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February 16, 2001
Sky-High
Energy, Fertilizer Prices Soar...
By Lana Robinson
Field Editor
If you haven't already consulted with your fertilizer supplier in preparation for spring planting, hold on to your pocketbook! High natural gas prices, coupled with an extra cold winter nationwide, have resulted in tight supplies and a costly end product.
Natural gas is used as feedstock for anhydrous ammonia, which is used to make virtually all nitrogen fertilizer in the United States. Due to the natural gas shortage, nitrogen fertilizer is in short supply in the near term. A sharp, 80 percent rise in the cost of natural gas has pushed the cost of production of many nitrogen fertilizers higher than the prices those products are bringing in the marketplace, making it uneconomical to produce these products. With the production costs for ammonia now averaging about $100 a ton, ammonia plants have reportedly curtailed operations to 60 to 65 percent of capacity. Industry observers worry that the coming period of high demand will likely make matters worse.
Problems began in 2000
The problem isn't new, nor unexpected. Last year, the price of gas nearly doubled from a low of $2.49 in February to a high of $4.68 per thousand cubic feet on June 27, and it was trading in early August for about $4.40. Ammonia, priced at New Orleans, went from $110 to $190 per ton during that period, according to an analyst for Credit Suisse First Boston. Nitrogen fertilizer prices in the Midwest rose 25 percent from late May to early August—an unusual occurrence since fertilizer prices usually decline after the end of spring planting season. On top of that, fertilizer manufacturers cut back production an average of 20 percent.
On Feb. 5, 2001, Terry Francl, senior economist for the American Farm Bureau Federation, reported that the unprecedented increase in natural gas prices late in 2000 shut down a substantial amount of anhydrous ammonia production over the past few months.
"Since the beginning of 2000, the average daily price for natural gas jumped from $2.37 per million Btu (MMBtu) to over $10 per MMBtu. The average daily price for natural gas in December averaged $8.80 per MMBtu," said Francl.
This runup in the cost of natural gas has a dramatic impact on the production cost of ammonia and other fertilizer products made with ammonia. For example, at $2.19 per MMBtu, the cost of producing a ton of ammonia is about $100, with gas being 72 percent of the cost of production. At $4.50 per MMBtu, the cost rises to about $180, with gas being 84 percent of the cost of production. At $10, the cost of production rises to $363. Without a comparable increase in fertilizer prices, the price of natural gas creates pressure for fertilizer producers to curtail production because they cannot recover their manufacturing costs. Ammonia producers have two alternatives in this situation. They either produce at a loss or curtail production. A combination of lower gas prices and/or higher prices for fertilizer products would once again create an economic incentive to resume production.
Since fertilizer is a commodity business, the world market sets the price for fertilizer products. Like farmers, fertilizer producers are price takers and increased costs—like those currently being experienced by the U.S. fertilizer producers—cannot simply be passed on through the price of the product.
"Anhydrous ammonia manufacturers began shutting down production in late 2000 as a result of the higher natural gas prices. By December, approximately 40 percent of the NH3 capacity in the United States had ceased production. That number rose to over 50 percent of production capacity in January. It would appear that as natural gas prices have decreased in recent days, futures prices are trading around $6 per MMBtu, some plants are restarting. Analysts estimate that ammonia production in the month of February will be down approximately one-third," the AFBF economist stated.
Francl said the decline in production has already reduced the supply of NH3 in the United States by approximately 2 million metric tons, a little over 10 percent of annual capacity.
"Unfortunately, that number continues to rise every day and could approach 3 million tons as the spring fertilizer season commences. Ammonia manufacturers have indicated that natural gas prices would probably have to get down to the $4-5 per MMBtu range before the industry would return to full capacity."
Fertilizer prices skyrocket
Fertilizer NH3 sold for an average of approximately $225 a ton a year ago. Currently farmers are being quoted prices in the $400-500 per ton range.
"One farmer reported paying $170 per ton for 32 percent nitrogen solution fertilizer compared to $90 a ton a year ago," Francl reported. "These experiences suggest nitrogen fertilizer prices may average 75 percent above a year ago this spring. Farmers spent $10.5 billion for fertilizer in 2000. Fertilizer costs could jump $3 billion plus or minus in 2001 depending on what happens to natural gas prices over the remainder of the year."
Francl said the cost to individual farmers varies depending on the crop and nitrogen fertilizer rate. Based on average application rates in the past, corn farmers will pay an additional $20 per acre for fertilizer, cotton farmers approximately $13 per acre, and wheat farmers approximately $10 per acre. These amounts can vary as much as plus or minus 50 percent depending on the intensity of the crop production. For example, irrigated corn farmers apply nitrogen at the rate approaching 200 lbs. per acre compared to dryland corn where less than 100 lbs. of nitrogen is applied.
Some may switch to soybeans
A piece in the Kiplinger Newsletter said fertilizer prices for farmers are up about 47 percent over last year. Corn growers are hardest hit, with the potential for their costs to rise by $24 per acre. Soybean farmers, on the other hand, can expect fertilizer-related cost increases of only $4 per acre. Consequently, many Midwest farmers may switch to beans this spring.
Purdue University experts say given the way corn responds to fertilizer nitrogen and that recommended rates are conservative, cutting back nitrogen rates by 10 percent from the recommended rate is unlikely to hurt yields by more than a few bushels per acre.
What about future supplies?
The U.S. wet gas productive capacity has steadily declined from an estimated 55.5 billion cubic feet (Bcf) per day in 1995 to an estimated capacity of 51.3 Bcf per day in 2000.
"Part of this decline has been due to the `normal' productive decline in older, existing wells. However, largely due to restrictive environmental rules, there has been a sharp drop in drilling activity. According to the Cambridge Energy Research (CERA), gas-related drilling has steadily dropped from a peak from 650 active rigs in January 1998 to under 400 in mid-1999," Francl noted.
During much of the last decade, natural gas consumption was relatively steady. However, this was in large part due to warmer than normal winter weather. But a return to the recent colder, but closer to the long-term norm, winter weather, along with a robust economy, has pushed up the demand for energy and natural gas sharply higher this past year.
Total natural gas consumption in the U.S. in 2000 is estimated to be 22.2 Tcp. Ammonia producers utilize slightly less than 3 percent of total U.S. annual consumption of natural gas.
Francl concluded that the growing imbalance between natural gas demand and supply must be immediately addressed at the highest level.
"The Bush Administration and Congress should pursue policies that will enhance supply and moderate demand. In view of the fact that a growing economy requires significantly larger supplies of electricity, it would seem appropriate to look at ways of producing kilowatts from other energy sources. Likewise, opportunities to expand the area of search and incentives for drilling for new natural gas supplies should be vigorously pursued," he said.
