Natural gas prices have reached what fertilizer manufacturers are calling “a new plateau,” which means farmers can expect to pay more for nitrogen.
Jim Pendergast, director of corporate relations with Agrium, said gas prices, which are measured in units called mmbtus, have been above $5 US per mmbtu for most of the year. And that’s high.
“That has a big impact on nitrogen costs,” he said.
With prices at that level, natural gas represents nearly 80 percent of the cost of manufacturing a tonne of ammonia, which is the basic building block of all nitrogen fertilizers. In other years it has been as low as 65 percent of the cost.
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“Ammonia has been a very expensive commodity,” said Pendergast.
It takes about 34 mmbtus to make a tonne of ammonia. Add in labour and power costs and the total comes out to about $200 per tonne.
Alberta Agriculture tracks a variety of farm input prices. Its statistics show that the August 2003 price for 46-0-0 urea fertilizer is 30 percent higher than it was a year ago, while 82-0-0 anhydrous ammonia is up 27 percent.
Pendergast said prices are up no matter what type of nitrogen fertilizer is being considered.
“It’s all based off of ammonia, which is all based off of natural gas.”
The good news is that the summer on the eastern seaboard has seen moderate weather. Residents in North America’s biggest natural gas guzzling region, where the gas is used to fire electricity plants, haven’t cranked up their air conditioning units as much as usual.
That has allowed storage reserves to be refilled, which is causing prices to drift a bit below that $5 plateau.
“We’re thinking this trend may continue for a while longer,” said Pendergast.
At least until the cold weather hits. The dead of winter is typically when gas prices reach their highest levels, which can affect spring fertilizer prices.
He thinks farmers might want to consider prepurchasing their nitrogen this fall for next year’s crop.
“That’s probably a good time to take advantage of what could be lower prices,” said Pendergast.
University of Saskatchewan agricultural economics professor Ken Rosaasen said the industry always wants farmers to buy in advance. But a few factors will influence that decision.
The most important is whether farmers want to buy nitrogen fertilizer at all. Rosaasen said most grain prices have fallen relative to last year, so producers might not want to spend as much on inputs in 2004.
“From a demand side, the economic forces are saying it doesn’t look as profitable as a year ago.”
Cash flows may also be tighter this year, especially for mixed operations, a lingering effect of this summer’s bovine spongiform encephalopathy crisis. Many producers would have to borrow money to pay for the fertilizer.
Then there is the wild card element to consider. If winter 2004 is colder than usual, natural gas prices could rise above $6 per mmbtu. If it is mild, they could fall below today’s levels when spring arrives, said Pendergast.
