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Nitrogen Fertilizer: Dependency on Imports May Thwart Foreign Oil Independence

Fertilizer consists of three macronutrients that are essential for food production and quality: nitrogen, phosphorus and potassium. Nitrogen accounts for approximately 56.6% of the 21.3 million tons of fertilizer generated in the U.S. Nitrogen fertilizer is the largest single operating expense for most farmers. Unfortunately, a reliance on imports to maintain an appropriate level of supply to meet the growing demand and the rising price of natural gas is forcing the prices for fertilizer to increase significantly.

SUPPLY

Increasing natural gas costs resulting in diminished production capacity

Fertilizer manufacturing facilities are heavily dependent on natural gas. Nitrogen fertilizer is generated by capturing the nitrogen from the atmosphere and combining it with hydrogen from natural gas to form anhydrous ammonia. Ammonia is a building block to make other nitrogen fertilizer products. Natural gas accounts for approximately 90% of the cost of producing this nitrogen-based fertilizer. With rising natural gas costs, production facilities have either closed or been idled. According to The Fertilizer Institute, 25 ammonia nitrogen fertilizer plants have permanently closed, and an additional 5 locations have been idled since 2000. This has led to a 35% decline in U.S. production capacity and a 44% decrease in output from 2000 to 2006.

Imports of nitrogen required to maintain an acceptable level of supply

The U.S. has become more dependent on imports of nitrogen to maintain the level of supply necessary. In 1997, the U.S. imported approximately 35% of the nitrogen needed for fertilizing purposes; by 2006 it exceeded 80%. The U.S.’s main supplier of nitrogen is from a group of islands in the Caribbean; however, additional resources are provided by Canada, Russia and the Ukraine. The challenges of importation of nitrogen include the fact that it is a hazardous material, the countries closest to the U.S. have natural gas prices similar to the U.S. which keeps the price up, and finally, while the natural gas prices are lower in other countries, the rising cost of transportation is also driving up costs. It is thought by some that our efforts to break our dependence on foreign oil could be thwarted by a dependence on the fertilizer necessary to the production of alternative fuels.

DEMAND

Global population growth driving demand for food and clothing and, in turn, fertilizers

According to the Food and Agriculture Organization of the United Nations, the world population is expected to grow 1.10% from 2006 to 2015. It is anticipated that world population growth will add 50 to 70 million people annually until 2035. This increase in population is expected primarily in developing countries. This continuous growth in population requires additional food and clothing fibers so the agricultural industry’s reliance on fertilizer is expected to continue.

Contracts for uncultivated land expiring

The U.S. had contracts under the Conservation Reserve Program to keep a fixed number of acres of land uncultivated. Many of these contracts have expired and enrollment in the program has also decreased. The combination of these two factors means that over 800,000 hectares of land could start being actively cultivated. This increased acreage is anticipated to drive the demand for fertilizer up.

Increasing corn plantings, heavily dependent on nitrogen fertilizer, increasing demand

Currently corn is the crop most dependent on nitrogen fertilizers. Historically, this was not as much of an issue relative to the fertilizer industry, but more recently, has had a huge impact. The number of acres of corn planted was relatively stable from 2000 to 2006; however, it jumped over 19% from 2006 to 2007 by more than 15 million acres. This expansion in corn is due in part to it becoming a more profitable crop driven by ethanol and exports. This increased the demand for nitrogen by approximately 1 million tons in 2007 just for corn production.

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