The Federal Energy Regulatory Commission and Commodity Futures Trading Commission (CFTC) have only a “limited role” in cushioning the blow of high natural gas prices that have led to the shutdown of half of the domestic nitrogen fertilizer industry, sending fertilizer producers overseas and U.S. farmers into the arms of lower priced imports, according to a new General Accounting Office (GAO) report.

Between January 2001 and June of this year, eight U.S. nitrogen fertilizer manufacturers permanently closed their plants and a ninth facility has not operated since 2001, said the GAO in a study released Friday. High natural gas prices, which account for up to 90% of the production costs of nitrogen, “are continuing to exact a financial toll” on the nitrogen fertilizer industry, which was operating at only 50% of capacity in June of this year, it noted. Nitrogen is a fertilizer itself, and is used to make other nitrogen-based fertilizers

Although U.S. fertilizer manufacturers could resume operation when gas prices return to lower levels, “higher prices sustained over the long term may result in more permanent curtailment of domestic production,” the agency warned. In addition to above-normal gas prices in the U.S., nitrogen fertilizer producers are being squeezed by fertilizer imports that are subsidized and gas prices that have been set artificially low by foreign governments, said Sen. Tom Harkin of Iowa, the ranking Democrat on the Agriculture Committee who requested the GAO study.

Meanwhile, the GAO reports there is little FERC can do to soften the impact of the gas prices on fertilizer producers, aside from ensuring that gas prices are just and reasonable and free from fraud and market manipulation. The CFTC, which oversees natural gas derivatives that are traded on federally regulated exchanges, has a restricted role also. It has no direct control over gas prices, but rather it protects traders and the public from fraud, manipulation and abusive practices.

While FERC and the CFTC have fined a string of energy companies for manipulation or attempted manipulation of gas prices, Harkin said he didn’t know if the actions had favorably affected fertilizer costs. Nevertheless, he called for Congress to bolster the ability of FERC and the CFTC to punish manipulators of gas prices, saying that “such manipulation threatens the bottom line of many farmers and agribusinesses.”

The U.S. Department of Agriculture (USDA) is powerless over nitrogen fertilizer prices. It does not control prices for domestic nitrogen fertilizer, and nitrogen fertilizer imports from overseas generally are not subject to U.S. trade restrictions, such as quotas and tariffs, the GAO said. The USDA, however, does monitor and report on developments in the agricultural sector that could affect farmers and offers certain programs to help farmers manage risks associated with crop yield and revenues, the agency noted.

This marked the second time the GAO, at Harkin’s urging, has investigated the impact of gas price spikes on the nitrogen fertilizer market. In his latest request, Harkin asked the agency to review the role of the federal government in managing the impact of high gas prices on the domestic fertilizer industry, as well as how gas prices were affecting fertilizer prices, production and supplies.

Although above-normal gas prices have caused nitrogen fertilizer production facilities to close their doors in the last couple of years, nitrogen fertilizer stocks for U.S. farmers have been adequate as foreign countries with low gas prices have filled the void, the GAO report said.

In 2001, for example, when gas prices shot to as high as $10.16/MMBtu and anhydrous ammonia, one of the most commonly used nitrogen fertilizers, rose to $290 per ton, “supplies of nitrogen fertilizer were adequate to meet farmers’ needs…primarily because of a significant increase in imported nitrogen,” the agency noted.

Most nitrogen fertilizer imports have come from the United States’s neighbor to the North in past years, but Canadian imports dropped by almost 13% in 2001, the GAO said. At the same time, lower priced nitrogen fertilizer imports from Trinidad Tobago, Venezuela and the Ukraine rose by 19%, 59% and 469% respectively in that year, it said. The price of gas, a key component in the production of nitrogen fertilizer, was “considerably lower” in the three countries than in the U.S.

Harkin contends that U.S. nitrogen fertilizer producers are at a competitive disadvantage with fertilizer imports, which he says are subsidized and manufactured from gas that is priced artificially low. In the last few years, the U.S. and Western Europe governments “have been pressing countries in the former Soviet Union, particularly Russia, to price their natural gas more fairly as part of making their economies more market-oriented” in preparation for joining the World Trade Organization, he said.

Coinciding with the fall-off in domestic nitrogen fertilizer production caused by high gas prices in 2001, imports rose to nearly nine tons in that year from 6.3 tons in 2000, the GAO reported. Imports of nitrogen accounted for more than one-third of the total U.S. supply of 21.4 tons in 2001, and were just shy of U.S. production of 10.58 tons.

A USDA survey found that nitrogen fertilizer supplies were at 97% of normal levels nationally by early June of 2001, despite an estimated 25% reduction in U.S. nitrogen fertilizer production that year, the GAO study said. The USDA “did not conduct a similar survey in 2003, when gas prices and fertilizer prices again increased, because it was unaware of any concerns about the availability of nitrogen fertilizer.”

In addition to adequate U.S. supplies, the USDA said that about 34% of corn producers, who responded to a survey in 2001, reported they “purchased a majority of their nitrogen fertilizer at prices that were set prior to January 2001 and, therefore, were not affected by the sharp increase in fertilizer prices that year.” Corn is a crop that requires large quantities of nitrogen fertilizer, the GAO report noted.

“Sound financial planning by many of America’s farmers has allowed them to minimize the financial strain caused by volatile natural gas prices by pre-purchasing their fertilizer needs,” said Harkin. “If natural gas prices remain high, however, it is unclear how big an advantage pre-purchasing will offer in the future and what impact that will have on farmers’ pocketbooks.”

Rep. Richard Pombo (R-CA), chairman of the House Resources Committee and co-chairman of the House gas task force, called the GAO report a “wake-up call” for Congress to pass energy legislation, which eliminates the “outdated policies and red-tape” that have caused “this massive imbalance in the natural gas market.”

Similarly Rep. W.J. “Billy” Tauzin (R-LA), chairman of the House Energy and Commerce Committee and co-chairman of the gas task force, said the GAO study was “another example of how high natural gas prices have dealt a tremendous blow to our economy.” The nation “simply cannot afford to wait any longer” for a national energy policy bill.

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