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I would like to commend all of our customers that took advantage of the early prepayment prices that were available for your spring inputs. Many of our customers trusted our agronomy team who advised them to prepay their nitrogen fertilizer needs. This appears to have been the right decision at this time. There has been many questions asked about nitrogen prices and supply that I want to respond to with as much factual background information as I possibly can. The following are answers to some of the most commonly asked questions that I have heard.
The first and most popular question is why have nitrogen fertilizer prices risen so high and so rapidly? The main factor for this rapid increase is the rise in natural gas prices. In the past year the cost for natural gas has quadrupled, going from $2.37 per MMBtu to a contract price of $9.90. Since natural gas is, by far, the primary component in producing all forms of nitrogen fertilizer, the cost of producing these has also risen to levels so that most producers cannot cover cash production costs. This has forced many production companies to either idle or curtail their capacity and has caused the industry operating rate to decrease to 54% of total capacity, its lowest level in history.
Another question that that I have heard is what caused the run-up in natural gas prices? A
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simple answer is too much demand and not enough supply. Natural gas inventory at the end of December was at a record low with one factor being the unseasonably cold temperatures over the last few months.
A second factor has been the significant increase in the use of natural gas for electric power generation. Due in part to the robust economy in recent years, the demand for electric power has risen at a rate of 4 percent per year. Many new power plants have been constructed with the vast majority of these plants using natural gas as their primary fuel source. At the same time that demand was going up, supply has been going down. U.S. gas productive capacity has been steadily declining over the last few years due to "normal" productivity decline in older wells and the sharp drop in drilling activity of potential new wells. While drilling numbers have rebounded recently, new supply will not reach the market for the next 12 to 18 months.
The final question is when are nitrogen fertilizer prices expected to return to "normal"? This is virtually impossible to predict and will depend on variables such as future demand, imports and what happens to natural gas prices. Demand is predicted to decrease due to less corn acres being planted. Approxi
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