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a n e c o n o m ic re v ie w b y th e F e d e ra l R eserve B a n k o f Chicago




The Port of Chicago
Fertilizer outlook

m ay
1975




The Port of Chicago

3

Located at the center o f the
industrial and agricultural
heartland o f the United States,
the Port of Chicago once held
great prom ise for expansion
and growth. This advantage,
however, has been underm ined
by several fundam ental
changes in modes of
transportation.
Fertilizer outlook

8

While rising capacity will
likely exert the major in­
fluence on fertilizer prices
in the remainder o f the
Seventies, rising costs portend
higher fertilizer prices over
the long term.

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Business Conditions, May 1975

3

The Port of Chicago
H istorically, waterborne transportation
has played an im portant part in the
growth and development o f C hicago as a
m ajor com m ercial and industrial center.
C h icago’s location at the southwestern tip
o f a m ajor natural waterway—the port o f
entry to the heartland o f Am erica—has
always provided an ideal terminus for
shipments o f raw materials to be processed
a n d eventually transported by land
throughout the United States as finished
or sem ifinished products.
Through the years o f C h icago’s rapid
in d u s tria l d e v e lo p m en t, w aterborn e
transportation on the Great Lakes was
dom inated by shipments o f bulk cargoes
such as grains, iron ore, quarry products,
and fossil fuels. This continued to be the
case even after the completion o f the St.
Lawrence Seaway in 1959 opened C hicago
to overseas traffic. In 1973—the m ost re­
cent date for w hich complete data are
available—the Port o f Chicago handled
47.4 m illion tons o f cargo—40.5 million
tons domestic, 4.3 m illion tons overseas,
and 2.5 m illion tons with Canada.
M ost o f the domestic tonnage in 1973,
in both source and destination, w as made
up o f five groups o f bulk products: coal (26
percent), petroleum and petroleum prod­
ucts (15 percent), iron ore and ore concen­
trates (19 percent), limestone and quarry
products (19 percent), and soybeans and
grain (2 percent).
The proportion o f bulk cargo involved
in trade between C hicago and Canada is
even more prom inent than in domestic
trade. Iron ore shipments from Canada
have accounted for as much as two-thirds




o f C an a dian /C h icago trade in some years;
the volume o f bulk-goods trade with
Canada often exceeds 90 percent o f the an­
nual Canadian tonnage handled at the
port.
B ulk ca rg oes and semiprocessed
materials also are important in C hicago’s
overseas trade. In recent years iron and
steel products (plates, sheets, pipe, and the
like) have accounted for 30 to 40 percent of
total foreign tonnage handled in Chicago
(mostly imports), and processed grain
products for an additional 15 to 20 per­
cent. Corn, soybean, and other bulk grain
exports make up 30 to 35 percent o f total
annual volume. Electrical and nonelectri­
cal m achinery, with a high value per ton,
typically account for only 1 to 2 per­
cent o f annual tonnage, but a substantially
larger share o f total annual dollar value.

The port’s domestic trade is
founded on raw materials
other
grains and
soybeans
iron and steel

H

limestone and
uncategorized
nonmetallic
non
minerals

I'X

petroleum
products
'iron ore
-coal

1971 1972 1973

4

Federal Reserve Bank of Chicago

Bulk cargos are the staples of trade
between Canada and the Port of Chicago
million short tons
other
coke and
misc. pet.
prod.
grains and
soybeans

other
nonmetallic minerals
newsprint
iron ore

1.5

1.0

0.5 -

0.0
1968

1969

1970

1971

1972

1973

C hicago port traffic has been
about evenly split between imports
and exports in overseas trade,
whether measured in terms o f ton­
nage or dollars. C h ica go’s export
tonnage typically is somewhat
larger than its import tonnage,
while the value o f imports is
greater than the value o f exports.
An export/im port balance is im por­
tant for achieving economies o f
operation because ships unloading
cargo are able to reload cargo for
the return trip. Frequent and costcom p e titiv e s a ilin g schedules
traditionally are im portant in­
gredients in port development and
expansion, and good “ turnaround”
characteristics are influential fa c­
tors in the designation o f a city as a
“ port o f call” by shipping lines.

