oversight

Natural Gas: Domestic Nitrogen Fertilizer Production Depends on Natural Gas Availability and Prices

Published by the Government Accountability Office on 2003-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Ranking Democratic
                 Member, Committee on Agriculture,
                 Nutrition and Forestry, U.S. Senate


September 2003
                 NATURAL GAS
                 Domestic Nitrogen
                 Fertilizer Production
                 Depends on Natural
                 Gas Availability and
                 Prices




GAO-03-1148

                 a

                                                September 2003


                                                NATURAL GAS

                                                Domestic Nitrogen Fertilizer Production
Highlights of GAO-03-1148, a report to the      Depends on Natural Gas Availability and
Ranking Democratic Member, Committee
on Agriculture, Nutrition and Forestry, U.S.    Prices
Senate




Natural gas is the most costly                  Higher natural gas prices have contributed to higher nitrogen fertilizer prices
component used in manufacturing                 and reduced domestic production. The following figure shows the
nitrogen fertilizer. Therefore, when            relationship between natural gas prices and the farmer price for nitrogen
natural gas prices increased in                 fertilizer.
2000–2001, U.S. companies that
produce nitrogen fertilizer reported
adverse financial consequences                  Farmer Price for Nitrogen Fertilizer Relative to Natural Gas Prices, January 1998–March 2003
resulting from much higher
production costs. Concerns also
arose that the nation’s farmers
would face much higher nitrogen
fertilizer prices and that there
might not be an adequate supply of
nitrogen fertilizer to satisfy
farmers’ demands at any price.
Responding to congressional
concerns, GAO undertook a study
to determine (1) how the price of
natural gas affects the price,
production, and availability of
nitrogen fertilizer and (2) what role
the federal government plays in
mitigating the impact of natural gas
prices on the U.S. fertilizer market.



                                                Higher gas prices in 2000–2001 also led to a 25 percent reduction in domestic
                                                production of nitrogen but, despite this decline, the supply of nitrogen
                                                fertilizer was adequate to meet farmers’ demand in 2001. Demand was met
                                                because U.S. nitrogen production was supplemented by a 43 percent
                                                increase in nitrogen imports and a 7 percent decrease in agricultural
                                                consumption of nitrogen fertilizer.

                                                The federal government does not set natural gas prices, and it has a limited
                                                role in managing the impact of natural gas prices on the U.S. fertilizer
                                                market. Three federal agencies—(1) the Federal Energy Regulatory
                                                Commission, (2) the Commodities Futures Trading Commission, and (3) the
                                                Energy Information Administration—are responsible for ensuring that
                                                natural gas prices are determined in a competitive and informed
                                                marketplace. Moreover, the federal government has no role in controlling
                                                fertilizer prices, but the U.S. Department of Agriculture (USDA) does
                                                monitor developments in the agricultural sector, including fertilizer markets,
                                                that could affect farmers. Also, in 2001, USDA collected additional survey
www.gao.gov/cgi-bin/getrpt?GAO-03-1148.         information in response to concerns about the price and availability of
                                                nitrogen fertilizer.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Jim Wells at
(202) 512-3841, wellsj@gao.gov.
Contents




Letter
                                                                                                1
                            Results in Brief 
                                                         3
                            Background                                                                 4

                            Higher Natural Gas Prices Have Contributed to Higher Nitrogen 

                              Fertilizer Prices and Reduced Domestic Production but Have Not
                              Affected Availability of Fertilizer                                      5
                            Federal Government Has a Limited Role in Managing the Impact of
                              Natural Gas Prices on the Fertilizer Market                             14
                            Observations                                                              19
                            Agency Comments                                                           20


Appendixes
             Appendix I:    Objectives, Scope, and Methodology                                        22
             Appendix II:   GAO Contacts and Staff Acknowledgments                                    26
                            GAO Contacts                                                              26
                            Staff Acknowledgments                                                     26


Tables                      Table 1: U.S. Nitrogen Supply and Demand, June 30, 1996–2002              12
                            Table 2: Average Corn Prices, 1996–2001                                   18
                            Table 3: Average Costs of Materials Used per Acre on Corn Farms,
                                     1996–2001                                                        19


