference in the effective tax rates from 2002 through 2004 is due to changes
in the mix of earnings among tax jurisdictions. The deferred tax debit, which arose primarily
in our U.S. tax jurisdiction, was triggered largely by Kenai related items in both 2004 and
2003.While there have been no significant changes in statutory tax rates in any of the jurisdictions
in which we operate, the mix of earnings and tax allowances among tax jurisdictions, realization
of unrecognized tax assets and many other factors impact these rates. A full explanation of
year-to-year variances in these rates for the three years ended December 31, 2004 is provided in
note 5 to our consolidated financial statements.Interest expense
Interest expense has declined from $68-million in 2002 to $63-million in 2003 to
$55-million in 2004, reflecting reductions in our debt levels financed from improved cash
provided from operating activities and from reductions in capital expenditures.Cash provided by operating activities
Our results for 2004 generated a record $449-million in operating cash flow, resulting in
an increase in our cash balance from $200-million to $425-million.Record sales, the net settlement received from Unocal in the amount of $25-million and
liquidated damages awarded by the Arbitration Panel in the amount of $50-million all contributed
to the record cash flows from operating activities for 2004 of
$449-million (2003  $186-million; 2002  $224-million).The net non-cash working capital balance at year-end 2004 increased over December 31, 2003 and
2002. With the aging of accounts receivable at the end of 2004 remaining relatively stable,
accounts receivable increased over 2003 and 2002 mainly due to increased product prices and a
reduction in utilization of the accounts receivable securitization program. Inventory increased
at year-end 2004 primarily due to lower sales volumes and higher unit costs of ammonia in the
fourth quarter of 2004 than in the same period in 2003 and 2002. The decline in ammonia sales
volume resulted primarily from the late harvest and early winter conditions experienced in our
key market regions, which limited the application period. The increase in ammonia unit cost
resulted mainly from higher natural gas cost.Dividends and preferred securities charges
In 2004 we paid cash dividends on our common shares of $14-million, or 0.11 cents per
common share (2003  $14-million or 0.11 cents per common share; 2002  $14-million or 0.11
cents per common share).In 2004 we paid securities charges on our preferred
securities of $9-million (2003  $11-million, 2002  $11-million). Seasonality Historically, our agricultural sales have been concentrated in the spring and fall planting
seasons. This typically results in stronger earnings for the second and fourth quarters and weaker
results in the first and third quarters as illustrated in the quarterly information contained in
the table of consolidated results of operations on page 24 of this managements discussion &
analysis. In order to accommodate peak season demand we must produce and store inventory throughout the year,
and this is reflected in inventory levels, which tend to be highest in April and October
immediately prior to the peak application seasons. Key input costs such as natural gas may
fluctuate significantly between the time the product is manufactured and the time it is sold.
Inventory volumes are typically lowest in July and December after the planting seasons; however,
inventory levels will be impacted by peak season supply and demand fundamentals and weather
conditions. North America and South America have opposite spring and fall seasons.  25




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis Approximately 12 percent of our Wholesale net sales are comprised of nitrogen products that we
market to a wide variety of industrial customers. These industrial markets provide consistent,
year-round demand and partially mitigate the seasonal and cyclical nature of the agricultural
market. 2004 fourth quarter operating results  Net earningsAgriums fourth quarter consolidated net earnings were $102-million, up $211-million from
the $109-million net loss reported for the same quarter of 2003. Diluted earnings per share
were $0.71 compared to a loss of $0.89 for the same quarter last year, which included the
write-down of our Kenai facility. While earnings continue to benefit from the tight supply and
demand fertilizer fundamentals, our fourth quarter results were improved by the recognition of
liquidated damages in the quarter under the Arbitration Panel award and a $36-million gain
recognized from the settlement of litigation, both related to our Kenai, Alaska nitrogen
facility.The growth in quarterly net earnings is largely attributed to our Wholesale operations in both
North and South America, which have benefited from the tight supply and demand fertilizer
fundamentals.Cash provided by operating activities
Operating activities provided cash of $191-million in the fourth quarter of 2004 compared
to $70-million for the same quarter of 2003. The increase of $121-million is due to improved
earnings and the Kenai award and settlement.Business segment performanceRetail n
    In the fourth quarter of 2004, we integrated our North and South America Retail segments
into one Retail segment. The change was a reflection of organizational and operational
changes that aligned and integrated our South America Retail segment with North America
Retail.n
    Fourth quarter Retail EBIT was up $11-million over the same period last year. The
increase is attributable to both growth in fertilizer sales prices and volumes.n
    Lower expenses relative to liability claims and accounts receivable write-offs also
contributed to the EBIT increase.  North America Wholesale n
    Wholesale EBIT for the fourth quarter of 2004 was $140-million, up $313-million from a
negative EBIT of $173-million for the same period last year. Excluding Kenai related items
from both years, Wholesale EBIT for the fourth quarter was $95-million in 2004 and
$62-million in 2003.n
    Gross profit in the fourth quarter of 2004 was up by $41-million over the same quarter
last year, with increased margin per tonne in every product category. In the quarter,
potash experienced the largest increase in gross profit of $17-million, primarily due to
higher prices. The growth in potash earnings is a reflection of continued tight supply and
demand balance, both internationally and in North America. Phosphate gross margins were up
$11-million due to higher prices for MAP driven by higher ammonia prices. Total nitrogen
increase in gross profit of $13-million was largely attributed to a $21-million growth in
urea gross profit, a reflection of tight supply and demand fundamentals both
internationally and in North America. This was partially offset by a $13-million decrease
in ammonia gross profit comprised of lower demand due to poor weather conditions in North
America and increased cost of product attributable to higher gas costs.n
    Expenses (income) in the fourth quarter of 2004 include $45-million of Kenai related
income, comprised of liquidated damages from the Arbitration Panel award and a gain from
the settlement of litigation. The prior year fourth quarter includes a Kenai asset
impairment pre tax expense of $235-million. Excluding all Kenai related items from both
years, expenses for North America Wholesale were up by $8-million in the fourth quarter of
2004 compared to the same period of 2003, largely relating to Kenai Earn-out accrued prior
to our settlement with Unocal in December 2004.  26




