Relationship between Nitrogen and Natural Gas

Nitrogen fertilizer is an important input in Iowa, the leading state in corn production. Due to the positive correlation ammonia has with corn and natural gas prices, many question whether the decline in ammonia prices is enough to reflect the lower corn prices and natural gas prices. 

In 2013, anhydrous ammonia was nearly $900/ton, but has since declined to an average of $367/ton as of October 2017. During that same timeframe, natural gas fluctuated between $7 to $10 per thousand cubic feet, but is currently around $8 per thousand cubic feet, which is very similar in price compared to 2013.

Figure 2 demonstrates the U.S. average anhydrous ammonia prices compared to natural gas prices from 2016 and prior. In the 1990’s and early 2000’s, the average ratio of anhydrous ammonia price ($ per ton) over natural gas prices ($ per thousand cubic feet averaged around 45:1.

As Figure 3 shows, the 3-month rolling average ratio of Iowa anhydrous ammonia prices over U.S. natural gas prices has declined significantly in recent years, from a value of over 100:1 in 2013 down to 45:1 in 2017. This shows that ratio between anhydrous ammonia prices and natural gas prices in Iowa are now more comparable to the ratio shown in the 1990s and early 2000s, and have returned to more a more historical normal relationship with natural gas.

As shown in the following graph, the basis has narrowed when comparing Iowa urea prices to world prices such as in the Black Sea. In 2013 and 2014 the average difference between Iowa and Black Sea urea prices was around $240/ton, but in 2017 that average difference was down to only $135/ton.

With the increased fertilizer production capacity in Iowa, nitrogen fertilizers have returned to more a more historical normal relationship with natural gas, one of the primary inputs for anhydrous ammonia. While there are many factors such as corn prices and demand that contribute to nitrogen prices, the increased capacity is one reason that has allowed Iowa to become significantly less dependent on imported nitrogen. 

For an Iowa farmer planting 1,000 acres of corn, the return of anhydrous ammonia prices back to historical relationships with domestic natural gas prices that existed in the 1990s, the savings in production expenses amount to nearly $50,000 per year.  With depressed corn prices, a significant reduction in input costs is vitally important to farmer profits and economic survivability.  We are not saying it is the only causal event, but the decline in the relationship of anhydrous ammonia prices to natural gas began about the same time as the announcement of the expansion of the nitrogen plants on both the western side of Iowa (Sioux City) and the new plant on the eastern side of Iowa which has been built near Wever.

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