Natural Gas: Domestic Nitrogen Fertilizer Production Depends on
Natural Gas Availability and Prices (30-SEP-03, GAO-03-1148).
Natural gas is the most costly component used in manufacturing
nitrogen fertilizer. Therefore, when natural gas prices increased
in 2000-2001, U.S. companies that produce nitrogen fertilizer
reported adverse financial consequences resulting from much
higher production costs. Concerns also arose that the nation's
farmers would face much higher nitrogen fertilizer prices and
that there might not be an adequate supply of nitrogen fertilizer
to satisfy farmers' demands at any price. Responding to
congressional concerns, GAO undertook a study to determine (1)
how the price of natural gas affects the price, production, and
availability of nitrogen fertilizer and (2) what role the federal
government plays in mitigating the impact of natural gas prices
on the U.S. fertilizer market.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-1148
ACCNO: A08605
TITLE: Natural Gas: Domestic Nitrogen Fertilizer Production
Depends on Natural Gas Availability and Prices
DATE: 09/30/2003
SUBJECT: Fertilizers
Natural gas
Natural gas prices
Prices and pricing
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GAO-03-1148
United States General Accounting Office
GAO
Report to the Ranking Democratic
Member, Committee on Agriculture, Nutrition and Forestry, U.S. Senate
September 2003
NATURAL GAS
Domestic Nitrogen Fertilizer Production Depends on Natural Gas Availability and
Prices
a
GAO-03-1148
Highlights of GAO-03-1148, a report to the Ranking Democratic Member,
Committee on Agriculture, Nutrition and Forestry, U.S. Senate
Natural gas is the most costly component used in manufacturing nitrogen
fertilizer. Therefore, when natural gas prices increased in 2000-2001,
U.S. companies that produce nitrogen fertilizer reported adverse financial
consequences resulting from much higher production costs. Concerns also
arose that the nation's farmers would face much higher nitrogen fertilizer
prices and that there might not be an adequate supply of nitrogen
fertilizer to satisfy farmers' demands at any price. Responding to
congressional concerns, GAO undertook a study to determine (1) how the
price of natural gas affects the price, production, and availability of
nitrogen fertilizer and (2) what role the federal government plays in
mitigating the impact of natural gas prices on the U.S. fertilizer market.
www.gao.gov/cgi-bin/getrpt?GAO-03-1148.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim Wells at (202) 512-3841,
[email protected].
September 2003
NATURAL GAS
Domestic Nitrogen Fertilizer Production Depends on Natural Gas Availability and
Prices
Higher natural gas prices have contributed to higher nitrogen fertilizer
prices and reduced domestic production. The following figure shows the
relationship between natural gas prices and the farmer price for nitrogen
fertilizer.
Farmer Price for Nitrogen Fertilizer Relative to Natural Gas Prices,
January 1998-March 2003
Higher gas prices in 2000-2001 also led to a 25 percent reduction in
domestic production of nitrogen but, despite this decline, the supply of
nitrogen fertilizer was adequate to meet farmers' demand in 2001. Demand
was met because U.S. nitrogen production was supplemented by a 43 percent
increase in nitrogen imports and a 7 percent decrease in agricultural
consumption of nitrogen fertilizer.
The federal government does not set natural gas prices, and it has a
limited role in managing the impact of natural gas prices on the U.S.
fertilizer market. Three federal agencies-(1) the Federal Energy
Regulatory Commission, (2) the Commodities Futures Trading Commission, and
(3) the Energy Information Administration-are responsible for ensuring
that natural gas prices are determined in a competitive and informed
marketplace. Moreover, the federal government has no role in controlling
fertilizer prices, but the U.S. Department of Agriculture (USDA) does
monitor developments in the agricultural sector, including fertilizer
markets, that could affect farmers. Also, in 2001, USDA collected
additional survey information in response to concerns about the price and
availability of nitrogen fertilizer.
Contents
Letter
Results in Brief
Background
Higher Natural Gas Prices Have Contributed to Higher Nitrogen
Fertilizer Prices and Reduced Domestic Production but Have Not Affected
Availability of Fertilizer Federal Government Has a Limited Role in
Managing the Impact of
Natural Gas Prices on the Fertilizer Market Observations Agency Comments
1 3 4
5
14 19 20
Appendixes
Appendix I: Objectives, Scope, and Methodology 22
Appendix II: GAO Contacts and Staff Acknowledgments 26
GAO Contacts 26
Staff Acknowledgments 26
Table 1: U.S. Nitrogen Supply and Demand, June
Tables 30, 1996-2002 12
Table 2: Average Corn Prices, 1996-2001 18
Table 3: Average Costs of Materials Used per
Acre on Corn Farms,
1996-2001 19
Figures Figure 1: Figure 2: Figure 3:
Figure 4: Figure 5:
Anhydrous Ammonia and Natural Gas Prices,
1998-2003 6
Urea, UAN, and Natural Gas Prices, January 1998-March
2003 7
Prices of Anhydrous Ammonia in the U.S. Gulf Port and
Mid Cornbelt Relative to Natural Gas Prices, January
1998-March 2003 8
Farmer Prices for Nitrogen Fertilizer Relative to Natural
Gas Prices, January 1998-March 2003 9
Nitrogen Fertilizer Availability, 2001 13
Contents
Abbreviations
CFTC Commodity Futures Trading Commission
EIA Energy Information Administration
ERS Economic Research Service
FERC Federal Energy Regulatory Commission
NASS National Agricultural Statistics Service
TFI The Fertilizer Institute
UAN urea ammonium nitrate
USDA U.S. Department of Agriculture
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.
A
United States General Accounting Office Washington, D.C. 20548
September 30, 2003
The Honorable Tom Harkin
Ranking Democratic Member
Committee on Agriculture, Nutrition and Forestry United States Senate
Dear Senator Harkin:
Nitrogen, the plant nutrient and fertilizer component most widely applied
by American farmers, is essential for maintaining the high yields achieved
for major crops such as corn, wheat, and cotton in this country. Natural
gas is a key component in the production of nitrogen, and the cost of
natural gas can account for up to 90 percent of nitrogen fertilizer
production costs. When natural gas prices in this country increased in
late 2000 and early 2001, U.S. fertilizer producers reported financial
losses resulting from the significant increase in their costs of producing
nitrogen fertilizer. These higher production costs also made it difficult
for U.S. producers to compete with foreign nitrogen fertilizer producers,
who could buy natural gas at lower prices and export their products to the
United States. At about the same time, concerns arose that the nation's
farmers would face much higher nitrogen fertilizer prices-and even that
there might not be an adequate supply of fertilizer to satisfy farmers'
demand at any price. Such an outcome was considered possible if U.S.
fertilizer producers were forced to significantly decrease their
production, because in recent years domestic producers have supplied more
than one-half of the nitrogen fertilizer used by American farmers.