Organization of the port

Lake ports handle much less
traffic than seacoast ports
million short tons

P hiladelp hia ■

Los Angeles |
DuluthSuperior
Chicago

■

Detroit

i

Milwaukee

I




exports imports

The deepwater shipping facilities in
what is officially recognized as the Port o f
C hicago are spread am ong three terminal
areas. The primary port facilities are in
Calumet Harbor on Lake M ichigan and
along a six-mile stretch o f the Calumet
River, both areas in the extreme southeast
corner o f the city. In 1973 these facilities
handled a total o f 26.6 m illion tons o f
cargo, o f which 6.6 m illion tons rep­
resented foreign shipments. To the north,
also on the shore o f Lake M ichigan but at
the water’s edge o f the city’s business dis­
trict, is the C hicago Harbor, also called
N avy Pier. This is a small facility, h an ­
dling primarily a m iscellaneous array o f
r e la t iv e ly h ig h -v a lu e d fo o d item s,
machinery, newsprint, and the like. Total
tonnage a tN a v y P ierin 1973 w as 404 thou­
sand tons. The city’s other m ajor port
facilities are situated in and around Lake
Calumet, six miles inland from Lake
M ichigan via the Calumet River. T onnage
handled by these facilities in 1973 totaled

5

Business Conditions, May 1975

2.2 m illion tons, 1.3 m illion tons o f which
were foreign.
T w o adm inistrative bodies—one state
and one city—are responsible for the
m aintenance and development o f the port
facilities in the C hicago area. By tradition
and by statute the city o f C hicago exercises
authority over port operations. T his ar­
rangem ent w as formalized in 1958 by the
establishm ent o f the Department o f the
Port o f Chicago, which is responsible for
the N avy Pier facilities. Other port
facilities fall under state jurisdictions. In

1951 the Illinois legislature created the
C hicago Regional Port District for the pur­
pose o f developing deepwater port facilities
in and around Lake Calumet. By statute
these facilities are leased to private firms.
Private interests took the initiative in
developing the deepwater port Calumet
Harbor facilities at the lake front and in­
land along a six-mile stretch o f the
Calumet River. Today, both the Lake
Calumet and the Calumet Harbor facilities
fall under the jurisdiction o f the state’s
Regional Port District.

' 0 - limits

O'Hare
Airport

The locations of Chicago’s
port facilities




North Branch■
Chicago River

Chicago Business Area,

South Branch
Chicago River^—

Midway Airport
Chicago city limits

Lake
Calumet

Calumet
Harbor

River

ILLINOIS

6

Federal Reserve Bank of Chicago

Growth of activities

“ general cargo” will be containerable
goods. Handling such goods would require
The growth o f port activity over the
a su b sta n tia l expansion o f modern
past 17 years has been prim arily tied to the
container-ship facilities at Great Lake
fortunes o f overseas trade. Overseas trade
ports. Yet the foreseeable volum e o f con­
activity at the C hicago port reached a
tainerable general cargo will support only
record level in 1971 when East, Gulf, and
limited
construction o f such facilities.
West coast dock strikes resulted in a diver­
Thus,
to
date,
Great Lakes port authorities
sion o f traffic to Chicago. Overseas trade
have
shown
little
inclination to develop a
handled at C hicago totaled more than 5
coordinated
program
to handle such ship­
million tons in 1971; in 1974 it amounted to
ping.
N
o
doubt
this
is
in part because the
just over 2 m illion tons. More than 50 per­
most logical plans call for fewer con­
cent o f the decline occurred in 1974, reflec­
solidated port locations; some ports would
tin g su ch u n u su a l sh ort-term c ir ­
lose a portion o f the overseas trade they
cumstances as labor union disruptions, a
currently handle. It is well known, for in­
shipping accident that tied up traffic
s t a n c e , t h a t s o m e tr a n s p o rta tio n
through the Welland Canal for weeks, and
authorities subscribe to the position that
a general slump in econom ic activity in the
“ fully integrated container facilities” are
U n ite d S tates a n d a b ro a d . W h ile
econ om ica lly justifiable only at the
worldwide econom ic conditions are ex­
Chicago port, with substantially lesser
pected to affect port traffic again this year,
container facilities at Cleveland, Detroit,
observers believe that the 1975 level will be
and Milwaukee.
an improvement over the 1974 level.
Still, long-term factors hold lit­
tle promise for a m ajor expansion
o f overseas traffic on the Great
Three product groups
Lakes or at the Port o f Chicago. For
dominate
Chicago’s
one thing, the present St. Lawrence
overseas
waterborne
trade
S ea w a y ca n n o t a ccom m oda te
million short tons
m any o f the new container ships—
4.5
the large, fast, ocean-going cargo
ships that have been gaining an in­
4.0
exports
imports
creasing share o f all overseas traf­
other
other
fic. Moreover, even if these ships
3.5
grain mill products
were able to navigate the seaway
iron and steel
iron and steel
effectively, they m ight lose much if
3.0
grain and soybeans
not all o f their high-speed and
quick-turnaround cost-cutting ad­
2.5 vantages if forced to negotiate the
low speed locks and channels o f the
2.0
seaway, and make numerous port
stops to unload or take on cargo.
1.5
Containerized shipping has
proved to be a m ajor obstacle to the
1.0
growth o f Great Lakes transporta­
tion and poses a dilemma to all port
0.5
authorities on the Great Lakes.
A ny appreciable increase in im ­
0.0
1972
1973
1971
1970
1968
1969
ports and exports o f high-valued