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  South America Wholesale n
    South America Wholesale EBIT was $23-million and gross profit was $28-million for the
fourth quarter in 2004, up $7-million and $6-million respectively from the same period last
year. The increase is primarily attributable to higher urea international prices, which
impacted both domestic and export selling prices, consistent with tightened supply and
demand balance.  Other n
    EBIT for our Other non-operating business segment for the fourth quarter of 2004 was up
$5-million over the same period last year. The increase in EBIT is largely related to
foreign exchange gains on the translation of U.S. dollar working capital in our Canadian
parent company. Capital resources  Non-cash working capital
Our non-cash working capital levels are affected by numerous factors including: n
    Seasonality factors discussed on pages 25 to 26 of this managements discussion & analysis;n
    Demand for our products and services;n
    Selling prices of our products and services;n
    Raw material input and other costs; and,n
    Foreign exchange rates.  The interaction of these factors and the increasing activity in our South America Wholesale
business tended to smooth our quarterly net working capital requirement throughout 2004.  Capital expenditures 2004
    
    
    2003
    
    
    2002(millions of U.S. dollars)Sustaining capital
    
    
    69
    
    
    
    72
    
    
    
    50Investment capital
    
    
    13
    
    
    
    2
    
    
    
    1Kenai Earn-out
    
    
    -
    
    
    
    25
    
    
    
    182
    
    
    
    99
    
    
    
    52
  Capital expenditures for 2004 remained at modest levels as we evaluated several investment
opportunities potentially requiring significant investment. The slight decrease in 2004 from
2003 related primarily to discontinuing capitalization of the contingent purchase consideration
for the Kenai facility (the Earn-out).Sustaining capital is directed towards maintaining the safe and efficient operation of our
facilities as well as extending their useful lives. Investment capital typically includes new
opportunities, such as acquisitions, and significant expansion of existing operations. In recent
years, investment capital had been restricted in order to conserve cash and improve our
financial position, but having largely achieved these objectives, our focus is now on new
investment opportunities.We are planning for a $97-million sustaining capital program in 2005. The most significant
projects include: n
    Redwater and Conda phosphate operations gypsum stack extensions for approximately
$37-million. These projects will increase the available storage area for by-product gypsum
and will extend the life of the storage area at Redwater from two years to five years,
based on current production capacity, and extend the life of the storage area at Conda from
one year to 10 years, based on current production capacity;n
    North America Wholesale additional sustaining capital for plant sites totaling
$27-million. This is on-going sustaining capital to ensure the continued safe and
efficient operation of our facilities; and,n
    Retail sustaining capital of $16-million relates to numerous retail centre projects as
well as building and equipment costs.  27




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  We are planning for a $77-million investment capital program for 2005. The most significant projects include: n
    ESN 150 Project, which involves the construction of a new coating plant capable of
converting the production from one existing urea granulation train at Carseland
(150-thousand tonnes per year) to ESN® product. Total project costs of $45-million are
expected with approximately $39-million to be expended in 2005;n
    Vanscoy potash operation expansion to allow for an additional 260-thousand tonnes per
year of production capacity by 2007. Total project costs are estimated at $56-million with
$23-million to be expended in 2005 pending favorable resolution of tax issues with the
Government of Saskatchewan. The project is subject to final government approval and, if
approved, is anticipated to be complete by Q4 2006; and,n
    Profertil debottleneck project will increase annual urea production by 20 percent by
2007. Our share of this project is expected to cost $30-million with only $4-million to be
incurred in 2005. This project is budgeted subject to a favorable resolution to the
Government of Argentinas investigation of urea pricing and assurance that future pricing
in Argentina will be market-based and gas contracts will be negotiated.  To the extent that these projects proceed to construction, we expect to finance these projects
through existing cash balances and cash provided from operating activities. Liquidity Based on current projections, our liquid resources, together with expected future cash flows
provided from operating activities, are expected to be more than sufficient to meet our future
requirements and obligations discussed above. At December 31, 2004, these resources consisted of
the following: Currency
    
    U.S. DollarDenomination
    
    Equivalent(millions of U.S. dollars)Cash and short-term investments
    
    U.S. Dollars
    
    
    403Canadian Dollars
    
    
    18Argentine Pesos
    
    
    4Short-term bank lines
(unused)(1)
    
    U.S. Dollars
    
    
    464Argentine Pesos
    
    
    10Other non-cash working
capital(2)
    
    U.S. Dollars
    
    
    3591,258(1)     Unused amounts are net of letters of credit outstanding as at December 31, 2004(2)     As discussed on page 31 of this managements discussion & analysis, we have an asset
securitization program in place in the amount of $125-million
 Depending on the nature, timing and extent of any potential acquisitions or greenfield
development opportunities, we may consider other sources of financing. In January 2005, we issued a redemption notice pursuant to which we will redeem our $175-million,
eight percent redeemable preferred securities for cash on February 14, 2005. The redemption price
will equal the principal amount of the securities plus accrued and unpaid interest to the date of
redemption. As explained on page 35 of this 2004 managements discussion & analysis, these
preferred securities were reclassified to debt effective January 1, 2005. In connection with the
redemption, we will record a loss on extinguishment of debt in the first quarter of 2005 in the
amount of approximately $3-million, representing the unamortized portion of the debt issuance costs, net of tax. Earnings
will benefit in future periods by lower interest charges.  28