According to fertilizer industry officials, higher natural gas prices in
2003 are again having a negative financial impact on the U.S. nitrogen
fertilizer industry, threatening to irreversibly cripple it.
In this context, you asked us to determine (1) how the price of natural
gas affects the price, production, and availability of fertilizer and (2)
what role the federal government plays in managing the impact of natural
gas prices on the U.S. fertilizer market. To address the first issue, we
examined government and industry price data pertaining to natural gas and
nitrogen fertilizer to determine how nitrogen fertilizer prices, both
major market
spot prices1 and retail prices paid by farmers, behaved when the price of
natural gas increased in 2000-2001 and again in early 2003. Specifically,
we determined the extent to which a correlation exists between the price
of natural gas at the Henry Hub2 and prices for three major types of
nitrogen fertilizer products: anhydrous ammonia, urea, and urea ammonium
nitrate (UAN). We selected these three products because they are widely
used by American farmers. We also examined data obtained from the
Department of Commerce and industry sources to determine how nitrogen
fertilizer production behaved when natural gas prices spiked in 2000-2001
and the results of a U.S. Department of Agriculture (USDA) survey aimed at
determining how farmers reacted to higher fertilizer prices in 2001. To
determine how higher natural gas prices have affected the supply of
nitrogen fertilizer, we obtained the results of a second USDA survey aimed
at determining the availability of fertilizer. In addition, we analyzed
sources, supplies, and consumption of nitrogen from fertilizer years 1996
through 2002.3 To address the second objective, we reviewed the
responsibilities of federal agencies relevant to the natural gas and
fertilizer markets and their efforts to monitor and collect information on
these markets. We also reviewed relevant documents provided by agriculture
and fertilizer industry representatives and interviewed these officials to
obtain their views on what actions, if any, the federal government should
take to mitigate the effects of high natural gas prices on the U.S.
fertilizer market. We performed our review from February through August
2003 in accordance with generally accepted government auditing standards.
A detailed description of our objectives, scope, and methodology is
contained in appendix I.
1Spot prices are the current cash prices at which fertilizer is sold at
various locations. For the purposes of our review, we used prices at two
major market locations: the U.S. Gulf Port, whose price is considered the
benchmark for fertilizer prices in North America, and the Mid Cornbelt.
Unless otherwise specified, fertilizer prices referred to in this report
are Gulf Port prices.
2The Henry Hub is one of the largest gas market centers in the United
States. Its price often serves as a benchmark for wholesale natural gas
prices across the country. The price of natural gas is commonly measured
in dollars per million British thermal units (mmBtu), which is
approximately 1,000 cubic feet of gas.
3Information on nitrogen and fertilizer production and consumption is
reported in industry sources on a fertilizer year basis-which represents
the time from July 1 to June 30. Thus, fertilizer year 2002 represents the
time between July 1, 2001 and June 30, 2002. Unless noted, all references
to nitrogen and fertilizer production and consumption are on a fertilizer
year basis.
Results in Brief Higher natural gas prices have contributed to higher
nitrogen fertilizer prices and reduced domestic production, but supplies
of fertilizer have been adequate during periods of high natural gas prices
in the past primarily because of increased imports. For example, between
January 2000 and January 2001, the average price of natural gas increased
by more than 300 percent, from $2.52 to $10.16 per mmBtu. Because natural
gas is the most costly component used in manufacturing nitrogen
fertilizer, the higher gas prices led to higher prices for nitrogen
fertilizer. For example, between January 2000 and January 2001, the U.S.
Gulf Port spot price for anhydrous ammonia, one of the most commonly used
nitrogen fertilizers, increased by 144 percent, from $119 to $290 per ton.
Higher natural gas prices during 2001 led to higher production costs for
U. S. nitrogen fertilizer producers and this in turn led to a 25 percent
reduction in domestic nitrogen production in 2001. Despite this
significant decline in production, a USDA survey found the supply of
nitrogen fertilizer was adequate to meet farmers' demand. According to
this survey, conducted from April to June 2001, while nitrogen fertilizer
supplies were below normal early in the year, they had returned to normal
levels by June. Our analysis shows that the demand for nitrogen fertilizer
was met in 2001 because (1) U.S. production was supplemented by an
increase of about 43 percent in nitrogen imports and (2) agricultural
consumption of nitrogen fertilizer decreased from 12.3 million tons in
2000 to 11.5 million tons in 2001. According to industry officials, gas
prices in 2003 are again resulting in unacceptably high production costs
and, as a result, a decline in production levels is occurring.
The federal government has a limited role in managing the impact of
natural gas prices on the U.S. fertilizer market. Although the federal
government does not set natural gas prices, three federal agencies-(1) the
Federal Energy Regulatory Commission, (2) the Commodities Futures Trading
Commission, and (3) the Energy Information Administration-are responsible
for ensuring that natural gas prices are determined in a competitive and
informed marketplace. Moreover, the federal government has no role in
controlling fertilizer prices, and nitrogen fertilizer products imported
from other countries are generally not subject to U.S. trade restrictions,
such as quotas or tariffs. However, as part of its overall mission, USDA
monitors developments in the agricultural sector that could affect
farmers. Regarding the fertilizer market, USDA collects information on
fertilizer prices and, in 2001, in response to concerns about fertilizer
prices and availability, conducted two surveys of the fertilizer market.
These surveys showed that there was no problem with fertilizer
availability
in 2001, and most farmers surveyed did not reduce their use of nitrogen
fertilizer.