■

Business Conditions, May 1975

The im portance o f a coordinated ap­
proach to these problems was emphasized
in Congressional hearings in 1970. A t that
time, Professor Eric Schenker, a transpor­
tation expert, suggested that “ . . . lake
ports must realize that their true com ­
petitors are the coastal ports, and only
through a determined, coordinated, and
immediate effort will they be able to meet
this com petition and expand their penetra­
tion o f the m idw estem transportation
market.” 1 More recent work by Professor
Schenker at the U niversity o f W isconsin’s
Center for Great Lakes Studies continues
to point to the im portance o f determining
the com parative shipping advantage o f
specialization at the various lake ports as a
m eans o f developing an intra-Great Lakes
shipping com plex.2
Given the restrictions imposed by the
St. Lawrence Seaway on ship size, Great
Lakes ports will not be able to compete
w ith tidew ater ports for m ost con­
tainerized traffic. Lake ports m ight func­
tion effectively, however, as ports o f call
for “ feeder” vessels handling container
traffic between tidewater and heartland
ports.
A unique drawback facing Great
Lakes ports has been the fact that ocean­
going U.S. shipping lines have not
operated on the Great Lakes since 1970—
and not since 1968 on a regular schedule.
This has m eant that in recent years lake
ports have not had the opportunity to han-

‘U-S., Congress, Senate, Committee on Com­
merce, Special Subcommittee to Study Transporta­
tion on the Great Lakes-St. Lawrence Seaway, St.
Lawrence Seaway Development Corporation,
Hearings on S.3137. 91st Cong., 2d sess., 1970, pp. 8999.
2The development of container facilities at the
Port of Chicago and the issue of merging the two port
authorities in the Chicago area are subjects of a
current study by the Illinois Department of Business
and Economic Development in cooperation with the
Economic Development Administration of the federal
government.




7

die those foreign-bound items or com ­
modities that governm ent policy restricts
to U.S. flag carriers. Such items include
defense equipment, some agricultural
shipments, and other products. These
goods must be shipped to seacoast ports by
land, depriving the Great Lakes ports o f
the opportunity to handle them. For the
1975 shipping season one U.S. flag line has
announced plans for m onthly service be­
tween the Great Lakes and the Mediter­
ranean area.

Conclusion
Traditionally, the viability o f any port
depends on the proxim ity o f that port to its
market area and on the ease with which
land transportation connects with the
port. In this sense the C hicago port, at the
center o f the industrial and agricultural
heartland o f the United States, held great
promise for expansion and growth. This
traditional com parative advantage o f loca­
tion, however, has been undermined by
technological changes in modes o f trans­
portation. A system o f favorable “ longhaul” rail tariffs to coastal ports, and more
recently the advent o f the “ unit train,”
have greatly diminished the price advan­
tages o f shipping via the Great Lakes. Less
frequent shipping schedules and often sub­
stantially longer delivery times to Europe
(compared with rail shipments to an East
coast port) also have discouraged overseas
shipping via the lakes. Future growth in
lake port shipping will be dependent upon
the resolution o f problems o f coordination
o f activities am ong the various ports as
well as within some local port authorities,
especially Chicago, and on the ability of
the port facilities to make the most effec­
tive use o f containerization and other new
shipping technologies.