Figures	                    Figure 1: Anhydrous Ammonia and Natural Gas Prices, 

                                      1998–2003                                                        6

                            Figure 2: Urea, UAN, and Natural Gas Prices, January 1998–March 

                                      2003                                                             7

                            Figure 3: Prices of Anhydrous Ammonia in the U.S. Gulf Port and

                                      Mid Cornbelt Relative to Natural Gas Prices, January 

                                      1998–March 2003                                                  8

                            Figure 4: Farmer Prices for Nitrogen Fertilizer Relative to Natural 

                                      Gas Prices, January 1998–March 2003                              9

                            Figure 5: Nitrogen Fertilizer Availability, 2001                          13





                            Page i                                                GAO-03-1148 Natural Gas
Contents




Abbreviations

CFTC         Commodity Futures Trading Commission

EIA          Energy Information Administration

ERS          Economic Research Service

FERC         Federal Energy Regulatory Commission

NASS         National Agricultural Statistics Service

TFI          The Fertilizer Institute

UAN          urea ammonium nitrate

USDA         U.S. Department of Agriculture


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 United States. It may be reproduced and distributed in its entirety without further
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 reproduce this material separately.




Page ii                                                          GAO-03-1148 Natural Gas
A

United States General Accounting Office
Washington, D.C. 20548



                                    September 30, 2003

                                    The Honorable Tom Harkin
                                    Ranking Democratic Member
                                    Committee on Agriculture, Nutrition
                                     and Forestry
                                    United States Senate

                                    Dear Senator Harkin:

                                    Nitrogen, the plant nutrient and fertilizer component most widely applied
                                    by American farmers, is essential for maintaining the high yields achieved
                                    for major crops such as corn, wheat, and cotton in this country. Natural gas
                                    is a key component in the production of nitrogen, and the cost of natural
                                    gas can account for up to 90 percent of nitrogen fertilizer production costs.
                                    When natural gas prices in this country increased in late 2000 and early
                                    2001, U.S. fertilizer producers reported financial losses resulting from the
                                    significant increase in their costs of producing nitrogen fertilizer. These
                                    higher production costs also made it difficult for U.S. producers to compete
                                    with foreign nitrogen fertilizer producers, who could buy natural gas at
                                    lower prices and export their products to the United States. At about the
                                    same time, concerns arose that the nation’s farmers would face much
                                    higher nitrogen fertilizer prices—and even that there might not be an
                                    adequate supply of fertilizer to satisfy farmers’ demand at any price. Such
                                    an outcome was considered possible if U.S. fertilizer producers were
                                    forced to significantly decrease their production, because in recent years
                                    domestic producers have supplied more than one-half of the nitrogen
                                    fertilizer used by American farmers. According to fertilizer industry
                                    officials, higher natural gas prices in 2003 are again having a negative
                                    financial impact on the U.S. nitrogen fertilizer industry, threatening to
                                    irreversibly cripple it.

                                    In this context, you asked us to determine (1) how the price of natural gas
                                    affects the price, production, and availability of fertilizer and (2) what role
                                    the federal government plays in managing the impact of natural gas prices
                                    on the U.S. fertilizer market. To address the first issue, we examined
                                    government and industry price data pertaining to natural gas and nitrogen
                                    fertilizer to determine how nitrogen fertilizer prices, both major market




                                    Page 1                                                   GAO-03-1148 Natural Gas
spot prices1 and retail prices paid by farmers, behaved when the price of
natural gas increased in 2000–2001 and again in early 2003. Specifically, we
determined the extent to which a correlation exists between the price of
natural gas at the Henry Hub2 and prices for three major types of nitrogen
fertilizer products: anhydrous ammonia, urea, and urea ammonium nitrate
(UAN). We selected these three products because they are widely used by
American farmers. We also examined data obtained from the Department
of Commerce and industry sources to determine how nitrogen fertilizer
production behaved when natural gas prices spiked in 2000-2001 and the
results of a U.S. Department of Agriculture (USDA) survey aimed at
determining how farmers reacted to higher fertilizer prices in 2001. To
determine how higher natural gas prices have affected the supply of
nitrogen fertilizer, we obtained the results of a second USDA survey aimed
at determining the availability of fertilizer. In addition, we analyzed
sources, supplies, and consumption of nitrogen from fertilizer years 1996
through 2002.3 To address the second objective, we reviewed the
responsibilities of federal agencies relevant to the natural gas and fertilizer
markets and their efforts to monitor and collect information on these
markets. We also reviewed relevant documents provided by agriculture and
fertilizer industry representatives and interviewed these officials to obtain
their views on what actions, if any, the federal government should take to
mitigate the effects of high natural gas prices on the U.S. fertilizer market.
We performed our review from February through August 2003 in
accordance with generally accepted government auditing standards. A
detailed description of our objectives, scope, and methodology is contained
in appendix I.



