Higher natural gas price increases cost of nitrogen fertilizers

<a href=www.stltoday.com>Saint Louis Post-Dispatch By Repps Hudson Post-Dispatch updated: 04/28/2003 11:16 PM

Farmers planting corn this spring are getting a refresher course in the law of supply and demand.

The price of natural gas, the main ingredient in production of nitrogen fertilizers, is nearly double what it was a year ago.

That's because winter was cold - again - and the amount of gas in storage is down drastically.

As for the effect on food prices for consumers, Jim Milleville doesn't see any. He's general manager of St. Clair Service Co., a farm cooperative in Belleville with about 1,000 members. "The cost of processing food is so much more than the commodity that it shouldn't make any difference."

Farmers will have to absorb the fertilizer cost increase.

Mike Schulte, a Belleville-area farmer who's planting 300 acres of corn this spring, is one of the lucky ones. He bought nitrogen fertilizer at $295 a ton last fall, before natural-gas prices hit about $9.50 a million cubic feet in late February. "Now (the fertilizer's) up to about $400 to $430 a ton," he said.

Another lucky - or far-sighted - farmer is Fred Yoder of Plain City, Ohio, president of the National Corn Growers Association. He paid $110 a ton last fall for anhydrous ammonia for his 450 acres of corn. Today that same nitrogen fertilizer would cost 55 percent more.

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"They may be contemplating cutting back on their acreage," he said, "or planting and then waiting until the corn's 6 to 12 inches high, then side-dressing it."

That would mean an application of anhydrous ammonia while the plants are young. It would be an additional expense in tractor fuel and time, but a drop in fertilizer prices could compensate for that cost, Yoder said.

Two years ago, after the worst natural-gas price spike anyone can remember, farmers also paid extraordinarily high prices for nitrogen fertilizers.

Natural gas provides the energy and the hydrogen to produce nitrogen fertilizers from ammonia. Natural gas accounts for 70 percent to 80 percent of the cost of such fertilizers, said Peter Scharf, associate professor of agronomy at the University of Missouri at Columbia.

He has written a paper urging farmers to use caution before deciding to switch to soybeans from corn because of the high cost of the fertilizer corn needs. For example, beans don't require nitrogen fertilizers.

Corn and soybeans are the two major crops most farmers in this area raise. They usually rotate the crops to protect soil conditions.

Scharf noted that when farmers plant beans on the same field a second year, the yield typically will be 5 percent to 8 percent lower than if they follow corn-bean rotation.

If farmers go with beans again instead, they could run into another law of supply and demand.

Fertilizing with nitrogen this spring may cost farmers $8 to $20 more an acre, but they still would be betting that their corn yield will make enough to turn a small profit, Scharf said.

Milleville estimated that farmers are paying up to $13.50 an acre more than they did last spring for fertilizer for corn.

Assuming corn sells for $2.50 a bushel this fall, Milleville said, farmers would have to raise an additional five bushels an acre to make up the cost.

However, if they switch to beans, Milleville noted, beans might glut the market, which could drive down the price.

At the same time, a smaller amount of corn planted this spring would mean a smaller harvest - and possibly higher prices. That would benefit corn growers.

Yoder said he expects corn production to drop 10 percent to 15 percent nationwide this year as more farmers switch to soybeans or grain sorghum, also known as milo, to save money.

Milo, which grows in drier conditions, is primarily a cattle feed.

Farmers in the South, who use natural gas to run irrigation pumps, may be thinking about switching to milo this year, because natural gas is too expensive to make irrigation cost-effective, Yoder said.

The higher price of natural gas will boost the cost of producing corn by about $2 billion nationwide, he said.

Much also depends upon things farmers cannot control: weather, overseas production and markets and other factors, such as military conflicts or political instability.

Scharf recommends that farmers scale back application of nitrogen fertilizers this spring by 10 to 20 pounds an acre, "thus saving about $3 to $6 an acre."

The science of agronomy hasn't developed to the point that it can determine exactly how much nitrogen is needed on a particular field, he said. "We find there's a tremendous amount of variability in soil productivity, field to field - even within a field."

The variables include soil types, humus, moisture content and other factors that can differ within just a few feet.

Applying fertilizer is a little like carpet bombing. Agronomy hasn't evolved to the point that fertilizer can be applied like "smart bombs" to boost productivity where it's needed while leaving the rest of the field alone.

Scharf and other observers see more uncertainty down the road, much of it related to fluctuations in natural-gas prices and the movement offshore of fertilizer production.

China is the largest producer of nitrogen fertilizers, followed by areas such as Eastern Europe, Trinidad and Tobago, Saudi Arabia and Venezuela, where the market price of natural gas is consistently lower than in the United States, Scharf said.

Two years ago, the market price of natural gas was much higher than what fertilizer producers had contracted for. As a result, those producers sold their gas to the market and didn't make fertilizer, Scharf said. That cut down on fertilizer supplies and helped push up the price.

The same trend seems to be happening again, Scharf said.

Furthermore, natural gas in underground storage in early April was 623 billion cubic feet, 883 billion cubic feet less than a year ago, according to the Energy Information Administration. This supply is 598 billion cubic feet - 49 percent - below the five-year national average of 1,221 billion cubic feet. That was a record low level for the last nine years, the Energy Information Administration said.

Reporter Repps Hudson: E-mail: rhudson@post-dispatch.com Phone: 314-340-8208