Farmers across Canada and the Midwest Grain Belt of the U.S. are angry and frustrated over the price they had to pay for nitrogen fertilizer this past spring. They want to know why the price of nitrogen fertilizer was nearly as high as it has ever been even though natural gas is near record lows.
Nitrogen fertilizer after all is basically modified natural gas, with natural gas forming the main feedstock and accounting for 75 to 85 per cent of the production cost in the manufacture of the fertilizer.
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Traditionally, nitrogen fertilizer prices have moved in tandem with natural gas prices. When natural gas went up, fertilizer increased in price as companies recaptured their higher production costs. But, says Tom Lilja, executive director of North Dakota Corn Growers, “since 2006 there has been a decoupling of this relationship. When corn futures went up, so did the price of nitrogen. Growers view nitrogen pricing as a problem.”
The scale of the disconnect gets clearer when you read the annual reports of some of the biggest fertilizer producers. In its 2011 annual report, one of the largest nitrogen fertilizer producers in the U.S., CF Industries writes, “Total cost of sales in the nitrogen segment averaged approximately $188 per ton in 2011 compared to $189 per ton in 2010.” Yet the company’s first-quarter report for 2012 showed net sales were up 37 per cent, with gross profit up 50 per cent due to higher sales volumes and prices, and lower natural gas costs.
Agrium, the major producer of nitrogen fertilizer in Canada reported similar results in its 2011 annual report. “Nitrogen gross profit was $322 million in the fourth quarter of 2011, more than double the $160 million reported in the same period last year due to higher realized prices and sales volumes.”
I asked Richard Downey, Agrium’s vice-president of corporate and investor relations how fertilizer is priced. He replied, “Competitively.” He explained that the dominant fertilizer market in the world is the Black Sea. That market is three times bigger than the North American market, Downey said, and the price we pay here is the Black Sea price plus transportation costs that would be incurred to bring the Black Sea product to Canada.
But there are factors which distort the competitive pricing practice that Downey describes, including the high transportation costs of moving fertilizer from the Black Sea market to North America. As well, the U.S. has imposed tariffs on Russian fertilizer imports because of perceived uncompetitive natural gas pricing in Russia, and last year China imposed an export duty of 110 per cent on nitrogen to stop exports and keep fertilizer prices down for Chinese farmers.
Most troubling of all, however, is the continuing consolidation of fertilizer manufacturing and marketing in the hands of a few large companies.
For example, with the purchase of Viterra’s share of Canadian Fertilizer in Medicine Hat, Alta., Agrium will control a huge percentage of the nitrogen fertilizer manufacturing in Canada. Furthermore, it will gain an estimated 50 per cent of the retail market, selling through its CPS retail locations.
Koch Industries, a privately held U.S. company, has bought up fertilizer plants in Canada, the U.S., and the Caribbean. It has distribution terminals in the U.S., Canada, Mexico, Brazil, Australia, France, and the U.K., and it can now manufacture, market, and distribute more than 13 million tonnes of fertilizer products annually.
Some observers also ask whether it’s just coincidence that fertilizer prices started their rapid climb at the same time CF Industries privatized. Prior to 2002, CF Industries was a traditional supply co-operative, owned by a number of agricultural co-operatives. Its mandate was the assured supply of fertilizer for its members. In August of 2005, CF completed its transition to a shareholder-owned company, and with that change in ownership came a change in mandate. Financial performance became the principal objective.
In spite of the fact we have the lowest natural gas prices in the world and we produce so much nitrogen fertilizer in Canada that about 25 per cent is exported, Canadian farmers are paying some of the highest nitrogen prices in the world.
That is the problem, but farmers are considering some strategies of their own in an attempt to reduce nitrogen costs.
Legume crops
In the West, many producers are adding or increasing pulse crop acres as a way to reduce their nitrogen fertilizer requirements. In Manitoba and the East, soybeans are getting a harder look.
Legume crops are able to produce much of the nitrogen they need, thereby reducing the amount of nitrogen fertilizer needed. On top of that, they produce a nitrogen credit for subsequent crops.
A survey of Montana growers by doctoral candidate Mac Burgess found pulse growers were able to reduce nitrogen fertilizer in a following wheat crop by an average 6.5 pounds per acre and still harvest seven more bushels of wheat than if they had grown wheat on wheat.
Burgess also calculated that half of the fossil fuel energy used in wheat production was used for the manufacture of nitrogen fertilizer. With energy prices likely to continue to increase in the future, legumes can reduce farm and world energy costs.