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Argentina repatriation conditions
Argentina has no current restrictions on currency transferability or convertibility.
Dividends are not subject to Argentine tax to the extent they are paid from retained earnings of
our Argentine subsidiary, ASP, and our Argentine joint venture, Profertil.In the event dividends are paid in excess of retained earnings, there would be a 10 percent
withholding tax levied in Argentina.Financing activities and financial position
One of our primary goals over the last three years had been to strengthen our financial
position. Improved operating conditions in all areas of our business as well as specific steps
we have taken have allowed us to achieve this goal and build a substantial cash reserve of
$425-million for growth opportunities and settling other obligations.In addition to scheduled repayments of our long-term debt instruments, we took the following
steps: n
    Entered into a $450-million three-year syndicated revolving unsecured credit facility
which replaced existing credit facilities expiring in 2004 totaling $281-million. In
addition to improved pricing and terms, the extended term and higher borrowing limits of
the new facility complements our growth strategy and provides us with increased liquidity
and flexibility for short-term borrowings; and,n
    Redeemed $50-million, six percent convertible redeemable preferred shares through the
issuance of 4.18 million common shares in January 2004.  At December 31, 2004 our debt-to-debt plus equity ratio was 35 percent down from 47 percent in
2003 and from 50 percent in 2002. Our market value debt-to-debt plus equity ratio was 21 percent at December
31, 2004.Financial covenants
Our credit facilities, debentures and senior notes require us to maintain certain financial
ratios and other covenants customary for these types of agreements.  Within our new $450-million bank credit facility, the principal financial covenants are: n
    funded debt to capital ratio of not more than 57.5 percent; and,n
    EBITDA to interest expense ratio of not less than 3.0  At December 31, 2004, our funded debt to capital ratio,
as defined in our bank credit facility agreement, was approximately 15 percent and our EBITDA to
interest ratio was approximately 11. There have been no changes during the year to the
covenants contained in the debenture and senior note agreements. At December 31, 2004, we were
in compliance with all of our covenants, and we believe that we will be in compliance with our
covenants in 2005 and the foreseeable future.Debt ratings As a result of the improved outlook for our industry in 2004, and the substantial
improvement in our liquidity, in April of 2004, Standard & Poors Ratings Services revised our
long-term outlook to BBB stable from BBB negative.On February 7, 2005, Moodys Investors Services revised our long-term outlook to Baa2 stable
from Baa2 negative.As at December 31, 2004, our debt instruments and preferred securities were rated by the
principal bond rating services as follows: Senior Unsecured Notesand Debentures
    
    Preferred SecuritiesMoodys Investors Services
    
    (Baa2)
    
    (Baa3)Dominion Bond Rating Service
    
    (BBB)
    
    (Pfd - 3Y)Standard & Poors Ratings Services
    
    (BBB)
    
    (BB+)
  29




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Outstanding shares and preferred securities
The number and outstanding principal amount of outstanding shares and preferred securities
as at January 31, 2005 are as follows: Number of Shares
    
    
    Principal Amount
    
    
    
    Market Trading Value(millions)
    
    
    (millions of U.S. dollars)
    
    
    
    (millions of U.S. dollars)Common shares
    
    
    132
    
    
    
    553
    
    
    
    
    2,133Eight percent non-convertible preferred securities (1)
    
    
    7
    
    
    
    175
    
    
    
    
    179(1)
Securities were reclassified to debt effective January 1, 2005
in accordance with Canadian GAAP and will be redeemed for cash on February 14, 2005
  Future cash requirements
Our existing obligations and commitments requiring future outlays of cash are comprised of the following: n
    Aggregate contractual obligations with legally binding terms;n
    Other obligations; including asset retirement obligations and environmental remediation
liabilities, where the extent, timing, or amount of the obligations may be determined by
some future event that cannot be determined with substantial accuracy;n
    Employee future benefit obligations;n
    Capital expenditure commitments;n
    Preferred securities charges up to redemption on February 14, 2005 and common share dividends; and,n
    General operating requirements including interest payments, income and other taxes
payable and peak seasonal working capital requirements. Obligations  Contractual obligations
As at December 31, 2004, our aggregate contractual obligations were comprised of the
following: Payment due by period:Less than
    
    
    One  three
    
    
    Four  five
    
    
    After five(millions of U.S. dollars)
    
    one year
    
    
    years
    
    
    years
    
    
    years
    
    
    TotalLong-term debt (a)
    
    
    60
    
    
    
    141
    
    
    
    30
    
    
    
    363
    
    
    
    594Operating leases (b)
    
    
    45
    
    
    
    62
    
    
    
    23
    
    
    
    15
    
    
    
    145Purchase obligations (c)(d)(e)(f)
    
    
    584
    
    
    
    171
    
    
    
    103
    
    
    
    127
    
    
    
    985Total
    
    
    689
    
    
    
    374
    
    
    
    156
    
    
    
    505
    
    
    
    1,724
  (a)
    
    Failure to maintain certain financial ratios and other covenants may trigger early
repayment provisions (See financial covenants on page 29 of this managements discussion &
analysis).(b)
    
    Includes short-term leases for railcars and distribution facilities in North America
Wholesale, vehicles and application equipment in North America Retail, and other computer
equipment leases.(c)
    
    Includes minimum commitments for North America natural gas based on prevailing NYMEX
forward prices at December 31, 2004. We commit to purchase a large percentage of our
production volume requirements for the next year at floating prices, and actual prices may
differ.(d)
    
    Liquid markets exist for the possible resale of North America Wholesale natural gas,
sulphuric acid and power purchased under the majority of these commitments, but gains or
losses could be incurred on resale.(e)
    
    Includes our 50 percent share of Profertils annual gas purchase commitments of
$249-million.(f)
    
