When the goal is creating nitrogen fertilizer, the first thing you need to start with is a lot of natural gas.
Everyone understands natural gas is one of the largest inputs — most estimates say about 70 per cent of the price you pay for nitrogen can be traced back to natural gas prices. But why that’s so is an interesting tale.
The first step in making nitrogen is making ammonia, which is produced by taking nitrogen from the atmosphere and combining it with hydrogen from methane, which is the largest component of natural gas. The end result is NH3, or anhydrous ammonia.
The chemical reaction that creates that NH3 needs energy, in the form of heat, which is created by burning a lot more natural gas.
And of course, NH3 is the base of all other nitrogen fertilizers.
Combine NH3 with carbon dioxide, and you get urea. Combine it with sulphuric acid you get ammonia sulphate, with phosphoric acid you get ammonium phosphate, and with nitric acid you get ammonium nitrate. Combine urea, ammonium nitrate and water and you get liquid UAN.
So the trappings of that nitrogen might be a bit different, but at its core, it’s built on a foundation of natural gas — which makes all nitrogen fertilizer very susceptible to swings in natural gas prices.
And lately, those natural gas prices have been on a tear, especially in Europe and Asia, where much of the world’s nitrogen is produced.
There are several reasons the price of natural gas has spiked there, with some energy industry analysts calling the events a “perfect storm.”
Europe and Asia experienced a colder winter last year, causing some competition among countries for supply this year.
Coal is on its way out and it was a bad year for wind generation, causing even more demand for natural gas.
And European production is falling for a few reasons. The pandemic reduced needed maintenance on energy production facility, and the Dutch are winding down their main Groningen gas field, a process that began in 2018.
There’s also been some speculation that Russia is taking advantage of the crisis to lobby for new pipeline capacity by limiting its shipments to the European Union.
The International Energy Agency has recently confirmed that “Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season.”
You can see the effect of this most clearly by taking a look at the available natural gas hedges. The best proxy for natural gas prices there is the Dutch TTF natural gas futures contract.
The nearby contract is currently sitting at US$91.194, having been as high as just over US$162 in September. In August it was below US$42. This time last year it was just below US$16. And for years before that it had bounced around between US$8 and US$16.
With numbers like that it’s clear there was nowhere for nitrogen prices to go but up. What’s still up in the air is just how long they’re going to stay in the stratosphere.
With so much of North America’s nitrogen produced offshore, many are saying at least through this coming spring. In fact, as you can read on page 19 of this issue, some are predicting shortages next spring, and are making dire predictions that some farmers might not be able to access the nitrogen they want to grow their crops.
That sort of talk circulates periodically through the agriculture sector around the world, and at least so far, it’s never truly come to pass. Farmers have always got what they’ve needed here in Western Canada, albeit often not at a price they like.
This year, however, the problem isn’t offline production capacity, or pandemic-disrupted supply lines (though that’s surely not helping the situation). Instead it appears to be nitrogen producers that are gun shy about buying natural gas at current prices, so they’ve simply curtailed production.
Whether that forces the cost of natural gas downward, and production picks up as the winter wears on, is anyone’s guess.
It raises the question whether the fertilizer futures launched some years ago by the CME might finally capture some farmer interest.
There’s some solace for Prairie farmers, however, in the form of higher prices for the commodities they sell.
Just this week, a colleague forwarded some prices from the Alberta Canola Producers Commission along with a note that it was remarkable to him to see canola prices in excess of $1,000 a tonne.
In the longer run, however, it might cause some farmers to consider adopting more soil-building farming techniques, such as regenerative agriculture strategies, to lower their dependence on this volatile input.
