The relationship between natural gas & nitrogen fertilizer pricing

If I had a nickel for every time I have heard that the price of nitrogen fertilizer is directly correlated to the price of natural gas ………….. well .............. I’d have a lot of nickels. And there is quite a bit of truth to the statement – they’re just not as closely tied as some people seem to believe. It would be more correct to say that the price of nitrogen is strongly influenced by the price of natural gas.

If you want to make nitrogen fertilizer the first thing you need to do is make anhydrous ammonia. Regardless of what kind of nitrogen you want to end up with the starting point is anhydrous ammonia. Once you have ammonia you can relatively easily convert it into urea, often in the same facility. You can also run the ammonia through a nitric acid plant and then combine the nitric acid with urea to make UAN or liquid nitrogen. So regardless of your destination the starting point is building ammonia.

Right now you are breathing air that is 78% nitrogen but the nitrogen isn’t in a form that plants (or animals for that matter) can utilize. In 1909 Fritz Haber pioneered the process of converting atmospheric nitrogen to NH₃. Rights to the process were subsequently purchased by BASF and refined by Carl Bosch. The two men were awarded Nobel prizes for associated work. The science that they developed which we now call the Haber-Bosch process has enabled the green revolution. Without the artificial fixation of nitrogen, life as we know it would not be possible but that’s a story for another day.

Nitrogen manufacturing plants take air which consists of oxygen and nitrogen and combine that with natural gas. Eventually the nitrogen from the air is bound to the hydrogen from the natural gas to give NH₃ (anhydrous ammonia). The oxygen from the air and the carbon from the natural gas end up recombining with the anhydrous ammonia to produce urea which for those of you who care has a chemical composition of (NH₂)₂CO.

The point of all that chemistry is to illustrate that the only components needed to manufacture nitrogen fertilizer are fresh air and natural gas. That in turn means that there most definitely is a relationship between the cost of natural gas and the cost to produce nitrogen fertilizer. Modern NH₃ plants will have roughly a 30:1 conversion ratio. That means if the price of natural gas is $4 per million BTUs then the plant will consume 30 times that or $120 worth of natural gas to make a tonne of ammonia. That’s an important number to keep in mind when nitrogen prices start dropping like they have lately or when natural gas prices start climbing like they have in the past. Take the price of natural gas per MMBTU and multiply it by 30. As soon as the retail price of ammonia gets close to that number you can expect manufacturers to start closing plants or shutting down production.

If the cost to produce a tonne of ammonia exceeds what it can be sold for then the manufacturer will need some pretty strong reasons to keep the plant open. They may have contracts to fill or they may have pre-bought natural gas but the bottom line is “if 30 times the current price of natural gas per MMBTUs is more than the ammonia can be sold for then you can expect some plant closures.” That’s what happened a few years ago when California was so short of natural gas during the winter. Ammonia manufacturers could make more money by selling their gas contracts than they could by building ammonia. So they shut the plants down and sold the contracts. Eventually that drives the price of ammonia up because guys like you want the fertilizer and despite what you may say today, you will pay more for it if you have to. For some of the older plants the factor is more like 35 or even 40 times which is why a lot of the old plants in the US got closed down during the gas price increases of the early 2000s.


If you look closely at the chart of the nitrogen index against the natural gas price you can see several periods where the price of nitrogen clearly lags the price of natural gas but appears to follow it. The early 2000s show a pattern of rising gas prices with nitrogen prices delayed but following the same trend. The disconnects between the two commodities get more apparent as we move back in time but that is understandable. Natural gas used to be a surplus commodity until we figured out a bunch of ways to use it – like making fertilizer.

There are a couple of important lessons you can draw from this relationship:

First, you need to keep an eye on the price of natural gas and particularly the forward futures contracts because that will give you a good head’s up for what’s likely to happen to the N price.

Second, if the day comes, and it may, when manufacturers are no longer willing to forward price retail ammonia, then you may be able to run your own hedge program based on natural gas. If you are a urea or UAN user then you can always buy and store. That may create some other difficulties but it is always an option. It’s not an option for ammonia so you are forced to trust your retailer but more importantly you are forced to trust that the manufacturers will continue to offer forward pricing to their retail locations. If you look at that practice from the manufacturer’s viewpoint it really doesn’t make much sense to let you contract ammonia at Dec. 31 pricing if prices are rising rapidly. There was a time when competitive pressures drove that practice and you should appreciate it while it lasts. Right now your major domestic manufacturer is integrating down the retail chain so you have to ask yourself how long they will continue to offer that option.



(added on edit) I was browsing a bit this evening and noticed the charts above. As always form your own opinions - I'm not qualified or authorized to give you advice.