    Purchase obligations exclude employee future benefits, for which employer contributions
are expected to be $6-million to $11-million in 2005.
  30




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis  Other long-term obligations
As at December 31, 2004, our other liabilities included balances related to asset
retirement obligations and environmental remediation liabilities and shutdown costs. Estimated
timing and amount of cash outflows associated with these liabilities are as follows: Payment due by period:Less than
    
    
    Six - 10
    
    
    11 - 15
    
    
    After 15(millions of U.S. dollars)
    
    six years
    
    
    years
    
    
    years
    
    
    years
    
    
    TotalAsset retirement obligations(1)
    
    
    26
    
    
    
    11
    
    
    
    55
    
    
    
    556
    
    
    
    648Environmental remediation
liabilities and shutdown costs
    
    
    78
    
    
    
    35
    
    
    
    11
    
    
    
    21
    
    
    
    145Total
    
    
    104
    
    
    
    46
    
    
    
    66
    
    
    
    577
    
    
    
    793(1)     Represents the undiscounted, inflation-adjusted estimated cash outflows required to settle the asset retirement obligations
in the amount of $52-million at December 31, 2004. See note 15 to our 2004 consolidated financial statements for further discussion of
asset retirement obligations.
 Off balance sheet financing arrangements  Asset securitization
Under our North American receivables securitization facility, certain of our U.S.
subsidiaries may sell up to $125-million of eligible accounts receivable on a non-recourse
basis. Fees and expenses paid to the financial institution are based on the accounts receivable
sold and prevailing commercial paper rates. The agreement expires in December 2007 and may be
terminated earlier by either party. Accounts receivable sold and fees and expenses paid under
this program are summarized in note 7 to our 2004 consolidated financial statements. Due to our
strong cash position, we did not utilize this securitization facility in 2004.The facility provides us with the flexibility to immediately realize cash for the sale of
receivables up to the amount of the program.Derivative instruments
We can enter into derivative financial contracts to help us manage volatility in natural
gas, foreign exchange rates and interest rates. A formalized hedging policy has been
implemented by our Hedging Committee, which operates under authorities and limits approved by
the Board of Directors.The authority and limits specify the percentage of Agriums natural gas requirements, currency
exposure and interest rates that may be hedged over specified time frames, acceptable
counter-parties and counter-party exposure limits based on credit ratings.Agriums accounting policy for derivative instruments and its derivative positions are described
in note 1 and note 21 to our 2004 consolidated financial statements.Related party transactions
We use Canpotex, a potash export and marketing company owned in equal shares by Agrium and
two other Saskatchewan potash producers, to market our potash overseas. Refer to note 24 to our
2004 consolidated financial statements for further information on transactions and balances with
Canpotex.  31




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis Our accounting policies Our financial statements and accounting policies are presented in accordance with Generally
Accepted Accounting Principles (GAAP) in Canada. A complete explanation of differences between
Canadian and U.S. GAAP is provided in note 25 to our 2004 consolidated financial statements, and a
full discussion of our significant accounting policies is provided in note 1 to our 2004
consolidated financial statements. Application of certain accounting policies requires us to make assessments as to the outcome of
future events that may have a material effect on current or future earnings. We make these
estimates based on technological assessment, the most recent information available to us as well as
considering historical trends. Changes in estimates that may have a material impact on our results
are discussed in the context of the underlying financial statement to which they relate. Critical accounting policies  We consider an accounting policy to be critical if:n
    It requires assumptions to be made that were uncertain at the time the estimate was made; and,n
    Changes in the estimate or different estimates that could have been selected could have a material
impact on our consolidated results of operations or financial condition. The following discussion presents information about our most critical accounting policies:  Plant, property and equipmentWe record plant, property and equipment at cost and include the cost of replacements and
betterments. In the event we construct a new production facility, cost is defined as
expenditures incurred up to the commencement of commercial production, and includes internal and
external costs of personnel, material and services as well as interest capitalized during
construction.There are two key areas requiring significant estimates in the application of our plant,
property and equipment policy. These are in the determination of possible impairment and the
estimating of the useful lives of assets.Impairment occurs when the carrying value of a long-lived asset exceeds both the cash flows it
is capable of generating, and its fair value. Fair value can be affected by a number of
factors such as new technology, market conditions for our products, availability of raw material
inputs and estimated service lives of the assets. We review the carrying value of our plant,
property and equipment on a regular basis, and where it exceeds fair value we consider the asset
to be impaired. If impairment has occurred, an impairment charge is recognized immediately.We depreciate our plant, property and equipment based on their estimated service lives, which
typically range from three to 25 years. We estimate initial service lives based on experience
and current technology. These estimates may be extended through sustaining capital programs or
by access to new supplies of raw materials. Factors affecting the fair value of our assets may
also affect the useful lives of our assets and these factors are constantly changing. We
therefore periodically review the estimated remaining lives of our facilities and adjust our
depreciation rates prospectively where appropriate.Asset retirement obligations and environmental remediationAsset retirement obligations are recognized in the period in which they are incurred if a
reasonable estimate of fair value can be determined. The obligation is measured at fair value
and is adjusted in subsequent periods through accretion expense. The associated asset retirement
costs are capitalized as part of the carrying amount of the related asset. As at December 31,
2004, the discounted carrying value of these obligations was $52-million, using discount rates
ranging from seven and one-half percent to eight percent.Environmental remediation liabilities relating to existing conditions caused by past operations
are expensed based on our best estimate of undiscounted future costs when remediation efforts
are probable, and the costs can reasonably be  32




