Natural gas key to fertilizer price
Natural gas has the potential to fuel farm machinery, but it's already crucial to agriculture for another reason -- as a major ingredient in nitrogen fertilizer.
Prices of natural gas and nitrogen have correlated in the past, but the current surge in U.S. natural gas production isn't expected to drive down fertilizer prices anytime soon.
"They don't tie anymore," said Glen Buckley, chief economist for the NPK Fertilizer Advisory Service.
Natural gas represents roughly 90 percent of the cost of nitrogen production, but that's not currently a deciding factor in fertilizer prices, he said. The fertilizer market is now affected by worldwide demand rather than supply.
The price of nitrogen closely tracks the price of natural gas when there is an oversupply of the fertilizer, as there generally was in the 1980s and 1990s, Buckley said.
Fluctuating natural gas prices basically represent the cost of production for nitrogen fertilizer, he said. In an oversupply of nitrogen, the price of natural gas determines whether fertilizer manufacturers can afford to continue producing the material.
If the nitrogen price falls below the cost of production, manufacturing capacity is closed. That constrains supply of the fertilizer, stabilizing its price. In other words, the price of natural gas establishes a price floor for nitrogen.
"We haven't been at that floor for a while," Buckley said.
Last year, for example, nitrogen fertilizer became more expensive even as natural gas prices fell, he said. For the past half decade, supplies of nitrogen of have been tight enough that its price moves independently of natural gas.
The world is moving back into an oversupply situation due to high prices, but that's not expected to make nitrogen cheaper for farmers in the near term, Buckley said.
Even so, abundant natural gas in North America is a positive sign for U.S. agriculture, since it helps preserve a domestic fertilizer manufacturing industry, he said.
Healthy domestic production prevents the U.S. from becoming overly dependent on imported nitrogen from the Middle East, a dominant manufacturing region, Buckley said. "We want to have security of supply."
Domestic natural gas production has expanded greatly due to changes in drilling technology, said Valerie Wood, president of the Energy Solutions natural gas analysis company.
Natural gas wells in the U.S. generate roughly 72 billion cubic feet of natural gas per day, up more than 30 percent in the last five years, according to Energy Solutions.
"Supply is a given now, whereas in the past it wasn't," Wood said. "The whole perception of what exists has changed."
The production growth can be attributed to hydraulic fracturing, or fracking, in which natural gas companies essentially drill wells horizontally rather than straight down, she said.
The process allows for natural gas exploration from one point, reducing the costs of moving drilling equipment and increasing the amount of gas that can be captured at a single site, Wood said.
"The same well can access a much larger pool of gas," she said. "It's basically telescoping out from a single hole in the ground."
-- Mateusz Perkowski