Reason for gas price increase

Byline: Hembree Brandon Farm Press Editorial Staff

Imports of fertilizer are expected to lessen the impact of rising natural gas prices on the farm sector, according to USDA's Interagency Agricultural Projections Committee.

While tightness in the U.S. natural gas market is expected to persist for the medium term, the resulting price volatility will likely have "only modest implications" for the farm sector because of increased imports of fertilizer, the committee said in its February 2005 Agricultural Baseline Projections.

Although the direct use of natural gas on U.S. farms is small in comparison to other energy sources, natural gas feedstock is the primary component of nitrogen-based fertilizers that are important to maximum production of corn, cotton, rice, and other crops.

"Use of nitrogen-based fertilizers has been part of the remarkable productivity gains of U.S. agriculture," the committee noted.

The United States has imported significant amounts of natural gas from Mexico and Canada over the past 20 years, and North America had been largely self-sufficient in natural gas production until the last several years, when the market tightened as demand for the low-polluting fuel rose for use in generating electricity, petrochemical production, and other manufacturing purposes.

"Natural gas imports through shipments of liquefied natural gas (LNG) will become increasingly important in augmenting North American supply and relieving the demand pressure on prices. But, there are currently not enough facilities for converting LNG to natural gas to meet projected demand, and several years will be needed before new LNG conversion facilities will be available to ease this situation."

For that reason, the committee said, "natural gas prices could be high and somewhat volatile" for the next several years.

Nitrogen fertilizer production in North America has been primarily based on natural gas because of its availability, historically low price, and environmentally-friendly characteristics.

But as U.S. natural gas prices rose sharply in recent years, many U.S. plants producing nitrogen-based fertilizers shut down, resulting in significant cuts in fertilizer output. Instead, fertilizer suppliers imported nitrogen materials from major exporters, such as Trinidad, Tobago, Canada, Russia, and Saudi Arabia - countries that have lower natural gas prices and thus a substantial cost advantage in production.

Fertilizer imports have helped to keep prices for nitrogen materials in the United States from rising as much as natural gas prices, the committee said. "Although fertilizer prices will rise as natural gas prices increase, as long as world fertilizer production remains ample, the availability of fertilizer imports to augment domestic supplies will continue to have a moderating effect on fertilizer prices for the U.S. farm sector."

hbrandon@primediabusiness.com