Jack L. H ervey

8

Federal Reserve Bank of Chicago

Fertilizer Outlook
Chemical fertilizers, in conjunction with
other modern farm ing techniques, have
aided the productive capacity o f cropland
substantially in recent years—some ex­
perts estimate that higher application
rates o f fertilizer m ay have increased U.S.
crop production by one-third or more. Food
production at levels that will keep pace
with a grow ing population in the future
will require even greater utilization o f fer­
tilizer materials.
Over the past two years a su pply/de­
mand im balance that caused fertilizer
prices to increase sharply has led to grow ­
ing concern about the availability and cost
o f fertilizer. Over the same period a number
o f d e v e lo p m e n ts h a v e substantially
altered the m anufacturing cost structure.
It now appears that supply and demand for
most fertilizers is com ing back into
balance, and this will be the overriding fa c­
tor influencing fertilizer prices paid by
farmers in the next few years.

Demand and supply in perspective
U sage o f fertilizer has increased rap­
idly in the United States since World War
II. In 1974 virtually all corn acreage, 80
percent o f all cotton acreage, and 66 per­
cent o f all wheat acreage were being fer­
tilized. Utilization o f the three major
nutrients—nitrogen, phosphate, and pot­
ash—grew by an average annual com ­
pound rate o f 7 percent from 1950 to 1960
and by nearly 8 percent from 1960 to 1970.
From 1970 to 1974 the average growth rate
dropped to just over 4 percent—a decrease
probably more related to supply con­
straints that occurred m idw ay through the
period than to a drop in demand.
Nearly all the nitrogen fertilizer con­




sumed in the United States is produced
within the country. The United States is a
net exporter o f phosphate fertilizer and a
net importer o f potash fertilizer. A p ­
proximately 30 percent o f U.S. phosphate
rock output goes to foreign buyers, and
some 15 to 20 percent o f phosphate fer­
tilizer production is exported. A bout 70 per­
cent o f the potash fertilizer consumed an­
nually in the United States is imported
from Canada.
With the exception o f the last couple o f
years, fertilizer supplies have been gener­
ally adequate—as evidenced by the trend
o f steady or declining prices throughout
the Fifties and Sixties. M idway through
the Sixties two factors converged and
made fertilizer manufacturing enorm ously
appealing from the profit standpoint. The
first was a dip in the level o f world food
production. M any observers interpreted
this development as a tremendous oppor­
tunity for the United States to “ feed the
world” in the future. The second factor in­
volved technological breakthroughs—par­
ticularly the development o f large cen­
trifugal compressor am m onia plants and
the refinement o f m ining techniques that
permitted the extraction o f high-grade
potash ore in Saskatchewan, Canada.
These breakthroughs cut production costs
by up to one-half for some nitrogen and
potash fertilizers. Large expansion pro­
jects also were undertaken in the area o f
phosphate production. A side effect o f the
rush to manufacture fertilizer w as that
p r ic e s fell s h a rp ly a n d su rp lu ses
accumulated.
By 1969 m ost fertilizer products reach­
ed the lowest prices on record and supplies
greatly exceeded demand. This depressed
situation resulted in losses for manufac-

9

Business Conditions, May 1975

Fertilizer prices appear likely to decline in the near term if
crop and fertilizer prices follow established patterns
percent, 1967=100

percent, 1967=100

N ote: In d exe s are fo r c ro p p rice s received by
fa rm e rs and fe rtiliz e r p rice s paid by farm ers.
‘ A verage o f firs t 4 m o n th s o f 1975.

turers, halted nearly all plans for expan­
sion, and closed m any less efficient
m anufacturing plants.

The turbulent 1970s
M arginal increases in crop acreage in
1970 and more substantial increases in
co m acreage in 1971 saw U.S. demand for
fertilizers begin to absorb some o f the sur­
plus supplies. Prices o f fertilizers began to
strengthen, returning almost to 1967
levels. In 1971, therefore, it appeared that
the fertilizer industry was “ back in
business” with demand and supply com ­
ing into balance and with prices returning
to a level that would produce profits—after
three consecutive years o f m anufacturing
losses.
Then on August 15,1971 the President
o f the United States imposed a freeze on
wages and prices. This action w as un­
timely for the fertilizer industry since
summer is a time o f discounts designed to
induce dealers to store products over the
winter m onths for sale in the spring.