Background Natural gas is a key feedstock in the manufacturing of nitrogen
for which there is no practical substitute. Manufactured nitrogen-also
known as anhydrous ammonia-is used as a fertilizer itself and is also the
primary building block used to manufacture all other nitrogen-based
fertilizers. Some of this nitrogen also is used for industrial purposes
such as promoting bacterial growth in waste treatment plants, making
plastics, and as a refrigerant. U.S. manufacturers supplied almost 14
million tons of nitrogen during fertilizer year 2002 and an additional 7
million tons were imported. Fifty-six percent of the total nitrogen supply
was consumed by U.S. agricultural demands. Since natural gas is the most
costly component of nitrogen, the profitability of the U.S. nitrogen
fertilizer industry depends, to a large degree, on the price of natural
gas in the United States. As we
4
reported in December 2002, natural gas prices can be volatile, and small
shifts in the supply of or demand for gas are likely to continue to cause
relatively large price fluctuations. In addition to facing a volatile
natural gas market, which sometimes leads to price spikes, America's
nitrogen fertilizer producers must also compete in a marketplace where
many competitors pay much lower prices for natural gas. For example,
industry data show that recently, when the U.S. market price for natural
gas was $5 per mmBtu, lower gas prices were available to nitrogen
fertilizer producers in other parts of the world. The price of gas in the
Middle East was 60 cents per mmBtu; in North Africa, 40 cents; in Russia,
70 cents; and in Venezuela, 50 cents. According to The Fertilizer
Institute (TFI),5 fertilizer products operate in a world market, and U.S.
prices are influenced by numerous variables other than the price of
natural gas in the United States.
4U.S. General Accounting Office, Natural Gas: Analysis of Changes in
Market Prices, GAO-03-46 (Washington, D.C.: Dec. 18, 2002).
5TFI represents, by voluntary membership, manufacturers, retailers,
trading firms, and equipment manufacturers of the U.S. fertilizer
industry. The Institute employs a full-time Washington, D.C. staff in
various legislative, education, and technical areas.
Higher Natural Gas Prices Have Contributed to Higher Nitrogen Fertilizer
Prices and Reduced Domestic Production but Have Not Affected Availability of
Fertilizer
Because the cost of natural gas accounts for such a large percentage-up to
90 percent-of the total costs of manufacturing nitrogen fertilizer,
nitrogen fertilizer prices tend to increase when gas prices increase. When
gas prices increased in 2001 and 2003, prices for nitrogen fertilizers
increased throughout the marketing chain. The higher natural gas prices in
2001 also led to higher production costs for the U.S. nitrogen fertilizer
manufacturing industry and resulted in a significant reduction in the
amount of nitrogen produced in this country that year. Despite this
decline in the production of nitrogen, supplies of nitrogen fertilizer
were adequate to meet farmers' needs in 2001 primarily because of a
significant increase in imported nitrogen.
Natural Gas and Nitrogen Fertilizer Prices Are Closely Related
Higher natural gas prices have contributed to higher prices for nitrogen
fertilizer throughout the marketing chain. When gas prices increased
significantly in 2001 and 2003, spot market prices, as well as the prices
farmers paid for fertilizer, increased for all three nitrogen-based
products included in our analysis-anhydrous ammonia, urea, and UAN.
Further, the high prices seen in 2001 could have been even higher, if the
volume of fertilizer imports had not increased to compensate for the
reduction in domestic production of nitrogen. The relationship between gas
prices and fertilizer prices was the strongest for anhydrous ammonia, at
least in part, because anhydrous ammonia contains the highest
concentration of nitrogen of the three fertilizer products-82 percent-and
natural gas is by far the most costly component used in manufacturing
nitrogen. Anhydrous ammonia is the nitrogen-based fertilizer used most
often in the United States, and is also the primary building block for
urea and UAN. As shown in figure 1, prices for anhydrous ammonia and
natural gas prices moved closely in relation to each other during the
period from January 1998 to March 2003. When gas prices increased or
decreased, the spot market price for ammonia tended to follow the same
trend. More specifically, both the price of natural gas and the price of
ammonia peaked in January 2001 and again in March 2003. Closer review of
the data shows that the monthly price of natural gas in January 2000 of
$2.52 per mmBtu had risen 1 year
later to $10.16 per mmBtu, an increase of 303 percent. Over the same time
period, the price of anhydrous ammonia rose from $119 per ton to $290 per
ton, an increase of 144 percent.6
Figure 1: Anhydrous Ammonia and Natural Gas Prices, 1998-2003
Anhydrous ammonia in dollars per ton Natural gas in dollars per mmBtu
400 12
350 10
300
8
250
200 6
150 4
100
2 50
00
Jan Apr
lJu
Oct Jan Apr
lJu
Oct Jan Apr
lJu
Oct Jan Apr
lJu
Oct Jan Apr
lJu
Oct Jan Apr
1998 1999
Source: GAO analysis of industry data.
2000 2001 2002 2003
Anhydrous ammonia - Gulf Port
Natural gas
From January 1998 to March 2003, prices of urea and UAN also reflected
natural gas prices. However, as shown in figure 2, the relationship
between the two was not as close as that between natural gas and anhydrous
ammonia prices because urea and UAN contain considerably less nitrogen
6Although there is a strong correlation between natural gas prices and
nitrogen fertilizer prices, many other variables influence the supply and
demand market forces that ultimately determine fertilizer prices. In
addition, U.S. companies that produce nitrogen use various purchasing
techniques to manage their natural gas price risks; therefore, they do not
purchase all their gas at the prevailing market price.
than anhydrous ammonia: 46 percent and 32 percent nitrogen, respectively.
Because urea and UAN prices reflect lower nitrogen concentrations, they
did not always move in direct relationship with natural gas prices. For
example, in May 1998, urea prices increased to $162 per ton, while gas
prices remained basically flat.
Figure 2: Urea, UAN, and Natural Gas Prices, January 1998-March 2003
UAN and urea in dollars per ton Natural gas in dollars per mmBtu 250 12
10 200
8 150
6
100 4
50 2
00
1998 1999 2000 2001 2002 2003 Jan Apr
Oct Jan Apr Oct Jan Apr Oct Jan Apr Oct Jan Apr Oct Jan Apr
lJu
lJu
lJu
lJu
lJu
Source: GAO analysis of industry data.
Urea-Gulf Port UAN-Mid Cornbelt
Natural gas
Note: UAN prices are shown in dollars per ton for a 32 percent nitrogen
solution.
