What does growing corn and other crops have anything to do with natural gas? It takes about 33,000 cubic feet of natural gas to produce one ton of nitrogen fertilizer. About 96 percent of the corn planted in the United States depends on fertilizers, such as Anhydrous Ammonia (NH3), 28pct-Liquid Nitrogen, Urea and Ammonium Sulfate. Fertilizers consume more than three percent of total U.S. natural gas use.
Some 90 percent of the cost of manufacturing nitrogen fertilizer depends upon the price of natural gas. The more fertilizer produced, the more natural gas is utilized and the higher both eventually cost. And according to widely followed natural gas commentator Phil Flynn of Chicago-based Alaron Trading, “Ethanol plants are going to require natural gas consumption to produce electricity.” Flynn hadn’t yet conducted a study into how much natural gas consumption would be required for these plants, but said in a telephone interview that he could be pursuing this.
We asked Flynn if the ethanol mania would have any impact on natural gas prices. “Absolutely,” he responded, citing that increased corn planting would require natural gas for the nitrogen-based fertilizers and to power the 70 or more ethanol plants on the books. Flynn pointed out natural gas prices would benefit from the ‘front and back end’ of the ethanol boom.
Record Corn Planting and Natural Gas
Corn acreage is one of the largest consumers of nitrogen-based fertilizer. And because of the recent ethanol subsidies, more corn will be planted this year than in the past six decades. According to the U.S. Department of Agriculture, corn growers intend to plant 90.5 million acres in 2007. Because forecasts of ethanol production are expected to increase, expect more corn to be grown. In 2008, about 25 percent of U.S. corn production is planned to produce ethanol. By 2012, 4.3 billion bushels of corn are anticipated for ethanol production. It takes about 450 pounds of corn to produce 25 gallons of ethanol fuel to power an SUV.
The recent ethanol boom has become a blessing for fertilizer companies and their share prices. Since this past summer, shares in Saskatchewan-based Potash Corp (NYSE:POT) have more than doubled to a record $191.46/share. The company is the world’s largest potash producer and a significant producer of nitrogen fertilizers. Shares in Illinois-based CF Industries (NYSE:CF) have nearly tripled in the same period. The company manufactures both nitrogen and phosphate fertilizers. Both have benefited from relatively lower natural gas prices in the face of strong demand for their products.
In 2004, about 12 million tons of nitrogen nutrients were consumed. But the increased corn planting has begun causing shortages in nitrogen fertilizers, according to Potash chief executive William Doyle. He told Bloomberg News last week that some farmers are not receiving sufficient fertilizer supplies because transportation facilities are nearly overloaded with shipments. This could impact fertilizing in mid summer if supplies continue to remain tight.
Corn planting takes place now through May in the Midwestern U.S. Some farmers pre-plant their nitrogen in March and April and skip the ‘side dressing’ in the summer. Fertilizing is generally done for two to three weeks at corn planting time. Side dressing is done over another two to three week period in July. “Knee high by the Fourth of July,” describes when the second fertilization is done. This refers to the height of the corn and represents the last fertilizer application for the growing season. Side dressing is said to give plants a boost and provide an easy, smooth and better harvest.
By 2012, nearly one-third of the projected U.S. corn production will be used to produce ethanol.
We talked with an Ohio farmer who told us, “Even though we farmers are complaining about the additional cost of fertilizer, we can not afford to not apply adequate amounts for corn production.” He explained, “If 28-percent Nitrogen costs me $100/ton more, and I use one-third ton per acre, that is an additional cost of $33/acre. With a yield of 150 bushels/acre, the cost is $0.22 more per bushel. But if corn prices are $1.50/bushel higher, then I can’t afford to under-apply the nitrogen.” There is a better return in higher corn-producing states, such as Iowa and Illinois, where yields are 200 bushels per acre.
The western Ohio farmer also compared his fertilizer costs for this season compared to previous plantings. “In 2000, my cost for NH3 was $242/ton,” he said. This year’s cost has nearly doubled to $580/ton. For the 2001 planting season, he paid $165/ton for 28-percent liquid nitrogen. His costs would have been about $280/ton for this season, but he pre-paid for this fertilizer in December, paying about the same he would have paid in 2004. For every one dollar increase or decrease in natural gas prices, fertilizer prices can swing up or down by 95 cents.
For this farmer’s fertilizer applications, he prefers 28-percent liquid nitrogen for each of handling and application. While anhydrous ammonia (NH3) can also be used, and is cheaper per unit of nitrogen, he finds it is less safe for use. NH3 is also a favorite among the illegal methamphetamine-manufacturers, which siphon off the ammonia from farmer’s nursing tanks. Urea is volatile and used mainly for wheat, but it also used by western Corn Belt farmers.
By 2020, there could be as little as 0.2 hectares of agricultural land per person.
Fertilizer prices have more than doubled over the past 15 years, and there is no respite in the near-term. A recent Energy Information Administration outlook forecasts benchmark natural gas prices rising by 9.2 percent in 2007 and increasing another 3.7 percent in 2008. World demand for fertilizers grew by 13 percent between 2001 and 2005, according to The Fertilizer Institute. After China and India, the U.S. is the world’s third largest nitrogen producer. Next year, the Ohio farmer could be faced with a steeper bill to fertilize his corn and other crops.