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##### 



Agrium
Inc. 2004 Managements Discussion &
Analysis  estimated based on current law and existing technologies. As at December 31, 2004, accruals for
environmental remediation liabilities totaled $112-million.Estimating the cost of both asset retirement obligations and environmental remediation
liabilities requires extensive judgment about the nature and timing of work to be carried out in
view of present environmental laws and regulations and these estimates are subject to
considerable uncertainty. Changes in these estimates could have a material impact on our
results of operation and financial position.Management has discussed the development and selection of these critical accounting policies
with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the
disclosure presented above relating to these policies. Non-GAAP disclosure In addition to the primary measures of earnings and earnings per share in accordance with
GAAP, in this managements discussion & analysis, we also make reference to EBIT before special
items (earnings before interest expense, income taxes, and special items), EBIT (earnings before
interest expense and income taxes), and EBITDA (earnings before interest expense, income taxes,
depreciation, amortization and asset impairment). The components of these measures are calculated
in accordance with GAAP, but EBIT before special items, EBIT and EBITDA are not recognized measures
under GAAP, and our method of calculation may not be comparable with that of other companies.
Accordingly, EBIT before special items and EBIT should not be used as an alternative to net
earnings (loss) as determined in accordance with GAAP, and similarly, EBITDA should not be used as
an alternative to cash provided by (used in) operations. EBITDA is used extensively in our financing covenants and performance incentive programs, and we
consider them to be useful disclosure for this reason. In addition, business segments and income
tax jurisdictions are not synonymous, and we believe that the allocation of income taxes distorts
the historical comparability of the performance of our business segments. Similarly, financing and
related interest charges cannot be attributed to business segments on a meaningful basis that is
comparable to other companies.  33




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis The following is a reconciliation of these key non-GAAP measures to net earnings (loss) and net
earnings (loss) per share as calculated in accordance with GAAP: Wholesale(millions of U.S. dollars except per share amounts)
    
    
    
    
    
    North
    
    
    SouthRetail
    
    
    America
    
    
    America
    
    
    Other
    
    
    Consolidated
    
    
    Per share2004EBITDA
    
    
    99
    
    
    
    465
    
    
    
    98
    
    
    
    (39
    )
    
    
    623Less depreciation and amortization
    
    
    18
    
    
    
    116
    
    
    
    15
    
    
    
    7
    
    
    
    156Less special items:Kenai award and settlement
    
    
    -
    
    
    
    86
    
    
    
    -
    
    
    
    -
    
    
    
    86EBIT before special items
    
    
    81
    
    
    
    263
    
    
    
    83
    
    
    
    (46
    )
    
    
    381Plus special items:Kenai award and settlement
    
    
    -
    
    
    
    86
    
    
    
    -
    
    
    
    -
    
    
    
    86EBIT
    
    
    81
    
    
    
    349
    
    
    
    83
    
    
    
    (46
    )
    
    
    467Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (136
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    276
    
    
    
    2.042003EBITDA
    
    
    85
    
    
    
    285
    
    
    
    78
    
    
    
    (52
    )
    
    
    396Less depreciation and amortization
    
    
    19
    
    
    
    99
    
    
    
    15
    
    
    
    7
    
    
    
    140EBIT before special items
    
    
    66
    
    
    
    186
    
    
    
    63
    
    
    
    (59
    )
    
    
    256Less special items:Asset impairment
    
    
    -
    
    
    
    235
    
    
    
    -
    
    
    
    -
    
    
    
    235EBIT
    
    
    66
    
    
    
    (49
    )
    
    
    63
    
    
    
    (59
    )
    
    
    21Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (0.25
    )2002EBITDA
    
    
    98
    
    
    
    142
    
    
    
    16
    
    
    
    (44
    )
    
    
    212Less depreciation and amortization
    
    
    21
    
    
    
    102
    
    
    
    18
    
    
    
    7
    
    
    
    148EBIT
    
    
    77
    
    
    
    40
    
    
    
    (2
    )
    
    
    (51
    )
    
    
    64Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -
    
    
    
    (0.08
    )
  34




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis Accounting policy changes There were no accounting policy changes during 2004, however, the following policies were
adopted or modified during the two-year period ended December 31, 2004:  Stock-based compensationIn the fourth quarter of 2003 we began prospectively expensing the fair value of stock
options granted in 2003 and thereafter. In accordance with the prospective method of adoption,
no expense was recorded for options granted prior to 2003, but the pro-forma effect on prior
years is disclosed in note 18 to our 2004 consolidated financial statements.Asset retirement obligations

In the fourth quarter of 2003, we early-adopted the new Canadian GAAP standard for asset
retirement obligations. The change in accounting policy was recorded retroactively. Under this
standard, the fair value of anticipated asset retirement obligations is capitalized as part of
the carrying value of the asset and depreciated over its useful life. The net present value of
the corresponding liability is recognized immediately and accreted by a charge to earnings over
the useful life of the asset. The effect of this change is disclosed in note 2 to our 2004
consolidated financial statements. New accounting standards  Classification of liabilities and equityAs a result of continuing efforts to harmonize Canadian and U.S. GAAP, the Canadian
Institute of Chartered Accountants amended its standard on the disclosure of financial
instruments.Under the new provisions, we reclassified our eight percent preferred securities as debt
effective January 1, 2005. Upon adoption of the new provisions, dividends previously charged
directly to retained earnings, net of tax, will be reflected as interest expense in our
consolidated statement of earnings.The change will be applied retroactively as a change in accounting policy in our 2005 financial
statements. Retroactive application will require the restatement of both our six percent
preferred securities that were converted to common shares in the first quarter of 2004 as well
as our eight percent preferred securities that will be redeemed in February 2005. The
retroactive accounting application will cause a decrease in retained earnings of $5-million in
2004 and $4-million in 2003; an increase in other assets of $5-million in 2004 and $6-million in
2003; an increase in future income tax liability of $7-million in 2004 and $6-million in 2003;
an increase in other liabilities of $175-million in 2004 and $207-million in 2003; and a
decrease in net earnings of $10-million in 2004, $15-million in 2003 and $11-million in 2002.
There will be no impact on diluted earnings per share as a result of this change in accounting
policy.As discussed on page 28 of this managements discussion & analysis, in February 2005, we will be
redeeming our eight percent preferred securities. Accordingly, only interest expense accrued to
the date of redemption will be reflected in our 2005 consolidated statement of earnings.  35




