Production cutbacks, global demand lift nitrogen prices

Of utmost concern to many producers in Arkansas and the rest of the U.S. is the dramatic rise in nitrogen fertilizer prices, particularly urea. Over recent months, a dramatic 50 percent increase in per ton urea prices has occurred.

As of early September 2006, the average per ton price of urea in eastern Arkansas was $260. Today, urea prices ranging from $420 to $440 per ton are very common.

Uncertainty exists whether prices will trend higher or stabilize. There are a few key factors currently influencing urea prices. Some of these may have lingering and long-term effects.

Overall demand for nitrogen fertilizer in the United States has been stable over the past 10 years. Substantial price increases over the past year for corn and wheat will increase demand for nitrogen significantly.

September 2007 corn futures have surged 26 percent since mid-September due to reduced inventories and increased ethanol demand. With corn prices at 10-year highs 60 days ago, U.S acreage for the crop may increase as much as 15 percent in 2007.

Furthermore, U.S. winter wheat acreage is up 3.5 million acres over the previous year, also due to decade high prices.

Unfortunately, this surge in nitrogen demand is occurring at a time when domestic nitrogen production is in decline.

U.S. production of anhydrous ammonia, the feedstock for production of other nitrogen materials, has decreased significantly in recent years.

The International Fertilizer Development Center reported in 1999 that U.S. ammonia capacity was about 20.1 million tons and urea capacity about 10.3 million tons. By 2005, ammonia and urea capacity had each declined 25 percent to 15 million tons and 7.7 million tons respectively.

The loss of domestic production can be largely attributed to the significant rise in the cost of natural gas. Natural gas costs account for the majority of anhydrous ammonia production costs. During the late 1990s, the cost of natural gas to ammonia producers reached approximately $2 to $2.25 per million Btu, accounting for about 80 percent of total production costs. By 2004 domestic ammonia producers faced gas costs of $5.26 per million Btu, representing nearly 90 percent of total production costs.

By the late 1990s, producers began idling and closing facilities because of increased costs of natural gas.

After a further surge in natural gas prices in recent years, U.S. nitrogen producers find it increasingly hard to compete with foreign countries where natural gas can be obtained at lower prices. The General Accounting Office documented in 2003 that while natural gas prices averaged $5 per million Btu in the United States, the price was 60 cents per million Btu in the Middle East, 40 cents in North Africa, 70 cents in Russia, and 50 cents in Venezuela.

Nitrogen imports accounted for nearly 50 percent of domestic supply for the 2005 fertilizer year (beginning July 1) and 85 percent of nitrogen fertilizer use. By comparison, nitrogen imports only accounted for 20 to 25 percent of total nitrogen supplies during the period 1985-2000.

During 2005, the United States imported urea from 33 foreign countries. Two-thirds of total imports were from Canada and six Middle Eastern countries.

Information from ag input suppliers and the U.S. International Trade Commission reveals that nitrogen imports are running below average levels for this time of year. Urea import volumes are below last year's total import levels by 483,000 tons.

As in the United States, grain acreage will expand around the world. Price competition from various countries, particularly those in Latin America, has resulted in cargos of urea being diverted to locations other than the U.S. gulf coast.

High energy prices and increased grain acreage will continue to be major factors supporting fertilizer prices. World economic growth, particularly in Asia, is expected to continue and along with it energy demand should rise. Natural gas prices have increased about 15 percent since early January, and futures contracts indicate that prices will remain between $7.70 and $9.40 per million Btu from 2007 to 2010. Thus, natural gas will continue to be a major influence upon and significant component of nitrogen production costs.

The latest estimates from the U.S. Department of Energy indicate that crude oil prices will hover near $64 per barrel over the course of 2007. Crude prices at this level will encourage the continued expansion of biofuel production. U.S. ethanol production could consume nearly 30 percent of total corn production in 2007.

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