Dynamic changes in the competition for fertilizer
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.
Indeed, 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.
The characteristics of the new plants are important. 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).
Each plant has differing goals. Plants in existence would seek to expand and pre-empt new entrants. The cooperatives view this as a means to better serve their grower customers in a more vertically integrated system. Energy companies are looking for a use of their outputs. Offshore entrants are looking for opportunities to serve the U.S. market and potentially export fertilizer to other countries, including China.
Our model shows the distribution of fertilizer production, as well as flows from production areas to meet county level demands. The most valuable (lowest cost) origins for U.S. processing are primarily in Louisiana. Several locations in Wyoming, Iowa, Georgia, Nebraska, Kansas and North Dakota also would be positive.
While there are up to 25 proposed fertilizer projects, these results indicate that 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 that shorter-haul rail shipments would be competing with trucks.
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