Nevertheless, the August date established
a base for fertilizer prices for the next two
years. Some pass-through o f increased
production and distribution costs were
allowed over the ensuing period, but
domestic price increases were minimal
compared to those in world markets. Dur­
ing 1973 world prices o f fertilizer were
anywhere from 50 to 200 percent above
U.S. prices. This situation hastened the
flow o f fertilizer from the United States to
foreign countries exactly at the time that
supplies were grow ing short in the United
States.
When fertilizer prices were decon­
trolled on October 26,1973, domestic prices
simply exploded. By December 1973 the
average farm price for concentrated
superphosphates had jumped 36 percent
above the September level. By April 1974
the price had increased nearly 60 percent
over the previous September level, and by
September 1974 the average price farmers
paid was double the year-earlier level. The
average price farmers paid for the most
com m on nitrogen fertilizers rose between

Fertilizer manufacturing processes
Water

Carbon Dioxide
(ammonia production
byproduct)

Natural
Gas

Phosphate
Rock

Sulfuric
Acid

Water

Potash
Ore

Water

Ammonia

Potash
Solution
Nitric
Acid

Solution

RAW
MATERIALS

Phosphate
Slurry

INTERMEDIATE
PRODUCTS

Ammonium
Nitrate
Solution

Granular
Urea L

Nitrogen
Solution

45- 0-0

32- 0-0

Granular
Ammonium
Nitrate

Ammonia
(compressed
gas)

Granular
Diammonium
Phosphate

34- 0-0

82- 0-0

18- 46-0

Granular
Normal
Superphosphate
0 - 20-0

LIQUID MIX
FERTILIZERS

'Phosphoric acid can also be iroduced via an electric furnace process.
'The three numbers describe ne percentage of the nutrients available in terms of N-P 2 O 5 -K 2 O (nitrogen-phosphate-potashf




Granular
Potash

0- 0-60

TYPICAL
FERTILIZER
GRADES2

Federal Reserve Bank of Chicago

BULK BLEND
FERTILIZERS

Granular
Concentrated

Superphosphate
0- 46-0 j .

Business Conditions, May 1975

120 and 150 percent in the same September
to September period.

The energy crisis
In October 1973 the Arab members o f
the Organization o f Petroleum Exporting
Countries (OPEC) began to restrict exports
o f crude oil. A lm ost overnight crude oil
prices nearly quadrupled and a sharp rise
in prices o f other energy products ensued.
The im pact o f the energy crisis on the fer­
tilizer industry was evidenced by rising
natural gas prices, the m ajor raw material
in anhydrous am m onia production. It
takes about 38,000 cubic feet o f natural gas
to produce 1 ton o f anhydrous ammonia.
Natural gas prices fall into two
categories, interstate gas, regulated by the
Federal Power Commission, and in­
trastate gas, in m ost instances considered
a free market commodity. A ll domestic
natural gas costs had been extremely
stable and relatively low compared to the
cost o f other feedstocks until the Arab oil
embargo. A s a free market commodity,
however, prices o f intrastate gas respond­
ed quickly to the price increases in energy
products, and by the end o f 1974 the asking
price for new intrastate natural gas was
almost ten times more than prior to the oil
embargo. Interstate prices, while being ad­
justed upward, remain well below the price
o f intrastate gas at the present time.
Other factors, too, have served to in­
crease fertilizer costs in recent years. In
1970 the Canadian governm ent began
lim iting potash production in an effort to
reduce the overabundent supplies that had
forced market prices below production
costs. Large investments required for
pollution control equipment, especially in
phosphate production, also limited capital
expansion in the early Seventies.

Recent experience
Planted acreage o f the 16 principal
crops grown in the United States increased




