December 5, 2002

Surges in Natural Gas Prices May Not Mean High Nitrogen Prices Next Spring

After coping with higher fertilizer nitrogen prices in 2000-2001, farmers are concerned that an early fall surge in natural gas prices may result in higher nitrogen prices in the spring. There are differences between this year’s gas increases and the increases seen two years ago, according to David Franzen, a soils scientist with the North Dakota State University Extension Service.

Last spring, and so far this fall, anhydrous ammonia prices have been higher, but not unreasonably so. "Urea prices become more cost-effective as ammonia prices rise," Franzen says. "The decision on what nitrogen source to use becomes harder when the price gap narrows."

With current natural gas prices around $4 MMbtu, will nitrogen prices be stable, or will they rise to the levels of a couple winters ago? "It’s hard to tell for certain, but there are substantial differences between this round of price increases and the last one," Franzen says. "This current price surge in natural gas is not unlike those seen in April and May of this year, and the ammonia markets basically reacted to them with a yawn. Also, the surge this fall is occurring two months earlier than in 2000, allowing more time for producers and suppliers to bring in cheaper, imported products."

Another factor that could make a difference is the weather. "In the fall of 2000, the weather was horrible, with wet fields in the Red River Valley and elsewhere that allowed the application of only a small amount of fertilizer," Franzen says. "This fall, although it has been cold, the weather generally has allowed application of fertilizers where farmers elected to do so. This means that there probably won’t be the huge surge in demand for anhydrous in the spring as there was two years ago."

The situation two years ago taught us some lessons. "In 2000-2001 the supply industry was not as prepared as they are now to handle the large amounts of imported nitrogen required to supply the United States," Franzen says. "Although natural gas prices are rising in North America, they are still cheap, and will remain so in Russia, Venezuela, the Middle East and other producing countries. These countries produce ammonia and ammonia-derived fertilizers. Higher prices here mean higher profits for them."

Timing makes a lot of difference, Franzen says. "Whereas in 2000-2001 there was only a couple of months to bring badly needed fertilizers into the country before spring planting in the southeastern US, and three to four months for the rest of the country, there is almost six months to lay in cheaper products for the Northern Plains before next spring.," he explains. "What I think this means is that although ammonia prices may increase over last spring’s prices, the increases will not be as severe as they were in 2000-2001. It also means that urea will stay reasonable compared to ammonia. It is more easily imported and transported than ammonia, and at a cheaper price. We didn’t have a shortage in 2001, and I don’t anticipate one in 2003."

Changing world conditions could play a part in the market. "There is a wild card in the deck’" Franzen warns. "We don’t know what the reaction of ammonia-producing countries will be if we go to war with Iraq. One has to believe that natural gas-producing countries need the money and, even if they are upset, the fertilizer will flow. It is still a concern, however, since the last natural gas increase decimated our capacity to produce our own fertilizer products. And any increase in fertilizer prices caused by domestic gas price increases will not help the competitiveness of our own reduced domestic nitrogen production industry."

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Source: David Franzen, (701)231-8884, dfranzen@ndsuext.nodak.edu
Editor: Tom Jirik, (701)231-9629, tjirik@ndsuext.nodak.edu