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Price predictions

May 1, 2006 12:00 PM
By Ed Clark


THIS GROWING season there is good news about nitrogen fertilizer: It appears that prices for the fertilizer will fall in late spring and early summer from the sky-high prices of winter.

The reason is that the price of natural gas, from which almost all nitrogen fertilizer is made, crashed — from $16/million British thermal units (mmBtu) right after Hurricane Katrina damaged the natural gas pipeline infrastructure in the Gulf, to less than $7 in late March.

The outlook is for prices of natural gas to stay at current levels. Jim Ritterbusch, an energy consultant in Galena, IL, says the outlook for natural gas prices “is for continued weakness.” In late March, nearby natural gas futures on the New York Mercantile Exchange were trading in the range of $6.50 to $6.80/mmBTU. Last year, all bets were off once hurricanes hit and ignited the huge price run-up.

“We now have near-record levels of natural gas in storage and it will take a long time to reduce the surplus,” Ritterbusch says. “If we have a normal summer, prices will stay weak.”

By June, it's possible that prices for ammonia will be below $400/ton in the Midwest, more than $200 below last winter's peak, says Ohio State University economist Matthew Roberts. “If you still need it and can get it for $375, you need to buy,” he says. That probably doesn't look like a steal compared to the anhydrous prices of near $150/ton a decade ago, but it's less than the $600/ton peak of this winter, Roberts says. Prices in late March were about $500/ton.

Other factors

Overall, prices have risen about 20 to 30% over the past two years, says Bruce Vernon, director, crop nutrition marketing for Agriliance, St. Paul, MN. Several factors have come together to keep prices high.

For starters, fertilizer is bulky, and it takes a lot of energy to transport it. Thus, “the higher prices we've been paying at the pump translate to higher costs” to transport fertilizer, Vernon says. “There has been a 30% increase in the price of fuel alone.”

Another factor responsible for fertilizer's price rise is freight, “and there has been a high demand for scrap metal, which means not as many barges and railcars are available,” Vernon says. Some freight rates have risen by 50%.

That said, Vernon explains that the price of nitrogen fertilizer from now through next spring largely will be determined by two factors: how hot this summer is, and what the hurricane season is like.

Increasingly, natural gas is used to make electricity; thus a hot summer means a high level of air conditioning that will draw down the high reserves. One key reason why natural gas is used to make electricity is that no new nuclear power plants and few coal-fired plants are being built.

As for hurricanes, it's impossible to know what will happen, although Vernon says that some experts are saying the conditions appear right for another season of high hurricane activity (the southern Atlantic is warm, for instance). In other words, what natural gas, and in turn nitrogen fertilizer, will cost this fall, winter and next spring is anyone's guess.

As for this growing season, Vernon thinks that ammonia prices had stabilized on a national basis as of late March but that further declines are possible in July.

The long-term outlook for natural gas and thus nitrogen fertilizer is a mixed story. The good news is that production is increasing by 2 to 3% a year globally and much of the increase is in the Middle East and the Caribbean, where it is much cheaper to produce than in the U.S. (less than $2/mmBTU vs. at least $7/mmBtu in the U.S.). Thus, over time, cheaper natural gas prices could translate into cheaper fertilizer prices.

But global demand is increasing about as fast as supplies are. In the U.S., natural gas production is increasing about 1.5% a year while demand is increasing 2 to 3% a year. In other nations, demand is increasing for ammonia fertilizers from India, China and Brazil.

Use of natural gas futures?

With ammonia prices that are volatile and linked with natural gas, does it make any sense for retailers and farmers to “hedge” their fertilizer needs through the use of natural gas futures on the New York Mercantile Exchange?

For retailers and large-acreage farmers, “it could, but it's not a perfect hedge, but it's worth checking out,” Roberts says. He says that they would need to track the relationship over time between natural gas futures and ammonia prices. Roberts also says that given the size of the contract, producers would need at least 2,500 to 3,000 acres because the size of a contract is for 10,000 mmBTU, although mini contracts are also available.

However, Iowa State University economist Roger Ginder does not recommend natural gas as a hedge, because natural gas futures are so volatile and because cheaper nitrogen imports could enter the U.S. at any time and send prices lower. What retailers and producers need, he says, are pricing tools that would allow them to lock in both corn and fertilizer prices.

Vernon agrees: “The correlation between natural gas futures and ammonia is about 80%. You need a tighter band.” In response to the need for farmers to manage the risk, Agriliance two years ago introduced the Crop Nutrient Exchange, in which farmers can work through their dealers to forward price fertilizer up to a year in advance that they will take delivery.







 

SEFP ATE




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