August 1, 2001

Farmers are not likely to see any relief in nitrogen fertilizer costs in the coming year, according to a University of Kentucky Cooperative Extension Service agricultural economist.

"For the next year or so nitrogen fertilizer prices will at best remain stable," said Gregg Ibendahl, UK Extension agricultural economist. "It is very likely that nitrogen fertilizer prices will continue to rise."

Nitrogen is major factor in corn production. It is the No. 1 input farmers use on corn that can impact yield. Farmers should consider locking in prices if they see attractive pricing fluctuations, he said.

Increased nitrogen costs in 2001 resulted in many farmers paying twice as much as they did the previous year. Despite those high prices, fertilizer companies are earning smaller profits, according to a Wall Street Journal article published July 9.

Those low profits are attributable to several factors. Fertilizer companies had to pay higher prices for natural gas, the key element in nitrogen production. For a typical producer of ammonia, cash costs rose from $100 per ton to more than $300 per ton.

Reserves of natural gas shrank due to demand outpacing production and imports during last year. A colder winter and more gas fired power plants lead to the increase in demand and corresponding low inventories. That situation is expected to reverse next year and natural gas prices have already declined as inventories are being built.

Another factor impacting company profits is weak demand from farmers. Low crop prices and wet weather in the upper Midwest caused consumption of nitrogen fertilizer to drop after eight years of increases.

These low profits have resulted in reduced domestic supply. It is estimated that a third of North American nitrogen capacity has been shut down, according to the Wall Street Journal. This presents a potential problem for farmers.

Normally, with falling gas prices, farmers should see a reduction in nitrogen fertilizer prices. However, because supply is reduced, farmers may not see reductions in price.

Ibendahl said consumption of nitrogen is expected to increase while North American production will be slow to recover from this year's drop in production. Domestic production that was idled this year may never come back because these plants were the least efficient, he said.

As a result, imports will start to play a bigger part in nitrogen supply in the United States. Therefore, for the short term, supply issues will outweigh any advantages that the lower natural gas prices provide.

For the long term, it is unclear how imports will impact nitrogen fertilizer prices, Ibendahl said.


Gregg Ibendahl, (859) 257-3616