October 31, 2006
Hmmm, let’s see if we can follow this bit of news: Natural gas prices have dropped significantly from a year ago, allowing suppliers to build reserves and creating a record high surplus…but...users will likely pay higher prices going into the winter, and then pay a bit less as the winter goes on, maybe.
That’s because, industry sources say, many utility companies will be basing their early-to-midwinter charges on older, higher-priced gas in their reserves, rather than on the cheaper gas they’re now buying.
So, although natural gas prices are now below $5 per 1,000 cu. ft. (mcf), compared to $15 per mcf a year ago following supply interruptions from Hurricane Katrina — a drop of more than two-thirds — the National Energy Assistance Directors Association says the average savings per household will be only about $44 for the winter heating season ($119 according to the federal Energy Information Administration). That’s assuming a “normal” winter.
While forecasters are predicting a relatively mild winter for much of the South, Mother Nature may well have other ideas, in which case any “savings” could quickly vanish.
Farmers are, of course, concerned about the price outlook for nitrogen fertilizers for spring 2007 crops. Natural gas is the primary feedstock for these materials, and some of the record high prices over the past year (up 70 percent since 2002 and 90 percent from 1990) are reflected in much of the fertilizer now in the pipeline.
Still, anhydrous ammonia in August was in the $435 to $450 per ton range, down $100 or more from the $543 reported in April.
And although many farmers cut back on fertilizer applications this year to try and hold the line on costs, analysts expect demand will increase going into 2007 as gowers plant more corn acres to capitalize on the burgeoning ethanol market (nearly 13 percent of the 2005 corn crop went to ethanol).
USDA’s agricultural baseline projections to 2015 show significant increases in corn plantings, reaching an estimated 85 million acres by 2011 as more ethanol plants come online, and corn is a fertilizer-intensive crop.
Natural gas represents 70 percent to 90 percent of the production cost of a ton of anhydrous, and the escalation in gas prices has been a primary factor in the closing of nitrogen production plants — 24 gone since 1998.
The fertilizer industry has urged Congress to pass legislation before its November adjournment to encourage more exploration and drilling for natural gas. “The future of farm families and those who serve them is on the line,” Alex McGregor, a board member of The Fertilizer Institute (TFI), told the House Agriculture Committee in hearings on the 2007 farm bill.
“I know of no other action that could better help us to insure affordably-priced plant food for the American farmer for the next several years,” he said.
The Senate recently approved The Gulf of Mexico Energy Security Act, which would allow drilling in about 8.3 million acres of the eastern Gulf. But it remains to be seen if the Senate and House can reconcile the measure and get it to the president this year.
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