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Demand, not Natural Gas, Driving Anhydrous Prices

October 31, 2011
By: Ed Clark, Top Producer Business and Issues Editor
ANHYDROUS
  

Ammonia price variability is being caused by demand factors, not by natural gas prices as has been the case in many years. The average Illinois cost of anhydrous ammonia rose $52/ton from $853 July 7 to reach $801 on Oct. 13, according to a report by the Agricultural Marketing Service.

Natural gas, which is the major cost of producing anhydrous, has not been rising, however. "This has caused the anhydrous ammonia-to-natural gas ratio to increase dramatically," a University of Illinois farm economics report says.
 
The ammonia-to-gas price ratio was relatively stable from January 2001 through December 2006, with a ratio average of 49. This ratio indicated that the anhydrous ammonia price per ton was 49 times the per thousand cubic feet price of natural gas. Since the end of 2006, however, the ratio has been much more variable. The ratio averaged 61 in 2007, 85 in 2008, 74 in 2009, and 97 in 2010. So far this year, the ratio has averaged 128.
 
The increase in the ammonia-to-natural gas ratio has occurred roughly at the same time as when commodity prices increased. Between 1975 through 2006, Illinois corn prices averaged $2.40/bu. The increase in corn prices correspond to an increase in crop production around the world, leading to more fertilizer demand. As a result, increases in demand may partially explain the ratio increase, the report says.
 
The ratio has also been spiky since 2007. The ratio reached a high in October 2008 of 123. This was followed by a decline, corresponding to declines in prices of many assets as the financial crisis became evident in 2008. The ratio has been high again since late 2010 through the first half of 2011, averaging close to 130.
 
Both of the spikes have been associated with high corn prices. "These prices could signal shifts in crop production that could change the demand for nitrogen fertilizers. It could also signal profit taking on the part of manufacturing of fertilizers," the report states.  
 

 

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FEATURED IN: Top Producer - December 2011
RELATED TOPICS: Farm Business, Crops, Inputs, Fertilizer

 
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