Moreover, the prices of nitrogen fertilizer can differ depending upon how
much further along the marketing chain prices are recorded. For example,
as shown in figure 3, the price for anhydrous ammonia in the Mid Cornbelt,
where this fertilizer is primarily used, was higher than the price in the
U.S. Gulf. This difference reflects the cost of transporting the ammonia
from the Gulf, where it is produced, to the Mid Cornbelt. Also, changes in
the price
of nitrogen fertilizer can lag behind changes in natural gas prices,
depending upon where in the marketing chain prices are recorded. For
example, as shown in figure 3, the price for anhydrous ammonia in the Mid
Cornbelt peaked in February 2001-about 1 month after natural gas prices
spiked that year. Other increases and decreases in the price of Mid
Cornbelt ammonia lagged behind natural gas price changes on other
occasions. We believe these lags reflect the time associated with
transporting the fertilizer from its point of origin to the farmers who
ultimately use the product.
Figure 3: Prices of Anhydrous Ammonia in the U.S. Gulf Port and Mid
Cornbelt Relative to Natural Gas Prices, January 1998- March 2003
Retail prices for nitrogen fertilizer, or those prices paid by farmers,
also tend to rise sharply when natural gas prices increase. As shown in
figure 4, the USDA-reported farmer prices for nitrogen fertilizer
reflected the
natural gas price spikes that occurred in January 2001 and March 2003.
However, the 2001 spike in fertilizer prices lagged behind the increase in
gas prices by about 1 month. The February 2001 price for nitrogen
fertilizer was about 79 percent higher than it was the previous year.
Figure 4: Farmer Prices for Nitrogen Fertilizer Relative to Natural Gas
Prices, January 1998-March 2003
Farmer price for nitrogen fertilizer in dollars per ton Natural gas in
dollars per mmBtu
400 12
350 10
300
8 250
200 6
150 4
100
2 50
00
1998 1999 2000 2001 2002 2003
Farmer price
Natural gas
Sources: GAO analysis of USDA, National Agricultural Statistics Service,
and industry data.
Note: Nitrogen fertilizer prices were calculated using USDA price indices
and the amount of nitrogen contained in anhydrous ammonia, urea, and UAN.
Furthermore, according to USDA data, the average U.S. farm-level price for
nitrogen fertilizer during the spring, when farmers' demand for nitrogen
fertilizer is the highest, tracked natural gas prices. Specifically, the
April monthly price for natural gas increased approximately 84 percent
from April 2000 to April 2001. Over the same time period, the April
farm-level price for anhydrous ammonia increased 76 percent from $227 to
$399 per ton. By April 2002, gas prices had decreased by 39 percent, and
ammonia
Jan Apr
Oct Jan Apr Oct Jan Apr Oct Jan Apr Oct Jan Apr Oct Jan Apr
lJu
lJu
lJu
lJu
lJu
prices had dropped by 37 percent from the previous year's level. In April
2003, the price of natural gas was again higher, increasing by 48 percent,
and the average farm-level price of anhydrous ammonia followed this trend
by increasing 49 percent. However, it is difficult to determine the extent
of financial harm farmers suffered because of increased fertilizer prices
in 2001. A USDA study directed at determining how corn farmers responded
to higher fertilizer prices in 2001 found that about 34 percent of the
responding producers of corn-a crop that requires large quantities of
nitrogen fertilizer-purchased a majority of their nitrogen fertilizer at
prices that were set prior to January 2001 and, therefore, were not
affected by the sharp rise in fertilizer prices that year. Further, these
producers were among the largest corn-producing farms and applied the most
nitrogen fertilizer per acre. Eleven percent of the corn producers that
responded to the USDA survey reported adjusting their nitrogen application
rates or practices in response to higher prices, and the remaining 55
percent of respondents-generally smaller corn farms that applied the least
amount of nitrogen fertilizer-reported they took no action in response to
higher nitrogen fertilizer prices in 2001.
Higher Natural Gas Prices Had Financial Consequences for U.S. Nitrogen
Fertilizer Producers and Led to Reduced Production
The sharp rise in gas prices in 2001 had financial consequences for the
U.S. nitrogen fertilizer manufacturing industry because of the sharp
increase in their production costs. These higher production costs, which
could not be recovered through higher fertilizer prices, led to plant
closures and a significant reduction in domestic nitrogen production.
According to industry data, several companies that manufacture nitrogen
fertilizer reported decreased revenues or financial losses in 2001, and
each cited higher natural gas prices as contributing to or causing the
financial consequences. For example, one large interregional cooperative
that produces nitrogen fertilizer for U.S. farmers and ranches reported a
loss of more than $60 million in 2001. The company's 2001 annual report
cited high natural gas prices as a primary reason for the financial loss.
Industry data obtained from the International Fertilizer Development
Center7 showed that between January 2001 and June 2003, eight U.S.
nitrogen fertilizer manufacturers permanently closed their plants, and a
ninth plant had not operated since 2001. Industry officials also told us
that
7The International Fertilizer Development Center is a public, nonprofit
organization dedicated to increasing agricultural productivity through the
development and use of sound plant nutrient technology.
natural gas prices in 2003 have remained well above historic averages and
are continuing to exact a financial toll on the domestic nitrogen
fertilizer manufacturing industry. These officials cite the fact that, in
June 2003, the U.S. industry was operating at only 50 percent of capacity
as evidence of this toll. Further, they said the industry has suffered
through several years of extreme financial hardship, caused in part by
higher gas prices driving up production costs and foreign competitors who
have access to less expensive natural gas and, if gas prices in this
country remain relatively high, more U.S manufacturers are likely to
curtail nitrogen production, and some could permanently shut down their
plants.
The production and consumption of fertilizer is often measured by the
amount of nutrient content in the fertilizer applied. For nitrogen
fertilizer products, the primary nutrient that is measured is nitrogen.
Manufacturers supply nitrogen that is consumed in both the agricultural
and industrial sectors. Table 1 below provides estimates of nitrogen
supply and demand in the United States over the last 7 years, including
the nitrogen nutrient content in fertilizer products consumed by the
agricultural sector. As the price of natural gas, the key component in the
manufacturing of nitrogen spiked in 2001, nitrogen production fell. As
shown in table 1, U.S. manufacturers produced 25 percent less nitrogen in
2001 than in 2000.
