The Natural Gas & Nitrogen Disconnect

January 24, 2013 05:51 AM
 

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The price of Nitrogen fertilizer is highly dependent on the cost of natural gas. The United States is in the midst of a boom in natural gas production and nattie prices have fallen dramatically as a result of increased supplies in storage. But Colorado growers are questioning why Nitrogen fertilizer pricing has not followed natural gas to the downside.

Since 2006, anhydrous ammonia pricing has climbed 50% while natural gas prices have fallen by 60%. In 2005, net Nitrogen imports overtook U.S. production, and imports have been on the rise annually ever since.

The price of anhydrous ammonia is near a record high, fetching $879.00 per ton in the Midwest. With natural gas at ten-year lows, growers are beginning to question the high price for NH3 and other ammonia-based fertilizers. Tumblr.com quotes Colorado grower, Mike Bowman, "Historically, cheap natural gas equals cheap anhydrous ammonia, but we have seen the correlation disappear."

The Rocky Mountain Farmers Union has announced that it has appealed to the USDA to respond to growing concerns about price-fixing. With ire in the air, a number of factors must be considered.

Domestic production of anhydrous, and its feedstock ammonia in particular, has fallen sharply since 1999 when U.S. production began a descent from 12.9 million tons annually to just 8.1 million tons in 2011. At the same time, imports of ammonia have nearly doubled, while stocks-on-hand declined. That means the U.S. Nitrogen market is more dependent than ever on foreign sources of ammonia.

Meanwhile, despite domestic production running over 85 percent of capacity, limited pipeline capacity takes its toll as well. This puts a portion of the transport burden on a rail system that is hesitant to carry the volatile and high maintenance NH3. Due to safety concerns and regulations surrounding the transport of ammonia, rail carriers demand a premium for moving ammonia via rail -- if they carry the substance at all.

The other factor here is the high return growers reaped in wake of the 2012 drought. The price of fertilizer is more closely coupled with the price of corn than with natural gas at present. When fertilizer sees available revenue from high commodity returns, the market runs for the upside, hoping to capture that farm revenue. Add to that a movement toward more planted acres to corn in the 2013 season, and N demand is expected to be high in the coming spring application season.

High farm returns, limited transport availability, reliance on volatile imported supplies and high expected demand all factor in to the high price of nutrient in the present day -- and, oh, by the way, the Mississippi River has to muster enough water to float nearly half of the N this nation will use in 2013 up from the Gulf, creating its own level of anxiety in the market.

The silver lining is that demand that nearly prices itself out of the market will inspire domestic production and that is the flashpoint for utilizing the inexpensive natural gas supply the U.S. now enjoys. At least nine new Nitrogen producing facilities and expansions are expected to come online in the United States by 2015. Increased domestic production will pressure prices lower once the domestic supply increases enough to allow Nitrogen to fall, and truly couple with domestic natural gas.


  Photo credit: Darwin Bell / Foter.com / CC BY-NC

 

 

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