11

substantially during the past two years.
Over three-quarters o f the increased acre­
age—up 11 percent from 1972 to 1974—was
planted to corn and wheat, which utilize
relatively large quantities o f fertilizer.
Perhaps an even more basic contributor to
the sharp increase in fertilizer demand was
the rise in crop prices—not only the
m otivating force behind the acreage ex­
pansion but also a source o f increased
funds and new econom ic incentive for fer­
tilizer purchases. Crop prices increased
over 40 percent during 1973 and rose
another 30 percent in 1974.
Nitrogen. Nitrogen utilization is close­
ly linked to corn acreage, and a 7 percent
increase in corn acreage in 1973 followed
by an 8 percent increase in 1974 pushed de­
mand for nitrogen fertilizer sharply up­
ward. Consumption o f nitrogen increased
nearly 4 percent in 1973 and 10 percent in
1974, despite substantially higher prices.
However, nitrogen fertilizer production
has increased only m arginally since 1970.
Only three new large am m onia plants
came on stream from 1970 through 1975,
although several smaller plants have
either been constructed or reopened. A m ­
monia plant capacity in the United States
has grown by less than 2 million tons in
thel971-75 period, compared to a nearly 10
million ton increase in the 1966-70 period.
Phosphates. Phosphate rock produc­
tion has not kept pace with domestic
utilization and exports in recent years.
Total inventories o f phosphate rock have
dropped to the minimum workable level.
However, the long-term contracts that
m any rock producers have with fertilizer
companies suggest that sufficient rock
supplies will be available to meet domestic
demand although exports m ay be pared for
the next year or two. Furthermore, plans
are underway to increase phosphate rock
m ining capacity by almost 60 percent by
1980.
Wet process acid production is cur­
rently being expanded and will enable the

12

Federal Reserve Bank of Chicago

industry to increase production o f phos­
phate fertilizer. A number o f new wet
process plants brought on stream since
mid-1973 increased acid production in 1975
about 35 percent over 1973 levels. A d ­
ditional expansion projects and new
plants will raise phosphoric acid capacity
approximately 40 percent by 1980.
Potash. M ost North Am erican potash
facilities are located in Saskatchewan,
Canada. U.S. facilities, located in New
Mexico, California, and Utah, account for
about one-fourth o f total North Am erican
capacity. In recent years, however, due to
cutbacks in Canadian production, U.S. fa ­
cilities have accounted for alm ost onethird o f the total production. However,
high-grade ore in the United States has
been mined out for the most part.
Canadian potash production facilities
were overbuilt in the late Sixties. In 1970
the Saskatchewan provincial governm ent
effected regulations causing potash pro­
ducers to limit production to 50 percent o f
rated capacity in an effort to deal with
oversupplies and to establish a floor price
on Canadian potash.
U sage o f potash follow ed the same up­
turn as nitrogen and phosphate in 1973
and 1974. By 1974 North Am erican utiliza­
tion outstripped production by nearly onehalf m illion tons. Inventories were suf­
ficient to handle the increase, but rising de­
mand set o ff a scramble to increase the
capacity o f Canadian plants. That task,
however, proved to be more difficult than
expected. Even though plants were op­
erating far under rated capacity, equip­
ment and labor shortages slowed expan­
sion efforts. During the 1973-74 year (July
1 to June 30) Canadian producers only
reached about 70 percent capacity. C ana­
dian potash production could reach about
three-fourths o f rated capacity this year.

Production costs up
The cost o f producing alm ost all fer­




tilizer has increased rapidly since 1973 and
it is likely that this trend o f rising costs will
continue well into the future. Raw material
and energy costs are up substantially—
some due to political action rather than
econom ic relationships—while inflation
and demand have pushed new plant
building costs to about three times the 1973
level.
Increasing natural gas costs (or the
costs o f substitute products), higher plant
costs, and policies o f Canadian govern­
ments will have the most im pact on future
fertilizer costs. For example, the average
cost o f interstate natural gas used in am ­
monia production in 1974 was around 45
cents per 1,000 cubic feet (MCF), compared
to intrastate gas at about 20 cents per
MCF. The weighted average cost was
about 35 cents per MCF, w hich m eans gas
costs were a little over $11 per ton o f am ­
monia. Some observers suggest that in­
terstate gas prices to industrial customers
m ay rise to $2 per M CF by 1980, indicating
that natural gas costs for manufacturers
utilizing interstate gas m ight total around
$75 per ton o f ammonia.
Yet even with raw material and plant
construction costs at record levels, it is con ­
ceivable that these expenses m ay com e un­
der downward pressures in the future.
Should the cost o f alternative energy
supplies, such as crude oil, decrease, the
drop could be reflected in natural gas
prices, as was the recent increase. When
measured on a BTU equivalent, the current
price o f crude oil, about $11 per barrel,
translates into about $2 per M CF o f
natural gas. If the price o f crude oil were to
decline to $7 per barrel, the equivalent
natural gas price would be about $1.25 per
MCF, or 25 to 35 cents less per M CF than
some recent contracts made by am m onia
producers.
There are a couple o f characteristics o f
fertilizer production that tend to mitigate
rapid increases in some costs. One, it is not
labor intensive. Two, m any fertilizer raw

