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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. Subscriptions to Business Conditions are available to the public free of charge. For information concerning bulk mailings, address inquiries to Research Department, Federal Reserve Bank of Chicago, P. O. Box 834, Chicago, Illinois 60690. Articles may be reprinted provided source is credited. Please provide the bank’s Research Department with a copy of any material in which an article is reprinted. 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