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis Forward-looking statements Except for statements of historical fact, the statements in, or incorporated by reference in,
this managements discussion & analysis constitute forward-looking statements under applicable
securities legislation. These forward-looking statements include, but are not limited to,
references to:  n
    The amount and type of future capital expenditures and
capital resources;n
    Future cash requirements and long-term obligation;n
    Effects of the settlement with Unocal;n
    Business strategies and plans for implementing them;n
    Critical priorities for 2005;n
    Competitive strengths, goals, expansion and growth of our business and operations;n
    Innovations in seed crop outputs and future seed volumes, prices and sales;n
    Investigations by the Argentine government into competitive practices;n
    Risk mitigation activities;n
    Plans and references to our future results;n
    Disclosures made under the heading Our outlook on pages 37 to 38 of this managements discussion & analysis; and,n
    Industry fundamentals. These forward-looking statements are based on certain assumptions and analyses made by us in light
of our experience and perception of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate in the circumstances. However,
such forward-looking statements involve known and unknown risks and uncertainties, including those
referred to in this managements discussion & analysis, which may cause our actual results,
performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These risks include, but are
not limited to:  n
    General economic, market and business conditions, including: ¡
    
    Supply and demand for fertilizers, seed and crop protection chemicals;¡
    
    supply and demand for grain and other agricultural crops;¡
    
    changes in government agricultural, safety, environmental and other legislation and policies;¡
    
    fluctuations in foreign exchange rates, commodity, feedstock and nutrient
prices or other costs that cannot be recovered through nutrient price increases;¡
    
    actions by competitors and others including changes to industry capacity and utilization and product pricing;¡
    
    performance by customers, suppliers, personnel and counterparties to financial instruments; and,¡
    
    changes in capital markets.
  n
    Weather conditions and seasonal patterns.  n
    General operating risks associated with: ¡
    
    investment in foreign jurisdictions;¡
    
    the level and effectiveness of future capital expenditures and reliability of
performance of existing capital assets;¡
    
    ability to transport or deliver production to markets;¡
    
    present and discontinued mining operations;¡
    
    labour disruptions.
  n
    Strategic risks including: ¡
    
    our ability to implement our business strategy;¡
    
    results of our risk mitigation strategies, including hedging and insurance;¡
    
    uncertainty as to the feedstock reserves owned or otherwise available to us;¡
    
    our ability to integrate any assets we may acquire or the performance of those assets;¡
    
    the opportunities, or lack of opportunities, that may be presented to and pursued by us;¡
    
    technological changes; and,
  36




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##### 



Agrium
Inc. 2004 Managements Discussion & Analysis Other factors, many of which are beyond our control. Consequently, all of the forward-looking
statements made in or incorporated by reference in this managements discussion & analysis are
qualified by these cautionary statements, and there can be no assurance that the actual results or
developments anticipated by us will be realized or, even if substantially realized, that they will
have the expected consequences to, or effects on, us. We do not undertake any obligation to update forward-looking statements even if circumstances or
managements estimates or opinions should change. Investors should not place undue reliance on
forward-looking statements.  Our outlook  Grain supply and demand outlook The USDA is forecasting a nine percent (164-million tonnes) increase in global grain
production for the 2004  2005 crop season. This is the first time in the last five years that
production is expected to exceed consumption. However, global grain consumption growth remains
strong, and this is expected to limit the increase in ending grain stocks. A large global crop will be required again in the 2005  2006 crop season to keep pace with growing world demand. We anticipate crop prices in the spring of 2005 will be lower than in the spring of 2004 because of
the recent increase in global and U.S. grain and oilseed production. However, as global grain
stocks as a percentage of use remain low compared to historical levels, there should be some
improvement in grain prices from the lows experienced during the fall of 2004 and similar levels of
planted acres for 2005. The discovery of the Asian Rust disease in late 2004 in some U.S. soybean fields is expected to
have a negative impact on U.S. soybean acres in 2005 because of the threat of higher production
costs and lower yields. Asian Rust has been a common disease in soybean fields elsewhere in the
world but had not previously been detected in the U.S. The disease can be controlled through
fungicide treatment, but these additional costs may discourage some farmers from soybeans.
Increased fungicide treatment may be positive for U.S. retailers such as Agrium. If acres are
switched from soybeans, they are likely to move to corn and cotton, which is expected to have a
positive impact on the demand for nitrogen fertilizers. The U.S. farm economy remains robust with back-to-back years of record farm income in 2003 and
2004. Record yields in 2004 and government price support programs should lead to another strong US
farm income year for 2005, further supporting demand for agricultural inputs. The Canadian farm economy continues to be negatively impacted by the U.S. import restrictions of
Canadian cattle as well as weather related issues in Western Canada. However, the U.S.  Canada
border is slated to re-open in March 2005. A return to normal moisture conditions allowed for
above average crop production in 2004. However, early winter conditions negatively impacted crop
quality and delayed harvest progress throughout the fall. This should benefit the spring season of
2005 as fall nutrient application rates were below normal. In South America, the challenges of macro-economic reform remain, but unemployment and inflation
are continuing to improve, driven in part by the strong agricultural sector. The Argentine peso has
also stabilized against the U.S. dollar and we expect it to trade in a relatively narrow range for
2005. Global nutrient supply and demand outlook Despite some erosion in grain prices in the latter part of 2004, demand for agricultural
nutrients remains strong in many key regions of the world. Farmers in many countries are shielded
from lower global crop prices by government policies and programs. U.S. nutrient demand in 2005 is expected to remain similar to last year, as acreage for the major
crops should be largely unchanged. Application rates should be supported in 2005 by strong farm
incomes and significant nutrient uptake from the  37




