The majority of nitrogen (N) fertilizer sold in Iowa is either anhydrous ammonia, or products made from anhydrous ammonia (urea, ammonium nitrate, and urea-ammonium nitrate solutions) (Table 1). Ammonia is also a manufacturing component of other fertilizers such as ammonium sulfate, diammonium phosphate (DAP), and monammonium phosphate (MAP). Natural gas is a major feedstock in ammonia production--the hydrogen (H) in ammonia (NH3) comes from natural gas. It is not easy to combine N (N2 gas from the atmosphere) and H to make ammonia, so considerable energy (mostly natural gas) also is consumed. The average natural gas consumption for anhydrous ammonia production is approximately 33.5 million British thermal units (MMBtu) per ton. Therefore, the ammonia production cost is closely tied to the price of natural gas.
In 1999, the average price of natural gas was $2.19 per MMBtu, close to the past average natural gas price for the last 15 years (divide the cost per MMBtu by 10 to get the cost per therm of natural gas). It rose to a $4.40 average in 2000. At a price of $2.19 per MMBtu, the cost of producing ammonia is about $100 per ton. Recently, the spot price of natural gas spiked to $10.00 per MMBtu, which would translate to an ammonia production cost of approximately $360 per ton. At that cost natural gas accounts for more than 90 percent of the total ammonia production cost. Additional energy also is needed for manufacturing, storage, and transportation, which increases cost further and adds to the retail price.
Natural gas prices have increased recently for several reasons, including increased demand for generating electricity and slowed development of new gas supplies. Low inventories and the cold early winter high demand for home heating quickly brought depleted supplies. Hence the high price spike. If natural gas demand remains strong, and supply tight, then N fertilizer prices may remain high for some time.
Along with the cost concern is the potential for shortage of N fertilizers. Because of the high natural gas costs, ammonia production is idled at some plants and others are running at less than capacity. This could translate into some product shortfalls. Industry estimates vary, but the potential exists for 10 to 15 percent less N available for sale than normal this spring. The next few weeks will be critical for resumed ammonia production and lessening of the current supply situation. Increases in imported N fertilizers (mostly urea but also anhydrous ammonia) will help ease decreased U.S. production. Nitrogen production in other countries continues because natural gas costs are not as high as in the United States.
With the current supply-cost scenario it will be important for farmers to work closely with dealers and have N use plans (and contingency plans) in place. Don't get a surprise come spring. It will also be important for farmers and dealers to be flexible and work together to get all the various N fertilizer products applied, and applied in the best manner.
Appreciation is extended to The Fertilizer Institute  for information on natural gas pricing and ammonia production cost figures.
Table 1. Fertilizer distribution in Iowa, 1999-2000. Source: Iowa Department of Agriculture and Land Stewardship.
This article originally appeared on page 8 of the IC-486 (1) -- January 29, 2001 issue.