Table 1: U.S. Nitrogen Supply and Demand, June 30, 1996-2002
000 tons
Supply and
demand 1996 1997 1998 1999 2000 2001 2002
Producers beginning
inventory 2,415 2,047 1,799 1,956 2,585 1,856 2,468
Production 14,469 14,593 15,092 14,634 14,186 10,583 11,519
Imports 4,963 4,497 5,066 6,114 6,289 8,978 7,273
Total supply 21,847 21,137 21,957 22,704 23,060 21,417 21,260
Consumption 16,813 16,965 17,028 17,270 17,254 16,373 16,809
Agricultural 12,303 12,352 12,313 12,452 12,334 11,535 12,009
Industrial 4,510 4,613 4,715 4,818 4,920 4,838 4,800
Exports 3,292 3,365 3,390 3,458 3,442 2,768 2,945
Producers ending
inventory 2,047 1,799 1,956 2,585 1,856 2,468 1,690
Total demand 22,152 22,129 22,374 23,313 22,552 21,609 21,444
Sources: GAO analysis of Department of Commerce, Bureau of Census, and TFI
data.
Note: Total supply and total demand differ primarily because the
components are derived from several independent sources, as explained in
appendix I.
Imports Have Helped Maintain Availability of Nitrogen Fertilizer
Despite the significant decline in domestic production of nitrogen in
2001, supplies of nitrogen fertilizer were adequate to meet farmers'
demand that year primarily because of an increase in imports. USDA
collected additional survey information from April to June 2001 to
determine whether farmers were facing problems in obtaining nitrogen
fertilizer. The results of this survey show that the supply of nitrogen
fertilizer was adequate to meet farmers' 2001 demand. As shown in figure
5, while nitrogen fertilizer supplies were below normal in several states
in April 2001, they had returned to normal levels in all but one state by
June of that year. Nationally, nitrogen fertilizer supplies were at 92
percent of normal levels in early April 2001, while only 12 states
reported supplies at less than 90 percent of normal levels. Only two
states-Pennsylvania and New Jersey-reported supplies at less than 80
percent of normal levels. However, by early June nitrogen fertilizer
supplies were at 97 percent of normal levels nationally, and all but one
state reported supplies at 95 percent or more of normal levels. By June
30, 2001, USDA officials concluded that there were sufficient supplies of
nitrogen fertilizer, and they stopped the survey. Furthermore, USDA did
not conduct a similar survey in
2003, when gas prices and fertilizer prices again increased, because it
was unaware of any concerns about the availability of nitrogen fertilizer.
Figure 5: Nitrogen Fertilizer Availability, 2001
The results of USDA's survey are consistent with our analysis, which found
that although domestic production of nitrogen declined 25 percent in 2001,
the overall demand was met primarily because imports increased by about
43 percent. As shown in table 1, nitrogen imports increased from 6.3
million tons in 2000 to approximately 9 million tons in 2001. Although
most nitrogen fertilizer imported into the United States has for the past
several years come from Canada, the amount of nitrogen fertilizer imported
from Canada decreased by almost 13 percent in 2001. On the other hand,
nitrogen fertilizer imports from Trinidad Tobago, Venezuela, and Ukraine
increased by 19 percent, 59 percent, and 469 percent, respectively, in
2001. The price of natural gas in these three countries was considerably
lower than the price of gas in the United States; thus, fertilizer
producers in these countries were able to produce nitrogen fertilizer at
much lower costs than domestic producers.
Table 1 also shows that domestic agricultural consumption of nitrogen
decreased from 12.3 million tons in 2000 to 11.5 million tons in 2001-or
about 7 percent. At least part of this reduction can be attributed to the
impact of higher fertilizer prices on the country's farmers. For example,
according to USDA's survey aimed at determining how corn farmers responded
to higher fertilizer prices in 2001, 11 percent of responding farmers
reported they adjusted their nitrogen fertilizer rates or practices in
response to higher nitrogen fertilizer prices that year. About 80 percent
of these farmers reduced their nitrogen fertilizer use by an average of 23
percent.
Federal Government Has a Limited Role in Managing the Impact of Natural Gas
Prices on the Fertilizer Market
The federal government has a limited role in managing the impact of
natural gas prices on the domestic fertilizer market. For example, the
government does not determine the price of natural gas; however, two
federal agencies-the Federal Energy Regulatory Commission (FERC) and the
Commodity Futures Trading Commission (CFTC)-play important roles in
promoting competitive natural gas markets by deterring anticompetitive
actions. In addition, the Energy Information Administration (EIA) is
responsible for obtaining information about and analyzing trends in the
natural gas market that are used by industry and government decision
makers. As with natural gas, the federal government does not set or
control prices for nitrogen fertilizer. However, as part of its overall
mission, USDA does monitor developments in the agricultural sector that
could affect farmers. Regarding the fertilizer market, USDA collects,
analyzes, and disseminates information on fertilizer prices and uses and,
in 2001, collected additional information on the supply of nitrogen
fertilizer and how higher fertilizer prices affected farmers. Lastly, USDA
provides insurance and commodity price support programs to assist
America's farmers in managing risks associated with crop yields and
revenues.
Federal Role in the Natural Gas Market Is Focused on Ensuring a Competitive
Marketplace
As we reported in December 2002, in today's deregulated market the federal
government does not control the price of natural gas. However, two federal
agencies are responsible for ensuring that natural gas prices are
determined in a competitive marketplace. Specifically, FERC plays a major
role in overseeing the natural gas marketplace to ensure that prices are
just and reasonable and free from fraud and market manipulation.
Similarly, CFTC exercises regulatory oversight of natural gas derivatives8
that are traded on federally regulated exchanges, such as the New York
Mercantile Exchange, to protect traders and the public from fraud,
manipulation, and abusive practices.
Following the price increases that occurred in the natural gas market
during 2000-2001, both FERC and CFTC initiated investigations into
possible fraud or manipulation. In August 2002, FERC reported that it had
found indications that several companies may have manipulated spot prices
upward for natural gas delivered to California during 2000-2001.9 In March
2003, FERC reported that it had found evidence of manipulation of both
electricity and natural gas markets, and that spot market gas prices were
not produced by a well-functioning competitive market.10 FERC staff made
several recommendations to FERC commissioners aimed at correcting the
deficiencies they found in the electric as well as the natural gas market.
