You are getting ready to plant more corn than you have ever planted, maybe even change your rotation, permanently. There has been no time to pencil out your crop budget, but based on $3+ corn prices, it should all cash flow. You have been buying nitrogen for fall application, and your bill has grown bigger than ever before. But what about prices and availability for side dress anhydrous ammonia next spring? If ammonia pricing has always been an enigma, let’s explore the nitrogen economy.

You’re not going to grow corn without a healthy dose of nitrogen, either from ammonium nitrate, anhydrous ammonia, urea, or one of several other sources of nitrogen (N). Just like consumers’ knowledge of food goes only as far as the grocery store, farmers’ knowledge of nitrogen probably goes only as far as the farm service office. Let’s cure that with the help of economists Aleksander Abram and D. Lynn Forster at Ohio State University. Their research was published in September 2005, but provides a comprehensive look at nitrogen, all the way back to the Greek writer Pliny the Elder. Your history lesson is over, and the information you need begins.

You probably know that anhydrous ammonia is 82% nitrogen, and under pressure in a nurse tank it will be in liquid form colder than minus 33 degrees Celsius. It is attracted to water (anhydrous means it has none) and will take the water out of your skin if it has the chance. Aqua ammonia (21% nitrogen) is already in combination. Agriculture uses 85% of the ammonia produced in the US. It has many other uses, including explosives and as a feed additive for ruminants.

Nearly every country uses nitrogen and 75 nations have nitrogen production facilities. In 2003, 146 million tons of nitrogen were produced, nearly double that of 1980. Global use is 82% of capacity production, with the biggest producers in descending order being: China, India, Russia, and the United States. “In North America, approximately one-quarter of capacity remained idle due to soaring natural gas prices. Profitability of ammonia production is governed primarily by natural gas prices, which make up around 90% of the total ammonia production cost, and secondarily by other factors such as industrial efficiency, market power, or the effectiveness of distribution networks.” Natural gas provides the hydrogen component of the ammonia, and the nitrogen component comes from the air during the production process. So the major cost is the natural gas.

In 2004, natural gas prices ranged from 40 cents in North Africa to $5.50 in North America. Natural gas from oil fields can be compressed into liquefied natural gas, converted into exportable fertilizers, or burned off in flares. US production of ammonia peaked in 1998, but has been decreasing about 9% per year. Global production varies widely based on gas prices, politics, and production plant efficiencies. The Middle East, where natural gas is most plentiful, produces very little ammonia. By 2008 China will produce 22% of the world’s ammonia and US production will be at 14%.

Although their report was written prior to the 2005 hurricanes, the Ohio State economists tell why US prices jumped so much before the 2006 planting season, “In 2004, nearly 12 million short tons of ammonia were produced by 16 companies at 31 plants in 17 States in the United States. Fifty-seven percent of total U.S. ammonia production capacity was centered in Louisiana, Oklahoma, and Texas because of their large reserves of natural gas, the dominant domestic feedstock.”

2004 ammonia consumption in the US was 19.1 million tons for anhydrous ammonia, 11 million for urea, 7.8 million tons for ammonium nitrate, and 5.3 million tons for DAP. Prices of nitrogen fertilizers are all based on the amount of nitrogen in the fertilizer, and have been steadily climbing because of natural gas prices and production issues. Since ammonia is 82% nitrogen, its price will be the highest. Then comes “urea (46%), ammonium nitrate (33%) and nitrogen solutions (28-31%) having the largest correlation coefficient, and ammonium sulfate (21%) and DAP (18%) the smallest.” The Ohio State researchers say the relationship will not always be perfect because costs of some of the other elements in the fertilizer may skew the price.

There are also nitrogen price differences around the country according to USDA. “Northwest and Southwest exhibit the highest prices while South Central and Northern Plains the lowest. Others position themselves somewhere in between. Price differences are a result of supply-and-demand characteristics, natural gas prices in the producing regions, and transportation costs. South Central for instance has access to the cheapest source of natural gas. North Central and Northern Plains use large amounts of ammonia or ammonia-based products in the U.S., and due to large economies of scale and lower transportation costs prices are lower than in the Northwest or Southwest.”

Although prices will fluctuate, 90% of the cost of ammonia is based on the cost of natural gas. A $1 rise per million BTU for natural gas increases the cost of ammonia by $33 per ton. US ammonia manufacturers used 317 billion cubic feet of natural gas in 2004. “That represents 4.3% of total industrial use, and about 1.5% of total annual consumption of natural gas. The bottom line is that ammonia fertilizer production constitutes a miniscule portion of total natural gas use in the U.S”. However, agriculture has to compete for ammonia, and ammonia has to compete for natural gas. The US Energy Information Agency predicts that US consumption of natural gas will increase from the 22 trillion cubic feet used in 2003 to 30.7 trillion cubic feet in 2025, meaning that demand (and price) will steadily climb in coming years. As you would expect, there will be various imports and exports of natural gas and ammonia that will cause further fluctuations in price.

On the issue of pricing the Ohio State economists say there is an uncertain future:
• Ammonia production is shifting to parts of the world with lower natural gas prices.
• New Asian plants should be in production by 2007 bolstering the supply.
• The US will soon have the ability to receive increased liquefied natural gas imports by ship.
• Worldwide demand is expected to grow.
• Natural gas prices will float with the price of oil.
• Nitrogen-based fertilizers are expected to remain at higher price levels.

That is what you need to know about nitrogen, except for the price. For that, let’s visit with Kevin Dhuyvetter at Kansas State University, whose monthly forecasts for anhydrous ammonia are based on natural gas futures traded at the New York Mercantile Exchange. By using futures prices, he is calculating anhydrous ammonia prices in the Cornbelt. Since the January 2006 highs, the price of natural gas (and anhydrous ammonia) have been falling, but will begin to rise after the first of 2007. While current prices are nearly 30% less than they were in November of 2005, ammonia prices in the spring of 2007 will only be 3-7% less than they were compared to the spring of 2006.

Summary:

The story of the nitrogen you require for corn begins with natural gas, and its price is related to oil, as well as politics and a fragile production infrastructure. Ammonia, which is the primary source of nitrogen, is produced from natural gas, and because of a wide variation in the cost of natural gas around the world, ammonia prices will also vary widely. In the US, agricultural ammonia consumes only a sliver of the natural gas produced, and has to compete with many other industries. Since natural gas futures are traded, it is possible to watch futures prices and predict the cost of ammonia compared to prior seasons.