Business Conditions, May 1975

13

Fertilizer usage continues to grow but
at reduced rates in the Seventies
million tons

million tons

pressures on fertilizer subside, the prices o f
raw materials usually drop. On the other
hand, transportation and distribution
costs remain subject to the upward
pressures o f inflation.

materials, other than natural gas, are
limited to usage within the fertilizer in­
dustry and, therefore, are extremely sen­
sitive to supply and demand pressures
within the industry. Thus, as demand

Application rates have declined or held steady in recent years
due to fertilizer shortages and high prices
pounds per acre




pounds per acre
“1280
- 240

-

200

- 160

1968

1969

1973

1974

14

Future prices
Fertilizer prices peaked in 1974 and
early 1975 and are expected to begin a slow
decline for the next year or two. More
pronounced price declines are apt to take
place in the late Seventies, bringing fertilizer/crop price relationships back to
more traditional levels both in the United
States and abroad. Over the long term,
however, an upward climb in fertilizer
prices will likely prevail as forces o f supply
and demand begin to balance.
Nitrogen fertilizers. Prices o f nitrogen
fertilizers will likely come under in­
creasing downward pressure as new
production capacity comes on stream in
the next few years. If all the nitrogenproducing facilities scheduled to be built
between now and 1980 are completed, both
in the United States and other parts o f the
world, nitrogen production capacity will
exceed current demand projections and
will likely result in a surplus o f nitrogen
fertilizers. Nevertheless, if the cost o f
natural gas—more generally the cost o f
en ergy products—holds near current
levels, or rises, it will have a profound
effect on the long-term cost o f am m onia,
and therefore, on all nitrogen fertilizers.
Interstate natural gas prices are expected
to rise, and as “ old ” intrastate gas con ­
tracts expire and are replaced with con­
tracts supplying gas at higher rates—in
the United States the new rates will be sub­
stantially higher in m ost instances—
nitrogen prices will rise accordingly.
Phosphate fertilizers. Phosphate will
most likely continue to reflect supply/demand conditions in the fertilizer industry.
Phosphate fertilizer prices are likely to be
under downward pressure for the re­
mainder o f the Seventies. However, high
energy costs (electricity is used to mine
rock), Environm ental Protection A gency
regulations on strip-mining and on waste
products from phosphate manufacturing,
as well as increasing transportation and




Federal Reserve Bank of Chicago

distribution costs will likely serve to
drive phosphate fertilizer costs upward
over the longer term.
Potash fertilizers. The amount o f in­
crease in North Am erican potash produc­
tion for the remainder o f this decade
remains uncertain. Potash prices will
reflect the policies o f the governm ents that
control production, primarily the provin­
cial government o f Saskatchewan. A
regressive, retroactive tax has already
been imposed on Canadian potash pro­
ducers, and the provincial governm ent has
announced that it will take a controlling
interest in any new m ining adventure—a
move that surely will limit the desire o f in­
vestors to expand capacity in that region.
Thus, while the basic production facilities
are available, there is a question as to
whether firms will upgrade those facilities
to rated capacity. Rising Canadian prices
and government restrictions on output
may make it profitable to continue
operations in the U.S. potash mines for a
longer period than previously anticipated.
In contrast to nitrogen and phosphate,
potash prices m ay continue to rise slow ly
in the remainder o f this decade.

Future trends
Rising production capacity will likely
be the overriding factor influencing fer­
tilizer supplies and prices in the remainder
o f the Seventies. Nevertheless, rising costs,
particularly for natural gas, portend
higher fertilizer prices over the longer
term. From the end o f World War II until
the late Sixties the farm price o f fertilizer
held steady or declined as improved
m a n u fa ctu rin g technologies and in­
creasing econom ies o f scale more than
offset rising costs. However, it is unlikely
than farm fertilizer prices will reach the
low levels o f the late Sixties in the
foreseeable future. Higher m anufacturing
costs will cause firms to cut back produc­
tion much sooner than in the past when

Business Conditions, May 1975

prices fall. Increasing transportation and
distribution costs also will tend to hold fer­
tilizer prices at much higher levels.
Lower energy costs at some future date
m ay stem increases in the cost o f m anufac­
turing nitrogen fertilizer. And there is




15

always a possibility o f additional im­
provements in manufacturing technolo­
gies. However, these are unknowns at the
present.

Terry Francl