Higher Natural Gas Prices Have Contributed to Higher Nitrogen Fertilizer Prices and Reduced Domestic Production but Have Not Affected Availability of Fertilizer

Because the cost of natural gas accounts for such a large percentage—up  to 90 percent—of the total costs of manufacturing nitrogen fertilizer,  nitrogen fertilizer prices tend to increase when gas prices increase. The higher natural gas prices in  2001 also led to higher production costs for the U.S. nitrogen fertilizer  manufacturing industry and resulted in a significant reduction in the  amount of nitrogen produced in this country that year. The  results of this survey show that the supply of nitrogen fertilizer was  adequate to meet farmers’ 2001 demand. The results of USDA’s survey are consistent with our analysis, which found  that although domestic production of nitrogen declined 25 percent in 2001,  the overall demand was met primarily because imports increased by about  43 percent. However, two  federal agencies are responsible for ensuring that natural gas prices are  determined in a competitive marketplace. Federal Role in the Fertilizer Market Is Limited

The federal government does not control prices for nitrogen fertilizer, and  nitrogen fertilizer products imported from other countries are generally not  subject to U.S. trade restrictions, such as quotas and tariffs.However, as  part of its overall mission, USDA does monitor and report on developments  in the agricultural sector that could affect farmers and offers certain  programs to help farmers manage the risks associated with crop yield and  revenues. Observations

Natural gas is the most costly ingredient used in manufacturing nitrogen  fertilizer products. Objectives, Scope, and Methodology

In our study of the natural gas and nitrogen fertilizer markets, we  determined (1) how the price of natural gas affects the price, production,  and availability of nitrogen fertilizer and (2) the federal government’s role  in managing the impact of natural gas prices on the U.S. fertilizer market. In addition, we compared the relationship  between the prices paid by farmers for nitrogen fertilizer and natural gas  prices. To determine what role the federal government plays in managing the  impact of natural gas prices on the U.S. fertilizer market, we reviewed the  responsibilities of federal agencies regarding the natural gas and fertilizer  markets and their efforts to monitor and collect information on these  markets.
Why GAO Did This Study

Natural gas is the most costly component used in manufacturing nitrogen fertilizer. Therefore, when natural gas prices increased in 2000-2001, U.S. companies that produce nitrogen fertilizer reported adverse financial consequences resulting from much higher production costs. Concerns also arose that the nation's farmers would face much higher nitrogen fertilizer prices and that there might not be an adequate supply of nitrogen fertilizer to satisfy farmers' demands at any price. Responding to congressional concerns, GAO undertook a study to determine (1) how the price of natural gas affects the price, production, and availability of nitrogen fertilizer and (2) what role the federal government plays in mitigating the impact of natural gas prices on the U.S. fertilizer market.

What GAO Found

Higher natural gas prices have contributed to higher nitrogen fertilizer prices and reduced domestic production. The following figure shows the relationship between natural gas prices and the farmer price for nitrogen fertilizer. Higher gas prices in 2000-2001 also led to a 25 percent reduction in domestic production of nitrogen but, despite this decline, the supply of nitrogen fertilizer was adequate to meet farmers' demand in 2001. Demand was met because U.S. nitrogen production was supplemented by a 43 percent increase in nitrogen imports and a 7 percent decrease in agricultural consumption of nitrogen fertilizer. The federal government does not set natural gas prices, and it has a limited role in managing the impact of natural gas prices on the U.S. fertilizer market. Three federal agencies--(1) the Federal Energy Regulatory Commission, (2) the Commodities Futures Trading Commission, and (3) the Energy Information Administration--are responsible for ensuring that natural gas prices are determined in a competitive and informed marketplace. Moreover, the federal government has no role in controlling fertilizer prices, but the U.S. Department of Agriculture (USDA) does monitor developments in the agricultural sector, including fertilizer markets, that could affect farmers. Also, in 2001, USDA collected additional survey information in response to concerns about the price and availability of nitrogen fertilizer.