By Tim Todd

BridgeNews Commentary

KANSAS CITY (B)--The jump in natural gas prices that is sending rumbles through the North American fertilizer industry is rippling through farm country and may be heading toward the rest of the agribusiness sector.

For farmers, rumors and rumblings in the winter months are as predictable as the next cup of coffee. And it's not uncommon to have at least a few worried about the local availability of a specific seed variety, for instance.

For some growers, recent talk of soaring fertilizer costs is likely to fall under the heading of: "It's always something."

This year's rumblings, however, are backed by fact.

Natural gas is the key component in making ammonia, which is the basic building block of nitrogen-based fertilizers. By some estimates, natural gas can account for as much as 90% of the nitrogen production costs.

You don't have to look much further than the heating bill to see that natural gas isn't trading at the industry's ideal $2 per million British thermal units. Prices moved above $4 per MMBtu over the summer and in recent weeks, with a cold December and strong demand, natural gas contracts jumped above $10 per MMBtu.

According to an industry trade association, operating rates for U.S. ammonia plants have dropped to an estimated 60% to 65% of capacity as companies like Terra Industries and Mississippi Chemical opted to sell previously purchased natural gas directly instead of using it in production.

"Farmers need to be aware of the current gas situation and its impact on fertilizer," Gary Myers, president of The Fertilizer Institute, said in a press release from the trade association.

"Economic forces beyond our control make the outlook for price and supply of fertilizer very uncertain for the upcoming spring planting season."

Conventional wisdom suggests the most likely course of action for U.S. farmers is shifting some corn acres into soybeans, a crop that's not as fertilizer intensive and one that enjoys an advantage under the government's farm subsidy program.

"I just don't know why you would grow corn if you could grow soybeans," one Wall Street analyst said, citing the more favorable economics of soybeans.

It's hard to predict how many U.S. farmers will make a similar decision, but some private market analysts suggest a swing of 600,000 to 3 million acres, a range equal to anywhere from less than 1% to nearly 4% of the acreage of both crops.

If that happens, here is how it could affect various segments of the U.S. agribusiness sector:

--Seed marketers: Companies such as Monsanto, DuPont's seed making unit Pioneer Hi-Bred and others will be the first to see signs of a production shift. The larger seed makers regularly produce more seed than they expect to sell, leaving them with some degree of cushion in any given year. However, smaller, regional seed sellers could face a pinch if there's a massive shift within their region.

Seed companies started touting their 2001 product stable only a few weeks ago, and it's too early for talk of a run on seeds of either corn or soybeans. However, such rumblings would be an early sign of farmer planting plans.

Sector watchers might also keep an eye out for reports of deep discounts on corn seed, a possibility if sales lag in coming weeks as farmers opt for soybeans.

--Farm equipment: To buy the big machines sold by Deere & Co., CNH Global and Agco, farmers need to be making money.

Higher fertilizer prices drive up production costs for corn growers and could limit any upside they might enjoy from higher prices. Additionally, those who grow corn may try to control costs with reduced nitrogen applications, thereby cutting yields.

For soybean growers, stepped-up production across the U.S. could cut prices.

Those factors seem to suggest lower farmer income, but keep in mind that government farm subsidies can make a dramatic difference in income even in the face of historically low prices.

Additionally, the weather and world trade regularly wield influence on farm commodities and can rapidly change prices.

--Processors: For corn and soybean processors, the laws of supply and demand don't play by traditional rules.

For instance, one analyst said Corn Products International might not suffer as much as some might expect should corn prices edge higher as supplies tighten.

The reason? Reduced supplies could also increase selling prices of the company's processed corn products.

Alternately, the analyst offered that an influx of soybeans would not necessarily be good news for Archer Daniels Midland.

Oilseed crushing margins are critical for ADM, generating 56% of fiscal 2000 sales. Soybean crushing margins, which languished for months, started climbing late last year amid production cutbacks across the industry. Lower soybean prices could not only encourage some smaller crushers to restart production, but would also decrease selling prices for processed products.

Obviously, there's time for the fertilizer situation to change dramatically before planting begins, but all aspects of the agribusiness sector revolve around the farmer, and right now the farmer has some planting decisions to make.

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