Global Nitrogen Demand
Ethanol production has tripled since 2001
The ethanol success story in Brazil has spread worldwide. Fortunately for Brazil, ethanol is produced by sugarcane, not corn. The country relies mostly upon non-nitrogen-based potash for its fertilizer – possibly as much as 6.5 million tons in 2007. But Brazil’s productivity of liter per hectare from sugarcane dwarfs corn’s productivity.
According to The Worldwatch Institute, sugarcane yields about 6,500 liters of ethanol for every hectare compared to less than 3,000 liters of ethanol produced on every corn hectare in the United States. The ratio of energy output of sugarcane, compared to the fossil energy input required to produce ethanol, is higher than 8 times. The same ratio applied to corn stands between 1.3 and 1.8.
As with all commodity discussions, one must talk about China and India. Ethanol production is rising, but remains far below the percentage shares of the U.S. and Brazil. Fertilizers are serious business in China, where nearly 50 million tonnes of fertilizer are annually consumed. Of By 2011, fertilizer production could top 63.5 million metric tons, according to China’s National Agricultural and Rural Economic Development [NARED]. Of this, China hopes to produce 42 million metric tons of nitrogen fertilizers.
But China is faced with a significant problem while maintaining an annualized 7.5-percent GDP growth rate during this time. How will China obtain sufficient natural gas to reach this target?
Earlier this month, a senior adviser to the National Development and Reform Committee [NDRC] announced, “We are seeing difficulties importing gas.” China has been stymied in meeting its annual LNG import target of 20 million tons by 2015. The country has been attempting to reduce its dependence on imported oil by increasing use of natural gas.
China’s NDRC has targeted natural gas to comprise 8 percent of the country’s energy mix to help ease the pollution burden the coal industry places on China. The country is the world’s largest copper consumer and the largest steel manufacturer. For its energy, it draws heavily upon its coal production – and is now expected to become a net importer of coal for 2007.
High natural gas prices have forced China to rely more upon coal and accelerate its emphasis on the country’s growing natural gas sector. In March, PetroChina (NYSE:PTR) and Royal Dutch Shell PLC (NYSE:RDS.A) started commercial production in the joint venture’s Changbei gas field in northwestern China. Other natural gas fields in southwestern China, PetroChina’s Longgang gas field, and Sinopec Corp’s (NYSE:SNP) Pugang gas field in Sichuan province, may both show promise in increasing gas’s role in the country’s energy mix. But the NDRC’s plans of 92 billion cubic meters of natural gas production by 2010 is likely to fall short. At this time, gas may only reach a bit higher, at 5.3 percent, of the China’s overall energy production.
Which brings us back to fertilizer. China plans to annually increase grain productive capacity by 0.65 percent within five years – and hopes to decrease planted grain acreage by 0.18 percent. The state planning commissions will be forced to improve yields. Hence, we expect an increased reliance upon nitrogen fertilizers to realistically achieve the country’s target.
According to the International Plant Nutrition Institute, more fertilizers will be required to overcome the poor soil nutrients in China and India. Significant percentages increases in nitrogen-based fertilizers are anticipated.
How will China reconcile lowered expectations of natural gas imports in the context of increasing nitrogen-based fertilizers? We have previously covered China’s emerging coalbed methane [CBM] sector because (a) the country hopes to reduce the number of coal mining accidents resulting from methane explosions and (b) CBM can help increase the country’s energy mix.
According to the Carbon Finance Unit of The World Bank, China has placed a significant emphasis on coal methane projects. China’s National Climate Change Coordination Committee place coal methane projects into the top four prioritized categories for developing projects. Over a 20-year period, China hopes to reduce the carbon dioxide equivalent of 40 million tons by capturing the methane gas from the country’s coal mines and utilizing the gas to produce clean energy.
Now there is a third reason to follow the country’s CBM sector. A large share of China’s coalbed methane consumption has been allocated for nitrogen-based fertilizers. The industry generally depends upon methane gas for nitrogen production. As the country increases fertilizer production, the country’s state-owned CUCBM (China United Coalbed Methane) company will play a responsible role in helping bring many early-days CBM projects into production.
This could also explain BP Plc’s announcement, earlier this year, planning to heavily invest in the expansion of the company’s CBM fields in the San Juan Basin (Colorado, New Mexico). BP plans to spend more than $2 billion to increase its methane gas production. Other countries are also looking to CBM as another way to meet the increased demand for natural gas.
When CUCBM began awarding the production-sharing contracts (PSC) to foreign-owned companies, such as Far East Energy (OTCQB:FEEC), Green Dragon Gas [LSE-AIM: GDG], Fortune Oil [LSE: FTO] and Pacific Asia China Energy [PCEEF], the company probably did not forecast a large share of the methane production to be produced from the coalbed would go for fertilizer production. But, at this stage, this could increasingly become the case.
As the world moves forward to manufacture ethanol for its energy needs, or to make its soil yield a greater harvest, the role of natural gas could increase dramatically. Subsequently, the floor for natural gas prices could begin escalating as has been found with many other commodities.