Worried About High N Prices?

Keith A Kelling and Larry G Bundy

Department of Soil Science

University of Wisconsin - Madison

Source: PotashCorp

Fertilizers, Feeds& Industrial SalesFertilizersFertilizers &

ExplosivesIndustrial SalesFertilizers &Industrial Sales

Solid UreaUAN SolutionAmmoniumNitrateNitric AcidAmmonia

Natural Gas

Anhydrous Ammonia(NH3)

Carbon Dioxide(CO2)

Liquid Urea(UR)

Prill Toweror Granulator

UAN Solution

28-32% N (UAN)

Liquid Ammonium

Nitrate (AN)Nitric Acid

(NA)

Prill Toweror Granulator

33.5 MMBtu/ton

0.22 t/t0.29 t/t

0.80 t/t

0.35 t/t0.45 t/t 1.01 t/t

0.78 t/t0.58 t/t

1.01 t/t

Nitrogen - A Simplified Flow Diagram

Source: PotashCorp

Source: NYMEX Monthly Closing gas prices

NYMEX Natural Gas Prices

0123456789

1011

Jan-9

9

Apr-99

Jul-9

9

Oct-99

Jan-0

0

Apr-00

Jul-0

0

Oct-00

Jan-0

1

Apr-01

Jul-0

1

Oct-01

Jan-0

2

Apr-02

Jul-0

2

Oct-02

Jan-0

3

Apr-03

Jul-0

3

Oct-03

$US/MMBtu

$9.13

$4.43

Source: Monthly Closing gas prices

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Jan02 Jan03 Jan04 Jan05

Actual

$ Per MMBtu

January 2002 - December 2005

Henry Hub Price

Natural Gas Prices

PIRA Forecast

Source: NYMEX

2.75

3.25

3.75

4.25

4.75

5.25

5.75

6.25

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2003 2004 2005 2006 2007

$ US / MMBtu

NYMEX US Natural Gas Futures PricesOctober 16, 2003

Source: NYMEX

Per Cent 2002 2003 Change

Res/Commercial 22.04 22.85 +3.7

Electric Generation 15.11 13.75 -9.0

Industrial 20.11 18.89 -6.1Ammonia 1.14 0.90 -21.1

Misc. 5.17 5.17 0.0

Total 62.42 60.67 -2.8

U.S. Natural Gas DemandBCF/Day

1997-2003 Nitrogen Market Driving Factors

• High U.S. natural gas prices

• Record increase in world nitrogen

capacity

• China’s ban on urea imports

• Collapse of the Russian ruble

(i.e. natural gas prices)

Source: Industry Publications

US Ammonia Production is About 25% Curtailed

PotashCorp Geismar and Memphis still down

Koch’s Sterlington plants are still down

Terra’s Blytheville ammonia/urea brought back to 80% (was shut down on July 1)

Miss Chem’s Donaldsonville Ampro plant is still down

Miss Chem’s Donaldsonville Triad facility and Yazoo City 3 are up (Yazoo City 4 is still down).

Dakota Gas’ Beulah, ND plant down for $3.5 million of repairs

Source: Industry Publications

10

12

14

16

18

20

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Estimate

Actual

Million Tons

U.S. Annual Nitrogen ProductionCapacity

Source: Fertecon

Million Tonnes Product

New Ammonia Capacity vs Demand

Several Projects uncertain

Cumulative Growth

Source: Fertecon

Longer-Term Outlook

• Increased reliance on imports• Further consolidation of U.S. industry

– Industrial ammonia suppliers along Gulf coast likely to close and rely on imports

– Some urea capacity likely to close due to increased offshore competition

U.S. natural gas prices are expected to moderate but remain above historical averages. This will likely result in:

Tightening world balance and access to large domestic market, however, will allow the bulk of the industry to remain competitive

• Low commodity prices?• Some inflation• Large fertilizer price increases?

Possible strategies• Cut inputs?• Continue past practices?• Evaluate and allocate for best

returns

Y2K + 4 outlook

Corn grain yield response at Arlington 1990’s

020406080

100120140160180200

0 30 60 90 120 150 180

N rate (lb/a)

Economic Optimum N Rate (EONR)

Cost of lastincrement of

N added

Value of yield increase

produced

=

Calculation of economic optimum N rate for 1990’s Arlington corn data

N rate

Actual Yield

Yield Increase

Increased Corn Value

Increased Fertilizer

Cost

Increased Return

------ bu/a ------ ------------- $/a -------------

60 161.4 9.8 24.50 4.00 20.50

80 169.2 7.8 19.50 4.00 15.50

100 175.0 6.8 17.00 4.00 13.00

120 178.8 3.8 9.50 4.00 5.50

140 180.6 1.8 4.50 4.00 0.50

160 180.8 0.2 0.50 4.00 (3.50)

180 180.5 -0.3 (0.75) 4.00 (4.75)

Calculated at corn to N fertilizer price ratio of 12.5:1.Check yield 126 bu/a

EONR only changes slightly with N cost or corn value changes

• Steep response curve

• Broad top plateau

• EONR not related to yield

• Needed 0.78 lb N/bu

Optimum N rates for northern Illinois sites 1999-2002

location corn - corn soybean - corn

optimum N rate

yield lb N/bu

optimum N rate

yield lb N*/bu

lb/a bu/a lb/a bu/a

Perry 127 132 1.0 88 127 1.0

Urbana 187 161 1.2 163 183 1.1

Monmouth 173 174 1.0 127 202 0.8

DeKalb 206 159 1.3 126 172 1.0

*40 lb “soybean” credit added to calculate this ratio for corn following soybean.Adapted from Nafzigen et al, 2003.

Principles of N fertilizer economies

1. EONR generally insensitive to value/price changes

2. EONR is best rate if supply and capital are unlimited = largest total return

3. “Other” N reduces EONR

4. First units applied provide biggest per unit returns

5. Management value increases in tough times

Beating Y2K + 4

• Use the EONR or slightly less

• Credit all N sources

• Guard against N losses

• Treat each management unit individually

• Grow the best possible crop

UW Soil ScienceDepartment