---



##### 



Agrium
Inc. 2004 Managements Discussion & Analysis soil in 2004. The growth rate in nutrient demand in some parts of the world may be impacted by the
lower soybean and corn prices, particularly in countries like Brazil. However, this may only be
noticeable in the latter half of the year and if Northern Hemisphere crops produce another bumper
crop next year. Furthermore, world corn prices may start to improve in the spring of 2005 compared
to their post harvest lows of 2004. Growth in global industrial demand for nitrogen, phosphate and potash is also expected remain
strong as the world economies continue to grow.  NitrogenWe expect the global nitrogen supply and demand balance to remain tight throughout 2005.
No new dedicated ammonia facilities are scheduled to come on stream until late 2005 or early
2006, however production from a new Oman ammonia-urea facility may negatively impact the ammonia
market as the ammonia plant is brought into production in advance of the urea plant.
International ammonia prices were also at record levels in 2004 in a market that is more thinly
traded than urea.We anticipate a net increase in urea production capacity of 2.4-million tonnes for 2005, but we
are also forecasting an increase in demand of 2.9-million tonnes. China announced the removal
of the 11 percent VAT rebate on urea exports and imposed the equivalent of a $31.50 per tonne
tax on Chinese exports, effective January 1, 2005. This should be a positive development for
international urea prices.In North America and Europe, continuing high natural gas prices may limit the ability of some
producers to compete with lower-cost production from other areas with access to low-cost natural
gas.PhosphateGlobal phosphate demand growth is expected to exceed the change in capacity in 2005. Over
the short term, the majority of new global capacity is forecast to occur in China, where new
capacity is expected to be partially offset by closures of lower grade phosphate facilities.
Increased global demand and capacity closure are expected to more than offset these capacity
increases. In North America, industry consolidation may provide additional stability to the
market.PotashThe combination of strong demand growth in 2003 and 2004 and limited new capacity additions
have resulted in a considerable tightening of the global potash market. The potash market is
expected to remain tight in 2005 with the increase in potash demand forecast to exceed the
increase in capacity. Higher production rates from existing mines will be required to meet the
continued growth in potash demand. Distribution and Retail  The discovery of Asian rust in certain soybean growing areas of the U.S. could lead to an increased
need for fungicide application for prevention and control of the disease. This development may
increase chemical sales for North American retailers.  38




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##### 



Agrium Inc. 2004 Managements Discussion & Analysis Business risks Similar to other agricultural based companies, we are exposed to various risks and
uncertainties in the normal course of our business that can cause variations in our results of
operations and affect our financial condition. In 2004, we enhanced our enterprise risk management process for the management of risks facing our
company. Under this process, each department and operating segment of our business is required to
formally identify all significant risks, together with the cause of such risks, which they face in
their day-to-day activities. These risks are then prioritized in accordance with their potential
impact on our business, and the likelihood of occurrence. Mitigating actions that can be taken to
reduce exposure are identified. From this process, we are able to establish a detailed risk
profile of our business and develop strategies to mitigate the risks. The enterprise risk
exposures and mitigation plans are reviewed and approved on an annual basis by the senior
leadership of the Company and reviewed annually with our Board of Directors. Each department monitors risks and mitigating actions and formally reviews the risk profile and
mitigation plan on a quarterly basis. In some cases, financial risk can be reduced through insurance or hedging programs but these
programs can be costly in relation to the risks insured, and coverage may only be partial. In
other cases, risk management may involve far-reaching strategic decisions with long-term
consequences. We also believe that acceptance of some risk is necessary to be successful in
achieving our vision. The following is a discussion of the key business risks which we have identified through this
process and the strategies we adopt to mitigate them. However, it should not be assumed that the
process will identify and eliminate all risks, or that strategies adopted to mitigate them will be
successful. Product price risk The wholesale nutrient business is a commodity business with little product differentiation.
Product prices are largely affected by supply and demand conditions, and product prices can be
volatile.  Mitigating factors and strategies:n
    The product diversity of our wholesale business (nitrogen, potash, phosphate, sulphur) reduces the impact of poor supply and demand
fundamentals that can be experienced by a particular product category;n
    The geographic diversity of our customer base (North America, international) reduces the impact of poor economic, crop or weather
conditions in any one region;n
    Our customers have diverse end uses for our products (agriculture and industrial); and,n
    We have an extensive retail business that provides stability to our cash flows and earnings. Within our retail business, we have further
mitigating factors including: ¡
    
    Product and service diversity (fertilizer, chemical, seed and application services); and,¡
    
    Geographic diversity (broad regional U.S. markets, South America).
 Natural gas price and supply risk Natural gas is the principal raw material used to manufacture nitrogen. Natural gas is
subject to price volatility that can be reflected in our selling prices in periods of tight supply
and demand, but these conditions do not always prevail.  Mitigating factors and strategies:n
    In the long-term, locating or acquiring our facilities in areas of long-term supplies of lower-cost trapped natural gas;n
    In the short-term, we use derivative instruments and other contractual arrangements;  39