In a statement before the National Energy Marketers Association on April
4, 2003, the Chairman of CFTC acknowledged that the commission had imposed
monetary penalties and filed complaints in federal court against several
companies in connection with false reporting and attempts to manipulate
natural gas prices and operating an illegal futures exchange. The Chairman
also said that CFTC was actively engaged in other energy sector
investigations, and further charges might be filed.
8These natural gas derivatives are futures and options contracts whose
value is derived from the price of natural gas itself. These contracts can
be bought and sold by entities that are interested in protecting
themselves against increases in the price of natural gas.
9FERC, Initial Report on Company-Specific Separate Proceedings and Generic
Reevaluations: Published Natural Gas Price Data; and Enron Trading
Strategies, August 2002.
10FERC, Final Report on Price Manipulation in Western Markets, March 2003.
Following the price spike that occurred in the natural gas market in
February 2003, FERC and CFTC again undertook investigations of possible
market manipulation. On July 23, 2003, they issued a joint statement
saying that neither investigation had identified evidence of market
manipulation. FERC concluded that gas prices had risen in apparent
response to underlying supply and demand conditions and in a manner
consistent with those conditions.11 CFTC said that it found nothing that
suggested manipulative activity in the natural gas futures and options
market during the week of February 24, 2003.
A third federal agency-EIA-analyzes energy price movements and provides
market information that gas industry analysts use as an indicator of both
supply and demand. For example, in May 2002, EIA began reporting estimates
on the volume of gas in storage, which is a key predictor of future
natural gas prices. EIA also provides weekly and monthly updates on the
natural gas market and special reports on various issues affecting the gas
market. In its August 2003 energy outlook, EIA reported that gas prices at
the Henry Hub, one of the largest gas market centers in the United States,
fell below $4.70 per mmBtu during the last week in July 2003. This was
considered significant because these prices had been considerably above $5
per mmBtu on a monthly basis since the beginning of the year. However, EIA
advised that gas prices are at risk for volatility and industrial users
who rely on spot market purchases for their gas, such as nitrogen
fertilizer producers, face the greatest risk of higher natural gas prices.
11FERC, Report on the Natural Gas Price Spike of February 2003, July 2003.
Federal Role in the Fertilizer Market Is Limited
The federal government does not control prices for nitrogen fertilizer,
and nitrogen fertilizer products imported from other countries are
generally not subject to U.S. trade restrictions, such as quotas and
tariffs.12 However, as part of its overall mission, USDA does monitor and
report on developments in the agricultural sector that could affect
farmers and offers certain programs to help farmers manage the risks
associated with crop yield and revenues. The National Agricultural
Statistics Service (NASS) collects information on agricultural acreage,
production, stocks, prices, income, and information on fertilizer prices
and uses. For example, the annual Agricultural Chemical Usage report
provided by NASS includes information for targeted crops by major
producing states on how much and what type of fertilizer was applied per
acre. NASS also reports monthly price indices for three major fertilizer
types-nitrogen, phosphate, and potassium-and actual prices paid by farmers
for several fertilizer products in April of each year.
In addition to its routine surveys, USDA collected additional information
in 2001 about nitrogen fertilizer availability and prices. According to
officials from the Office of the Chief Economist, this information was
collected because Congress and others had raised concerns about higher
natural gas prices and the possible impact these prices would have on the
availability and price of fertilizer. In order to collect this
information, questions were added to USDA's ongoing Crop Progress survey
aimed at determining the availability of nitrogen fertilizer in 2001 and
to the Agricultural Resource Management Survey to determine how corn
growers responded to the higher nitrogen fertilizer prices that occurred
in 2001. The results of this additional survey information are discussed
elsewhere in the report.
12Although nitrogen fertilizer is generally imported into the United
States under a free trade arrangement, the United States International
Trade Commission has, since 1999, ruled on four cases alleging that
certain nitrogen fertilizers exported from several countries were being
sold in the United States at less than fair value. In three of these cases
-(1) Solid Urea from Armenia, Belarus, Estonia, Lithuania, Romania,
Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan, USITC Pub.
3248, Inv. Nos. 731-TA-339 and 340-A-1 (October 1999); (2) Certain
Ammonium Nitrate from Russia, USITC Pub. 3338, Inv. No. 731-TA-856,
(August 2000); and (3) Certain Ammonium Nitrate from Ukraine, USITC Pub.
3448, Inv. No. 731-TA-894, (August 2001) -the Commission found that
certain fertilizers imported from the cited countries were being sold at
prices that materially injured the industry in the United States.
Therefore, the price of certain nitrogen fertilizers imported from
Armenia, Belarus, Estonia, Lithuania, Romania, Russia, Tajikistan,
Turkmenistan, Ukraine, and Uzbekistan was restricted, either by order or
agreement. These restrictions are still in effect.
USDA also offers insurance and commodity price support programs to help
farmers manage risk associated with crop yields and revenues, but it
currently does not offer similar programs to cover the risks associated
with farm production costs, such as the cost of fertilizer. For example,
in 2002, USDA's insurance program covered crops valued at $41 billion, and
commodity price support payments have averaged more than $10 billion per
year since 1996. According to USDA officials, the agency does not offer
insurance to cover the risks associated with farm production costs because
these risks tend to be small compared with the risks associated with crop
prices. Since a farmer's income per acre from a crop equals the crop price
times the yield, changes in either crop price or yield are directly and
fully reflected in a farmer's income. As shown in table 2, crop prices can
change significantly over time and from year to year. From 1996 to 2001
the average price of corn declined by $.98 per bushel, or 35 percent, and
average corn prices declined by $.61 per bushel-24 percent-from 1997 to
1998. Overall, from 1996 to 2001, average corn yields increased only 11
percent-from 130 bushels per acre to 144 bushels per acre. In addition,
while national average yields are relatively stable from year to year, the
actual yields for individual farmers can vary significantly from year to
year as a result of natural causes, such as weather conditions and the
extent of loss caused by insects and diseases.
