High fertilizer prices are shaping up to be a significant factor for lower U.S. corn acreage this year, according to David Asbridge, Doane Ag Services, St. Louis, Mo. Asbridge spoke at the National Alliance of Agricultural Crop Consultants in Tucson, Ariz., in January.
High natural gas prices are part of the reason why fertility prices are skyrocketing, although not directly, according to Asbridge. Rather, high natural gas prices are forcing U.S. nitrogen manufacturers to cut back on production, leading to more imports, which is increasing global demand in a tight supply situation.
The 20-year long-term average price for natural gas had been about $2.10 per million British thermal units up until 2000. It takes about 33 million Btu to produce a ton of anhydrous ammonia, which is the base for other nitrogen products and is also a major input in phosphate products.
Over the last few years, there has been a tremendous upsurge in natural gas prices in the United States to an expected average of $13 per million Btu for 2005. Natural gas prices have since declined to around $9 per million Btu, but “are going to continue to stay high.”
The United States also currently has a shortage of production capacity for natural gas, according to Asbridge. “We are actually producing less natural gas in the United States than we were producing 20 years ago. This is a real problem that Congress, or our leadership, is going to have to address.
“As a result of the high cost structure of natural gas in the United States, we have had to close down about one-third of our total nitrogen production capacity over the last few years,” he said. “Since 1999, we’ve dropped from about 20 million tons of nitrogen production capacity to around 12 million tons.”
This shortage has created a lot of import demand for nitrogen fertilizer, especially urea. “Urea has been the standard for nitrogen fertilizer outside the United States. Urea is easier to ship, handle and store.”
Today, about two-thirds of the urea used in the United States is imported and a third comes from domestic sources. But demand for all fertilizer — P, K and N — is driving prices higher.
Asbridge noted that if there were enough plants on line in the world to satisfy nitrogen demand, “we probably wouldn’t be running any plants in the United States.”
“The rest of the world is using a lot cheaper natural gas than the United States,” Asbridge said. “In the Middle East, it’s around $1 per million Btu. Even in the high-cost areas of the world, the price of natural gas is $2.50 per million Btu. We can’t compete at the current $9 to $10.”
U.S. inventories of nitrogen fertilizer remain at low levels. “A lot of plants learned a lesson in 2001. They continued to run using higher-priced natural gas because they thought the demand was going to be there. At that same time, we were seeing a huge jump in imports. The cheap imported product was used up and the expensive product got left over. So now, during those times when we should be increasing inventories going into the spring season, we’re seeing inventories drop off.
“We have a pretty tight situation for anhydrous ammonia and urea. If the season breaks early, some areas may not get all the fertilizer they want, when they want it, at any price.”
One thing that could push natural gas prices down is warm weather between now and spring, noted Asbridge. But don’t expect fertilizer prices to decline. “There is a ton of uncertainty out there right now. Our best guess is that over the next three or four months, we’re going to see fertilizer prices stay right where they are, even if natural gas prices drop. It takes time to get plants up and running and to produce it.”
Asbridge described a perfect storm of fertilizer prices. “P,K and N, are at record levels. Another factor for the increase in phosphate and phosphate prices is the demand growth outside the United States.
“Of course, this is putting U.S. farmers under a lot of financial stress. Prices for corn have been going down over the last two to three years while the cost of producing corn has been going up. The biggest factor in the higher costs is fertilizer. The per acre cost for fertilizer has just about doubled over the last few years. Fuel prices have also doubled over the last few years.”
These factors will likely result in U.S. corn acres declining by 1.5 million to 2 million acres in 2006. “While cost of production is a factor, weather will play a role, as it always does,” Asbridge said. “If the weather looks good and farmers are rolling along, they may go ahead and plant more corn. But assuming average weather, we estimate about 79.5 million acres of corn in 2006.”
In the mid-term, “corn’s strong demand will help pull stocks down, which in turn will help push prices up a little bit. We’re still not real optimistic on how high prices will go, but they will turn around from where they are now.”
For this season, a lot of acreage will shift to soybeans due to its potentially better bottom line and the fact that Asian soybean rust did not have a major impact on the crop in 2005, Asbridge said.