---



##### 



Agrium Inc. 2004 Managements Discussion & Analysis n
    Our practice of adjusting our production rates and sourcing supply for our
customers from purchased product when conditions dictate reduces our exposure
to high natural gas costs; and,n
    The majority of our nitrogen sold in North America is
produced in Western Canada, which has lower-cost gas
than other competitors who produce and sell in North
America. During 2004, we settled our longstanding dispute with Unocal over gas supply issues for our Kenai
facility. The settlement agreement established a definitive gas supply obligation from Unocal to
the Kenai facility up until October 31, 2005. It is our expectation we will close the Kenai
facility in November 2005 unless alternate economic gas supplies can be obtained. Weather risk Anomalies in international and regional weather patterns can have a significant and
unpredictable impact on the demand for our products and services, which in turn has an impact on
our prices. Our customers have limited windows of opportunity to complete required tasks at each
stage of crop cultivation. Should adverse weather occur during these seasonal windows, we could
face the possibility of reduced revenue in the season without the opportunity to recover until the
following season. In addition, we face the significant risk of inventory carrying costs should our
customers activities be curtailed during their normal seasons. We must manufacture product
throughout the year in order to meet peak season demand, and we must react quickly to changes in
expected weather patterns that affect demand.  Mitigating factors and strategies:n
    We utilize long-range weather outlooks in our planning and may adjust production levels accordingly;n
    Our extensive distribution and storage system allows us to move products to locations where demand is
strongest. However, our ability to react is limited by the shortness of the peak selling season; and,n
    Geographic diversity of our wholesale markets and our retail facilities affords some protection against
regional weather patterns, and we also strive to mitigate our exposure through sales to industrial customers,
which represents approximately 12 percent of our Wholesale net sales. Transportation disruption risk Reducing the delivered cost and ensuring reliability of product delivery to our customers are
key success factors of our wholesale marketing operations.  Mitigating factors and strategies:n
    We develop detailed forecasts of product movement needs for each facility and transportation carrier;n
    Mutually beneficial long-term relationships with major carriers are continually developed and maintained;n
    Some of our production facilities are serviced through multiple carriers and modes of transportation; and,n
    We maintain multiple supply points, in case transportation disruption occurs at a particular facility. Country risk We have significant operations in Canada, the U.S. and Argentina and expect to further expand
our international operations. International business exposes us to a number of risks, such as
uncertain economic conditions in the foreign countries in which we do business, abrupt changes in
foreign government policies and regulations, restrictions on the right to convert and repatriate
currency and political risks.  Mitigating factors and strategies:n
    We seek to partner with reputable firms with experience or significant presence in foreign countries in which
we operate or intend to operate;n
    We hire personnel located in the foreign country or who have operating experience in the foreign country;n
    Non-recourse project financing with consortiums of international banks is obtained where appropriate; and,n
    We maintain excess cash related to international operations in U.S. dollars to the extent practicable.  40




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Agrium Inc. 2004 Managements Discussion & Analysis Foreign exchange risk A significant shift in value of the Canadian dollar against the U.S. dollar could impact the
earnings in our Canadian operating subsidiaries, which earn revenues mainly in U.S. dollars and
incur expenses mainly in Canadian dollars.  Mitigating factors and strategies:n
    Exposure to currency fluctuations is partially managed through our currency hedging programs; and,n
    The cost of natural gas in our Canadian operations provides a partial natural hedge when the Canadian dollar
strengthens. The Canadian natural gas purchases are denominated in Canadian dollars referenced to the AECO
gas price. The natural hedge is created because the AECO gas reference price substantially correlates, with
a basis differential, to the U.S. dollar denominated NYMEX gas price. Legislative tax risk Tax risk includes failure to comply with tax laws in the jurisdictions in which we operate.  Mitigating factors and strategies:n
    Our tax department proactively participates in tax and industry organizations and maintains an extensive
network of tax consultants;n
    In our international activities, we attempt to partner with reputable firms with experience in the foreign
countries; and,n
    We have centralized responsibility and oversight of all tax filings. Counterparty risk We face the risk of loss should a counterparty be unable to fulfil its obligation with
respect to accounts receivable or other contracts, including derivative hedging contracts.  Mitigating factors and strategies:n
    We have established credit procedures that include rigorous assessment of counterpartys credit-worthiness
and adherence to credit limits;n
    For derivative hedging contracts, we have established counterparty trading limits and netting agreements; and,n
    In our Retail segment, we service customers in diverse geographic markets, which reduces the impact of poor
economic or poor crop conditions in any particular region. Security risks We face security risks associated with our facilities and some of our products.  Mitigating factors and strategies:n
    We continue to work with industry associations, law enforcement and government agencies to ensure our
facility and product security requirements are identified and addressed;n
    We have developed and implemented a system to proactively identify and manage chemical exposure health risks;n
    We have implemented a delivery monitoring system for ammonium nitrate wherein we track all shipments and
verify receipt with the customer;n
    We have implemented a carrier verification system for all products wherein we examine carrier identification
and verifications prior to loading product from our plants and terminals; and,n
    Our facilities have developed security plans with security measures, which can be implemented in response to
real or perceived security threats.  41




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Agrium Inc. 2004 Managements Discussion & Analysis  Workplace health and safety risks Workers face health and safety risks arising from their normal work activities, and we are
committed to the health and safety of our employees, our customers and communities in which we
operate.  Mitigating factors and strategies:We use a three-part approach to mitigate environment, health and safety risks:n
    We have established a strong Environmental, Health & Safety policy (EH&S Policy) and
have developed a management system to implement the EH&S Policy. Our Environment,
Health & Safety Management System (EMS) addresses the following key points: ¡
    
    Health and safety responsibilities and accountabilities;¡
    
    Continuous improvement processes;¡
    
    Goal setting and planning;¡
    
    Security;¡
    
    Audits and inspections;¡
    
    Emergency response and crisis management;¡
    
    Incident reporting, investigation, analysis and corrective actions;¡
    
    Industrial hygiene and occupational health; and¡
    
    Waste management
 n
    We deploy the necessary expertise and resources to ensure that regulatory and system
requirements are understood, in-place, current and effective; and,n
    We have regular audits of external regulatory and internal system requirements and
process safety. Corrective actions are monitored for effective and timely closure.  42