Dynamics of the fertilizer industry changingMajor changes are occurring in the U.S. fertilizer industry. One is the change in composition of crops and the more robust commodity market, which has caused an increase in fertilizer demand.
By: William W. Wilson, Sumadhur Shakya and Bruce Dahl, NDSU Agriculture Communication
Major changes are occurring in the U.S. fertilizer industry. One is the change in composition of crops and the more robust commodity market, which has caused an increase in fertilizer demand.
Second is the dramatic reduction in the price of natural gas, a primary input for fertilizer manufacturing. This change varies regionally and gives advantages to fertilizer plants in lower-cost natural gas states.
Another change is in competitive pressures. A number of new groups are looking to enter the industry, and some plants are looking to expand.
We analyzed the spatial competition in the U.S. fertilizer sector and tried to determine the likely future spatial distribution of production and flows of nitrogen fertilizer.
The industry has been dominated by a few major firms that will have to confront new entrants in the market. There are at least 12 to 15 (some claim 25) new fertilizer plants being proposed in the U.S., each costing about $1.5 billion or more.
This industry has a number of important structural characteristics that impact competition and conduct. Domestic manufacturers have to compete with imports, demand is volatile and firm processing functions have high fixed and low marginal costs.
Through the years, fertilizer use has increased substantially in the U.S. and in other countries. Fertilizer demand varies across crops and geographically, which has important implications for spatial competition.
The expansion of corn production in the northern plains is a major source of new demand.
Traditionally, the industry has been dominated by a few large players mainly in Oklahoma, Louisiana and Texas, and a few plants in the Midwest. The industry imported significant amounts of fertilizer to meet its needs, with nitrogen fertilizer imports amounting to 57 percent of consumption.
Fertilizer manufacturing has tremendous economies of scale. Fixed costs are high and marginal costs low, and decline with increases in output. The dominant input cost is natural gas, which is 50 percent or more of the manufacturing costs, so access to low-cost natural gas provides an important advantage for plants.
It is partly the escalation in U.S. domestic oil output that is resulting in an increase in the variability of natural gas prices among regions.
Prices are lower in states such as Louisiana, Texas, Oklahoma and North Dakota, which provide plants in those areas with production advantages.
The breadth and scope of the new entrants in this industry is important. Since 2011, there have been many announcements about new plants, with each producing 1.1 million to 3.7 million tons per year.
Some plants are expanding (CF Industries, Agrium and Koch); some are established cooperatives (CHS) or newly formed cooperatives (Northern Plains Nitrogen); some are regional energy firms (Dakota Gasification and Mississippi Power); and some are offshore firms expanding into U.S. markets (Eurochem).
While there are up to 25 proposed fertilizer projects, not all would be viable. This is particularly true if all were built, in which case many would operate at substantially less capacity. In a model specification that required any new plant to have a capacity utilization rate of 75 percent or more, the results change. In this case, there would be only a few new plants, including those in Louisiana, Iowa and North Dakota.
Given these new plants, there would be substantial changes in the flow and distribution of products. Generally, these changes would result in reduced long-haul rail shipments. This possibly means shorter-haul rail shipments would be competing with trucks. Rail volume would decrease in some routes. Results indicate imports and shipments probably will decline and mostly be replaced by domestically produced products.
The implications of these results are important. For growers, the results should be viewed as positive. The combination of new fertilizer plants producing at a lower cost ultimately will result in lower fertilizer costs and probably less volatile prices because, in part, the fertilizer will be produced with more stable domestic natural gas that is declining in value. The implications for the fertilizer industry probably are more dramatic. This is an industry characterized by volatile demands and large-scale manufacturing, which have high fixed and low marginal costs. Further, the nature of the entrants and expanders is such that they have differing motives for entry.
Editor’s note: Wilson, Shakya and Dahl are in the North Dakota State University Agribusiness and Applied Economics Department.