Table 2: Average Corn Prices, 1996-2001 Crop prices/yields 1996 1997 1998 1999
2000 2001
Price (dollars per bushel at harvest 2.82 2.52 1.91 1.69 1.77 1.84
Yield (bushels per planted acre) 130 130 136 135 138 144
Source: USDA, Economic Research Service.
In contrast, a farmer faces fewer risks with costs of production because
these costs tend to remain stable from year to year. As shown in table 3,
total production costs per acre for a corn farm remained relatively stable
from 1996 through 2001, and changes in different cost categories often
offset one another. For example, although average fertilizer costs
increased by $8.68 per acre from 2000 to 2001, this large increase was
offset by a decrease of $8.24 in fuel, lube, and electricity costs. Other
production costs also decreased and, as a result, total production costs
decreased by $3.84, or about 2 percent.
Table 3: Average Costs of Materials Used per Acre on Corn Farms, 1996-2001
Cost categories 1996 1997 1998 1999 2000 2001
Fertilizer $47.04 $46.21 $41.44 $38.75 $39.04 $47.72
Seed 26.65 28.71 30.02 30.29 30.02 32.34
Chemicals 27.42 26.87 27.36 28.40 28.82 26.44
Fuel, lube, and electricity 24.43 24.55 22.96 23.04 29.12 20.88
Repairs 15.78 16.17 16.65 17.17 17.55 13.76
Custom operations 11.30 11.30 11.29 11.37 11.48 10.94
Manure 0.60 0.56 0.51 0.49 0.48 2.65
Interest on operating capital 3.86 3.96 3.61 3.50 4.53 2.60
Other variable cash expenses 0.30 0.32 0.31 0.31 0.31 0.22
Soil conditioners (lime) 0.16 0.16 0.16 0.17 0.16 0.12
Total costs $157.54 $158.81 $154.31 $153.49 $161.51 $157.67
Source: USDA, Economic Research Service.
Similarly, although USDA provides information to farmers through the
Cooperative State Research, Education and Extension Service to help them
participate in farm commodity futures markets, there is relatively little
information regarding farm production costs, such as fertilizer. According
to a state extension service official, the extension service has issued
several publications that provide information on farm commodity futures
markets because farmers are generally familiar with these markets and have
access to the information needed to participate successfully in these
markets. However, the extension service generally does not encourage
farmers to participate in futures markets involving farm production cost
items, such as fuels, because farmers are not as familiar with these
markets. Instead, farmers generally use various prepayment methods to
control the costs of items used in producing crops.
Observations Natural gas is the most costly ingredient used in
manufacturing nitrogen fertilizer products. However, the price of natural
gas can vary significantly in different markets throughout the world.
Unfortunately for domestic nitrogen fertilizer manufacturers, the price of
natural gas in the United States can far exceed its price in other parts
of the world. As a result, domestic manufacturers are at a competitive
disadvantage when domestic natural gas prices rise. Manufacturers can
close plants in response to periodic price spikes and resume production
when prices drop again, but higher prices sustained over the long term may
result in more permanent
curtailment of domestic production. In the past, farmers' needs for
fertilizer have been met by increases in imports when domestic production
has been curtailed, as it was in 2001. However, it remains to be seen how
well the market will respond to further reductions in the domestic
production of nitrogen fertilizer that may be caused by more sustained
higher natural gas prices in the future. Earlier this year, increased
natural gas prices once again caused higher production costs for the
nation's fertilizer manufacturing industry, which in turn contributed to a
reduction in the amount of nitrogen being produced and an increase in
nitrogen fertilizer prices. Although it is too early to determine whether
these higher gas prices will have the same adverse effect on the
fertilizer manufacturing industry as higher gas prices did in 2001, some
within the industry contend that continuing higher gas prices are
threatening the industry.
Agency Comments We provided USDA and TFI with a draft of this report for
review and comment. We received oral comments from USDA and TFI officials,
who agreed with our facts and observations.
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies to the USDA Secretary,
The Fertilizer Institute, and other interested parties. We also will make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
Questions about this report should be directed to me at (202) 512-3841.
Key contributors to this report are listed in appendix II.
Sincerely yours,
Jim Wells Director, Natural Resources and Environment
Appendix I
Objectives, Scope, and Methodology
In our study of the natural gas and nitrogen fertilizer markets, we
determined (1) how the price of natural gas affects the price, production,
and availability of nitrogen fertilizer and (2) the federal government's
role in managing the impact of natural gas prices on the U.S. fertilizer
market.
To address these objectives, we reviewed pertinent documents and obtained
information and views from a wide range of officials from both the federal
government and the private sector. We interviewed staff and/or obtained
information from the Department of Agriculture's (USDA) Office of the
Chief Economist, Economic Research Service, National Agricultural
Statistics Service, and Cooperative State Research, Education and
Extension Service; the Department of Commerce; the Department of Energy's
Energy Information Administration; the Federal Energy Regulatory
Commission; the Commodity Futures Trading Commission; and the
International Trade Commission. We also discussed the relationship between
the natural gas and nitrogen fertilizer markets with representatives from
various industry organizations, including The Fertilizer Institute (TFI);
the International Fertilizer Development Center; the American Farm Bureau
Federation; Agrium Incorporated; CF Industries, Incorporated; and Terra
Industries, Incorporated.
To determine how the price of natural gas affects the price of nitrogen
fertilizer, we examined industry-supplied natural gas prices and industry,
as well as government, price data for nitrogen fertilizer and determined
how fertilizer prices behaved when gas prices increased in 2000-2001 and
again in 2003. We determined the extent to which a correlation existed
between the price of natural gas and prices for three nitrogen
fertilizers, anhydrous ammonia, urea, and urea ammonium nitrate, which
were included in our analysis because they are widely used by American
farmers. We compared natural gas and nitrogen fertilizer prices for the
period January 1998 through March 2003. More specifically, we obtained
industry prices for natural gas at the Henry Hub from Global Insight
(USA), Inc. We selected Henry Hub prices because this market center is one
of the largest in the country and often serves as a benchmark for
wholesale natural gas prices across the country. We obtained monthly spot
prices, or the current cash prices at which nitrogen-based fertilizers are
sold at various locations, from an industry source-Green Markets:
Fertilizer Market Intelligence Weekly. Green Markets, a Pike & Fischer,
Inc., publication, collects independent spot price quotes for 19
fertilizer commodities every week. Our analysis of the market data
included fertilizer prices at two major market locations: (1) the U.S.
