farmgate: As You Book Your 2008 Nitrogen, Here Are The Reasons The Cost Is Higher.
In agriculture you have to think ahead. Risk has to be managed so a crisis does not develop. Crops have to be marketed before prices plummet. Inputs have to be booked before costs increase. And it is that nitrogen input that impacts fertilizer and chemical costs that requires immediate attention.
Any farmer offered a higher price for a crop will produce more of that commodity. But a USDA economist says it is just the opposite for ammonia production that results in the reduced availability of nitrogen fertilizer. The Impact of Rising Natural Gas Prices on U.S. Ammonia Supply is a recent analysis by USDA’s Economics Research Service which warns of reduced availability for ammonia due to higher natural gas prices.
Any producer knows the importance of nitrogen, and USDA says, “Total nitrogen costs for U.S. production of corn in 2005 and wheat in 2004 were $3.66 billion and $1.02 billion, respectively. Nitrogen costs contributed to the largest operating expense for both corn and wheat producers. Nitrogen application accounted for 22 percent of the operating costs for corn producers and about 33 percent of the costs for wheat producers.” With 90 million acres of $4 corn this year, nitrogen use increased rapidly in all likelihood. If you remember your soil chemistry less from school, “When combined with phosphoric acid and potassium chloride, ammonia and its derivatives are the basic material used in the formulation of various mixed fertilizers containing nitrogen, phosphate and potash, which are used extensively by farmers. Thus, a change in the price of ammonia often leads to changes in the prices of all nitrogen fertilizers.”
The basis for ammonia production is natural gas, which accounts for 72%-85% of the cost of ammonia, subsequently; there is an 80% price correlation between natural gas and ammonia. The high cost of natural gas and low margins earned by ammonia producers since 2000 means low profitability and USDA says, “Because of low profitability in recent years, a significant number of ammonia producers ceased production or merged with other producers.” Production capacity dropped 35% from 2000 to 2006 and actual production declined 44%. With less US production, imports of ammonia have increased, with a 115% jump from 2000 to 2006, with shipments from Trinidad and Tobago, Canada, Russia, and Ukraine. Even with increased imports, the overall supply has declined.
Higher prices of natural gas means farmers will pay more for ammonia, and prices went up 130% from 2000 to 2005. Those higher fertility costs dropped profitability by 22% in corn and 32% in wheat. USDA says those costs can be controlled by adopting production practices that conserve nitrogen, “For example, a corn producer might reduce the nitrogen application rate by applying the amount as determined by equating the marginal return of nitrogen fertilizer to the high nitrogen price, by delaying the nitrogen application from spring before planting to summer after planting, by increasing use of alternative sources of nitrogen (such as manure), or by switching from corn to soybeans, as soybeans can obtain enough nitrogen from the atmosphere.”
When ordering ammonia for your 2008 corn and wheat crops, prices will be a function of overseas production costs and transportation costs.
1) Canadian natural gas prices are parallel with those in the US, so Canada will not have a significant advantage, and production capacities have recently declined as well.
2) Imports from Russia and Ukraine have high transportation costs, negating the lower costs of natural gas and lower costs of ammonia production.
3) The Mideast and North Africa have only limited production capacity for ammonia, losing their advantage for low costs of natural gas.
4) Any increase of imported ammonia will likely come from the Caribbean Republics of Trinidad and Tobago. Their natural gas price is low, and production capacity is expected to increase, and there is more incentive to ship ammonia than natural gas.
USDA believes that further increases in natural gas prices in the US will result in further decreases in domestic ammonia production, and more imports, most likely from the Caribbean. Because of the increased demand on imported ammonia, US farmers may be susceptible to global competition for nitrogen fertilizer. The US does have some unused production capacity, which could supply enough ammonia to provide nitrogen to an additional 10 million acres, should ethanol continue to push up corn acreage. But that will result in higher prices for ammonia and the cost of nitrogen fertilizer.
Summary:
High prices of natural gas have curtailed ammonia production, reducing the supply and increasing the cost of nitrogen fertilizer. The Caribbean is a potential source for increased imports, but with increasing dependency on imported nitrogen comes a chance for a volatile supply and a volatile price.
Posted by Stu Ellis on August 9, 2007 12:14 AM to farmgate