Shopping internationally
While many farmers compare prices between local dealers, one Alberta farmer (who did not want to be named due to ongoing negotiations with suppliers and regulators) compared fertilizer prices between countries and found a pricing difference he hopes to take advantage of. At press time, anhydrous ammonia was selling at port in the southeast U.S. for $225 a tonne, significantly lower than what he can buy it for in Alberta, even with transportation costs added in.
This farmer is currently looking into acquiring the infrastructure needed to take advantage of this price, and he is also looking into the regulatory requirements he will have to meet to buy, transport, and store his needs for next year. By buying at current prices he expects he will cover all the additional costs and equipment needed to transport, handle and store a year’s supply of anhydrous ammonia in one growing season.
Co-operative production
North Dakota’s Tom Lilja says American corn groups have been researching alternate nitrogen concepts for the past seven years in an attempt to find a cheaper and more efficient supply. As a result of this study, the researchers came to the conclusion that the best way to ensure reliable supply at a reasonable price is for growers themselves to build a world-scale fertilizer plant that would utilize natural gas from the North Dakota Bakken oilfield that is currently being flared off.
On May 31 of this year, this plan was presented to the North Dakota Corn Growers and approved by the membership, followed by a July 11, 2012 press release announcing their intention to proceed with building a new billion-dollar nitrogen fertilizer plant.
Lilja hopes an offering circular will be in the hands of northern state farmers (and also Saskatchewan and Manitoba producers) by mid-winter 2013. He expects construction to start in 2015 and fertilizer production to begin in late 2016.
While Lilja says it is too early to talk pricing and product mixes, he considers this venture to be a hedge for farmers. It will add much needed nitrogen supply to the market, which will benefit growers by lowering prices. If fertilizer prices stay high, farmers who invest in the plant will benefit from good returns on their investment.
It’s worth observing that IFFCO, the Indian Farmers Fertiliser Cooperative Limited is the largest federated co-operative in the world. It is a true federation of close to 40,000 agricultural co-operatives. It was ranked No. 37 in companies in India in 2011, and produced 7.168 million tonnes of nitrogen fertilizer in 2008. That was 21.4 per cent of the nitrogen fertilizer used in India and roughly the same amount as Canada produces in a year.
BioNitrogen
Instead of building more large-scale nitrogen production facilities, Frank Segredo, corporate development officer for BioNitrogen Corporation believes small local plants could reduce fertilizer costs for farmers. “Transportation costs add at least $65 to $75 per ton of nitrogen fertilizer,” Segredo says. “If fertilizer was produced locally, these transportation costs could be reduced.”
Until now, this would have required the building of pipelines to move natural gas to each small plant, greatly increasing capital and operating costs. BioNitrogen has sidestepped this problem by replacing natural gas as the feedstock, using farm biomass sources instead.
Three researchers at Texas Tech developed a process whereby agricultural waste such as corn stover is pelleted and then gassified to turn the pellets into syngas, which can then be used to make nitrogen fertilizers. Based on this technology, BioNitrogen has engineered small modular processing and production facilities which can be built in agricultural areas where there is an abundance of biomass which could be converted back to fertilizer. An individual plant would produce up to 124,000 tons of fertilizer per year.
BioNitrogen plans to set up joint ventures with producer co-operatives who would use the fertilizer that is produced in each facility. The biomass needed to operate the plants would be sourced locally, much of it from the same co-opertatives that buy the end product. BioNitrogen would then build and operate a specifically engineered facility for the biomass in the area.
Segredo says there is a wide variety of biomass that could be utilized in such plants, from crop waste to tree clippings and perhaps even municipal waste.
Preliminary work is already underway for plants in Florida and Texas. Segredo expects these first plants to produce fertilizer early in 2014. “We are the only non-hydrocarbon-based producer of nitrogen fertilizer.”
Genetics to the rescue
To plant scientists, nitrogen fixation in non-legume species is what turning lead into gold was to alchemists or the Holy Grail is to religious scholars. It isn’t going to happen overnight, but scientific work on this quest is continuing and gains are being made. This September, the 13th Symposium on Nitrogen Fixation with Non-Legumes will be held in Munich, and scientists from around the world will share their results of their research in nitrogen fixation.
Of most interest may be the recent work that resulted in the development of nodules on the roots of a non-legumes. While these nodules did not lead to symbiotic hosting of nitrogen-fixing bacteria, the proof that non-legumes can form nodules is a huge step.
If Burgess is right, and half of the energy to grow high-input wheat is in its nitrogen, breeding a wheat plant that could fix its own N would not only be a boon to farmers, it could significantly reduce world fossil fuel requirements.
The question is, will the technology arrive in time to make a difference? CG
