By John Vogel
As printed in Farm Futures, October 29, 2008.

Nitrogen price relief may be spelled as r-e-c-e-s-s-i-o-n. Three sputtering global economic factors are converging to kill these "bull" markets.

Record high crude oil prices primed most free world economic engines to misfire, bringing on a surge in production and exploration - just as skyrocketing fuel costs arrived to hammer consumer spending. Natural gas prices, closely linked with oil and the precursor of nitrogen fertilizers, climbed with oil. Then, like oil, natural gas prices began choking on rising global production and new U.S. discoveries - in the face of slowing global demand.

Then came Uncle Sam's infamous bank bail-out and spreading global financial shockwaves. A world-wide economic slow down suggest declining demand for natural gas for non-ag industrial uses.

From June's wellhead peak of $10.82, natural gas prices plummeted 33% by early October according to U.S. Department of Energy's Energy Information Administration. That projection was made before the Down Jones went over the cliff. And the EIA warned that a major world-wise economic downturn would significantly impact for gas and oil.

Normally, natural gas prices rise heading into the winter season. But EIA officials recently reported that supply concerns "are dissipating due to abundant supplies in storage and continued reports of ample domestic onshore production."

How that impacts nitrogen?
Nitrogen prices seem to be following oil and natural gas downward. Nitrogen fertilizers are directly related to the price of natural gas (methane), explains Eddie Funderburg, ag consultant for Oklahoma-based Noble Foundation. A ton of anhydrous ammonia fertilizer requires 33,500 cubic feet of natural gas - about 85% of the cost of manufacturing it.

Using $7 per thousand cubic feet, it takes $234.50 of natural gas to make a ton of anhydrous ammonia. Even with ample transportation and marketing margins added on, that's far from the $1,000-a-ton anhydrous prices commanded earlier this year.

As of September 26, U.S. natural gas inventories, according to EIA, were at 50 billion cubic feet above the five-year average. Domestic production is projected to increase nearly 10% for 2008, without tapping the country's newest and largest find in the Northeast.

Global demand for ammonia also rose with oil and gas demand. And ammonia manufacturers have responded, according to an October report by Global Industry Analysts. Pulled by rising fertilizer use in Latin America, Africa and Asia, future growth in ammonia production capacity has been targeted to those regions.

GIA projects worldwide ammonia supplies to rise by 2010. It projects world ammonia markets to climb from 147.6 million metric tons in 2008 to 167 million metric tons by 2012.

However, that prediction is predicated on strong global economic growth and rising gross domestic product. Going into November, both were shrinking on a global scale.

Plummeting open market (speculative) nitrogen trading also is dragging on nitrogen prices. By late October, according to Bryce Knorr, Farm Futures economist, fertilizer morphed into a buyer's market.

Urea at the Gulf hit $300 a ton. Farm gate prices could be had at $650 to $700 a ton, if anyone wanted to buy. But Knorr points out, many dealers locked in much higher prices. Without competition, they may be unwilling to write down their price.

This article appeared in Farm Futures, www.farmfutures.com, on October 29, 2008.