The Fruit Growers News - February 2001

The price of nitrogen (N) fertilizers could be greatly increased this spring. Soaring natural gas prices could cause N prices to remain high when grower demand increases this spring.

Many N producing companies have already scaled back nitrogen or closed production plants because of the high cost of natural gas. Without a significant winter warming, natural gas prices and N prices are expected to remain high, and adequate N supplies may be difficult to affordably obtain this spring.

Between 80% and 90% of the cash cost of N hinges on natural gas. With natural gas costing up to 25% more, the entire fertilizer industry is struggling to deal with the resulting cost/price squeeze.

“Current N market prices are well below production costs,” said Al Giese. “That has forced many producers to scale back on production or shut down plants,” said Giese, co-president of Agrilliance, a joint marketing venture formed by Farmland Industries, Cenex Harvest States Cooperatives and Land O’Lakes.

Nitrogen is one of the essential plant nutrients. Vegetable plants, like all other green plants, require several nutrient elements for growth. Of these nutrients, N is the plant nutrient most often in short supply in the soil.

Farmland President and CEO Bob Honse said the company’s N fertilizer division is being particularly hard hit by the high cost of natural gas. Farmland is maintaining production at 85% of last year’s levels for ammonia and above last year for UAN, a liquid nitrogen fertilizer.

Honse said, “Farmland is committed to producing fertilizer for our owners. That’s what makes the cooperative system different from your typical investor-owned company.”

Several industry sources are advising farmers to expect higher prices to buy N fertilizer due to the winter fuel crunch that has many U.S. manufacturers, including makers of petroleum-based fertilizers, selling their electricity and natural gas supplies for attractive profits.

Terra Nitrogen Company reported in early January that it had idled its Blytheville, Ark., facility and one-half of its Verdigris, Okla., facility due to high natural gas prices. The idled capacity represents 64%, 50% and 100% of the company’s total ammonia, UAN and urea manufacturing capacity, respectively.
Terra will restart N production when natural gas and N prices reach levels allowing positive cash flows from the facilities. Meanwhile, the company reportedly sold portions of its commodity-bought natural gas to energy companies rather than produce N unprofitably.

“On the international stage, since fertilizer is traded internationally, the international price of fertilizer wasn’t really rising, it was below the cost of production for regional producers in North America in some cases,” said Doug Beever, manager of public relations for N producer Agrium. “That is why a lot of people cut back production of N.”

Beever explained, as the gas price in North America rose they didn’t necessarily rise in other countries where there are N-producing facilities. Since the fertilizer market is a global market and the natural gas market is a regional one, many facilities have had to cut back on N production.

“Price is determined on a supply and demand on a worldwide basis, said Beever. “The cost of gas is driven up, yet when our sale price is determined on a world stage where the gas price has not risen, you have a case for individuals in North America to curtail production. Which drops the supply side down a bit and the fertilizer prices begin to rise as a result. If all producers were experiencing the same gas cost scenario, I’m sure the international price of N would have reacted quickly, since it didn’t people had to curtail prices in North America over all.”

But can farmers take advantage of the world market for N? No, not this late in the game, according to Ron Phillips of The Fertilizer Institute.

Phillips reports that the volume of equipment to import anhydrous ammonia is limited, and the months left to transport all forms of N are too few for the material to arrive in time for spring application.

“The gas goes into the production of ammonia and ammonia is typically a raw material for the production of Urea and other N products,” said Beever. “When you end up with an increase in the cost of gas, it just trickles down to the next product lines.”

The Michigan Farm Bureau recently reported that the wholesale prices for anhydrous rose $135/ton from December 1999 to December 2000, with another rise expected in January.

The global fertilizer industry has pushed regional producers of N to cut back on production, because the producers outside of North America have not seen the sharp spike in natural gas prices and can continue to produce at lower costs.

“We are not price makers, we do not make a widget instead we make a commodity, much like the growers who use our products,” said Phillips. “We cannot pass an increase in the cost of production on to our customer.”

To view the Fertilizer and Natural Gas report prepared by The Fertilizer Institute, go to www.tfi.org.