Gulf Port, whose prices are considered the benchmark for fertilizer prices
in North America, and (2) the Mid Cornbelt, where large quantities of
Appendix I
Objectives, Scope, and Methodology
nitrogen fertilizer are used. In addition, we compared the relationship
between the prices paid by farmers for nitrogen fertilizer and natural gas
prices. To do this, we calculated the monthly prices paid by farmers for
nitrogen fertilizer. We used the April prices paid by farmers for
anhydrous ammonia, urea ammonium nitrate (32 percent nitrogen solution)
and urea (46 percent nitrogen). Since these prices are reported only once
a year in April, we applied the monthly prices paid index for nitrogen
fertilizer published by USDA to the April prices in order to calculate a
monthly price for nitrogen fertilizer. We did this by using the
appropriate weights, supplied by USDA, for each of the fertilizer
components (anhydrous ammonia, urea ammonium nitrate, and urea). The index
for nitrogen fertilizer is based on the Producer Price Index series (PPI)
and appropriate subcomponents from the Bureau of Labor Statistics. The
April fertilizer prices are obtained by survey from establishments selling
fertilizers to farmers.
To determine the effect of natural gas prices on domestic nitrogen
fertilizer production, we examined nitrogen inventory, production, and
consumption data obtained from government and industry sources from 1996
through 2002. These data (shown in table 1) reflect the estimated quantity
of nitrogen in the United States, including the nitrogen nutrient in
several fertilizer products-anhydrous ammonia, ammonium nitrate, ammonium
sulfate, aqua, nitrogen solutions, urea, and other nitrogen materials. The
estimated nitrogen production, imports, and exports were derived from the
Department of Commerce, Bureau of Census, quarterly report Inorganic
Fertilizer Materials and Related Products (MQ325B). The inventory data
were taken from a TFI report, Fertilizer Record, which reflects the
results of a TFI monthly survey of domestic nitrogen fertilizer producers.
The agricultural consumption data were derived from reports filed by
fertilizer users with state fertilizer control officials. These reports
are tabulated by the Association of American Plant Food Control Officials,
Inc. (AAPFCO) and TFI and published by TFI in Commercial Fertilizers.
Because of the incompleteness of the state fertilizer consumption reports,
an unknown but significant amount of missing data, particularly for the
most recent year, are imputed based on historical information by AAPFCO
and TFI. The estimates described above were used in this report for
several reasons. First, the estimates of total supply and total demand,
which reflect the combination of data from several independent sources,
differ only slightly. Second, the trends in consumption from the trade
source are consistent with those in the related Census Bureau series.
Third, these data are widely used by companies that produce nitrogen
fertilizer. In addition, we reviewed financial reports and other industry
documents that describe how
Appendix I
Objectives, Scope, and Methodology
the nitrogen manufacturing industry responded to higher natural gas prices
and interviewed industry and government officials to obtain their views
and comments.
In determining the effect of higher natural gas prices on the supply of
nitrogen fertilizer, we relied primarily on the results of a USDA survey
on fertilizer availability in 2001. According to USDA officials, they
added questions concerning nitrogen fertilizer supplies to the ongoing
Crop Progress survey1 because this was the most efficient and reliable
survey vehicle available on short notice. USDA asked respondents to report
on the adequacy of nitrogen fertilizer supplies that were available to
producers in their area. Although the responses were subjective, those
people providing the responses are widely respected as the most
knowledgeable about agricultural situations in their respective counties.
The results of the survey questions used to gather information on the
availability of nitrogen fertilizer were presented in the National
Agricultural Statistical Service's Crop Progress report dated June 4,
2001. We also examined data contained in our supply and demand table
(table 1) to determine sources, supplies, and consumption of nitrogen
fertilizer over the 7-year period ending in June 2002.
To determine what role the federal government plays in managing the impact
of natural gas prices on the U.S. fertilizer market, we reviewed the
responsibilities of federal agencies regarding the natural gas and
fertilizer markets and their efforts to monitor and collect information on
these markets. We reviewed relevant documents provided by agriculture and
fertilizer industry representatives and interviewed these officials to
obtain their views on what actions, if any, the federal government should
take to mitigate the effects of high natural gas prices on the U.S.
fertilizer market. We also reviewed relevant documents and interviewed
USDA and state extension service officials regarding how farmers manage
the risks associated with their production costs and the federal
government's role in assisting farmers in managing these risks. Finally,
we reviewed the results
1USDA, National Agricultural Statistics Service conducts crop progress
surveys on a weekly basis from early April to the end of November to
collect specific data and the overall condition of selected crops in major
producing states. The surveys are nonprobability surveys that include a
sample of more than 5,000 people who make visual observations and have
contact with farmers in their counties.
Appendix I
Objectives, Scope, and Methodology
of a USDA analysis of the 2001 Agricultural Resource Management Survey,
which was used to gather information on how American farmers who grow corn
responded to the higher nitrogen fertilizer prices in 2001.2 The results
of this analysis were presented in the USDA, Economic Research Service's
Agricultural Income and Finance Outlook report dated September 26, 2002.
We performed our review from February through August 2003 in accordance
with generally accepted government auditing standards. While we did not
independently verify the accuracy of natural gas and fertilizer prices and
other data obtained from industry sources, we did compare these data with
other relevant data to ascertain the reasonableness of the data we used.
We also interviewed knowledgeable government and industry officials to
determine the reasonableness of the data and our use of them. We
determined that the data were sufficiently reliable for the purposes of
our report.
2The Agricultural Resource Management Survey, conducted by USDA's Economic
Research Service, is an annual, state-by-state survey of farms and
agricultural commodities conducted to obtain information about the
financial condition, production practices, resource use, and economic well
being of America's farm households. Trained enumerators conduct personal
interviews of a statistical sample of farm operators to collect data for
this survey.
Appendix II
GAO Contacts and Staff Acknowledgments
GAO Contacts Jim Wells (202) 512-3841 Mark Gaffigan (202) 512-3168
Staff In addition to the individuals named above, Carol Bray, James
Cooksey, Nancy Crothers, Paul Pansini, Robert Parker, and Barbara
Timmerman
Acknowledgments made key contributions to this report.
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