IMPLICATIONS FOR WISCONSIN AGRICULTURE OF CURRENT NATURAL GAS PRICE FORECASTS FOR THE 2003-2004 HEATING SEASON
By Pat Walsh
Department of Biological Systems Engineering
UW-Madison/Extension
Wisconsin agriculture, industry and families rely heavily on natural gas to meet a variety of energy needs. In addition to being a fuel, natural gas is a feedstock for nitrogen, used to produce ammonia, the building block of all nitrogen fertilizer products. The availability and cost of natural gas profoundly affect the ability of Wisconsin's farmers to compete in today's tight agricultural markets. Unanticipated spikes in natural gas prices in 2001 and 2003 sent shudders through Wisconsin agriculture. What can be expected for the 2003-2004 heating season?
The most recent predictions of energy experts in Wisconsin and elsewhere suggest that natural gas prices will continue to rise. The Wisconsin Division of Energy (WDOE) predicts that prices for natural gas residential heating fuel may increase by 25 percent or more over last heating season. This would bring the price to more than $1.00 per therm. (A therm is 100,000 BTUs or 100 cubic feet of natural gas). An increase in natural gas prices could also increase electricity rates, since most new base electrical capacity in Wisconsin is natural gas powered for environmental reasons. The WDOE predicts electricity prices will also rise over last year.
The impacts of these price increases on fertilizer prices could be equally dramatic. The Fertilizer Institute states that natural gas constitutes 70 to 80 percent of the cost of producing ammonia. One ton of ammonia requires an average 33.5 million BTUs (335 therms) of natural gas as a feedstock. In the U.S. and Canada, some fertilizer manufacturers are cutting back on production. Others, including some Wisconsin companies, are absorbing some of the costs. Some companies may shift production overseas, where natural gas prices are lower and not as volatile.
If this is a harsh winter, prices will rise even more. A colder than normal winter will increase demand and drive up prices, perhaps dramatically.
THE REASONS FOR INCREASING NATURAL GAS PRICES
The reason for this continuous rise in natural gas prices is simple. Demand continues to grow while supply is stagnant and storage inventories have fallen. According to the U.S. Department of Energy's Energy Information Administration, 92 percent of electrical generating capacity now under construction in the U.S. is gas fired, and the use of natural gas for power production probably will continue to grow over the next decade. Natural gas continues to be the preferred fuel for home heating. Since natural gas is relatively clean, compared with fuels like coal, and is easy to transport, growth in demand is expected. The current high price of oil on the world market also favors use of natural gas in industrial and commercial facilities.
On the supply side, production is near maximum levels. The United States gets 99 percent of its natural gas from North America (85 percent from the U.S. and 14 percent from Canada). Greatly expanding natural gas production in North America or importing large quantities of liquefied natural gas (LNG) are years away from being a reality, even if national policy mandated these actions.
THE BOTTOM LINE
The bottom line for Wisconsin agriculture is probably an increase in natural gas and fertilizer prices this winter. The significance of the increase is unknown but may be large. Improving on efficiency in energy and fertilizer use is the best way to reduce the impacts of these price increases, which may continue for some time to come.