Blame Demand, Overseas Competition for Pricey Anhydrous

Editor's Note: Farm Futures continues a new ongoing series taking a more in-depth look at key input prices for the 2008 crop year. While higher crop prices have been good news on the farm, there's a bad-news scenario building for fertilizer costs. Our coverage continues with a look at the pressures impacting prices.

High demand for N is causing anhydrous prices to shoot through the roof and no longer link to natural gas prices, says one fertilizer analyst (see chart at the end of this story).

"The old relationships aren't holding," says Joe Dillier, Plant Food Market Manager for Growmark, a wholesale fertilizer distributor and cooperative. "The reason ammonia is $600 per ton is supply and demand."

In early 2000, when natural gas began moving from $2 to $8 per btu, retail ammonia prices also began moving higher. That linkage held true through the Katrina hurricane in August 2005, when logistical problems in the Gulf sent anhydrous prices soaring.

Back then it was a cost push - the cost of the product pushing the price of the product, explains Dillier. Now it's demand pull for all forms of N fertilizers —both here and abroad - that's causing higher anhydrous prices. That includes higher demand from India and Latin America, higher corn acres nationwide, and potential higher application rates per acre, although that is only speculation Dillier adds.  

Joe Dillier

"The reason anhydrous is as high as it is in the Midwest is because urea and UAN are high, and they are being driven by high demand in the U.S. but also in India, Latin America, even Europe as those farmers have moved away from set-aside acreage," explains Dillier.

Ten years ago the U.S. ammonia market was somewhat isolated. The U.S. produced its own nitrogen but companies began shutting down plants in the mid-90s because of high natural gas prices. Those shut downs became more drastic after 2000. Today we import nearly 70% of our urea needs and at least 50% of our anhydrous and UAN solution needs.

Historic price spreads

As prices for UAN solution, urea and ammonium nitrate went up recently, so did anhydrous - yet it's still the cheaper of the N fertilizers despite recent price hikes. However, now we have historically high wholesale price spreads between those forms of fertilizer. A year ago the wholesale price spread between different N fertilizers might have been 8 to 10 cents per actual pound of N. Today, because UAN and urea prices have spiked from international demand, the spreads may be 18 to 20 cents between all N forms.

"There are 640 pounds of actual N in a ton of anhydrous," Dillier explains, "so if that spread closes by 10 cents, that means another $164 per ton - just like that  - and anhydrous would still be cheaper relative to the other nitrogen products."

Because demand is so great, international players are forced to outbid each other for nitrogen - including the U.S.  Ammonia prices keep going up, but UAN solution and urea prices go up even more, and the reason is primarily international competition. If India woke up tomorrow and decided it could no longer afford to buy urea, it would ripple all the way back to the Corn Belt.

But for now, those low supplies and strong corn prices put retailers in the drivers' seat.