1
 Spot prices are the current cash prices at which fertilizer is sold at various locations. For
the purposes of our review, we used prices at two major market locations: the U.S. Gulf
Port, whose price is considered the benchmark for fertilizer prices in North America, and
the Mid Cornbelt. Unless otherwise specified, fertilizer prices referred to in this report are
Gulf Port prices.
2
 The Henry Hub is one of the largest gas market centers in the United States. Its price often
serves as a benchmark for wholesale natural gas prices across the country. The price of
natural gas is commonly measured in dollars per million British thermal units (mmBtu),
which is approximately 1,000 cubic feet of gas.
3
 Information on nitrogen and fertilizer production and consumption is reported in industry
sources on a fertilizer year basis—which represents the time from July 1 to June 30. Thus,
fertilizer year 2002 represents the time between July 1, 2001 and June 30, 2002. Unless noted,
all references to nitrogen and fertilizer production and consumption are on a fertilizer year
basis.




Page 2                                                               GAO-03-1148 Natural Gas
Results in Brief	   Higher natural gas prices have contributed to higher nitrogen fertilizer
                    prices and reduced domestic production, but supplies of fertilizer have
                    been adequate during periods of high natural gas prices in the past
                    primarily because of increased imports. For example, between January
                    2000 and January 2001, the average price of natural gas increased by more
                    than 300 percent, from $2.52 to $10.16 per mmBtu. Because natural gas is
                    the most costly component used in manufacturing nitrogen fertilizer, the
                    higher gas prices led to higher prices for nitrogen fertilizer. For example,
                    between January 2000 and January 2001, the U.S. Gulf Port spot price for
                    anhydrous ammonia, one of the most commonly used nitrogen fertilizers,
                    increased by 144 percent, from $119 to $290 per ton. Higher natural gas
                    prices during 2001 led to higher production costs for U. S. nitrogen fertilizer
                    producers and this in turn led to a 25 percent reduction in domestic
                    nitrogen production in 2001. Despite this significant decline in production,
                    a USDA survey found the supply of nitrogen fertilizer was adequate to meet
                    farmers’ demand. According to this survey, conducted from April to June
                    2001, while nitrogen fertilizer supplies were below normal early in the year,
                    they had returned to normal levels by June. Our analysis shows that the
                    demand for nitrogen fertilizer was met in 2001 because (1) U.S. production
                    was supplemented by an increase of about 43 percent in nitrogen imports
                    and (2) agricultural consumption of nitrogen fertilizer decreased from 12.3
                    million tons in 2000 to 11.5 million tons in 2001. According to industry
                    officials, gas prices in 2003 are again resulting in unacceptably high
                    production costs and, as a result, a decline in production levels is
                    occurring.

                    The federal government has a limited role in managing the impact of
                    natural gas prices on the U.S. fertilizer market. Although the federal
                    government does not set natural gas prices, three federal agencies—(1) the
                    Federal Energy Regulatory Commission, (2) the Commodities Futures
                    Trading Commission, and (3) the Energy Information Administration—are
                    responsible for ensuring that natural gas prices are determined in a
                    competitive and informed marketplace. Moreover, the federal government
                    has no role in controlling fertilizer prices, and nitrogen fertilizer products
                    imported from other countries are generally not subject to U.S. trade
                    restrictions, such as quotas or tariffs. However, as part of its overall
                    mission, USDA monitors developments in the agricultural sector that could
                    affect farmers. Regarding the fertilizer market, USDA collects information
                    on fertilizer prices and, in 2001, in response to concerns about fertilizer
                    prices and availability, conducted two surveys of the fertilizer market.
                    These surveys showed that there was no problem with fertilizer availability



                    Page 3                                                   GAO-03-1148 Natural Gas
              in 2001, and most farmers surveyed did not reduce their use of nitrogen
              fertilizer.



Background	   Natural gas is a key feedstock in the manufacturing of nitrogen for which
              there is no practical substitute. Manufactured nitrogen—also known as
              anhydrous ammonia—is used as a fertilizer itself and is also the primary
              building block used to manufacture all other nitrogen-based fertilizers.
              Some of this nitrogen also is used for industrial purposes such as
              promoting bacterial growth in waste treatment plants, making plastics, and
              as a refrigerant. U.S. manufacturers supplied almost 14 million tons of
              nitrogen during fertilizer year 2002 and an additional 7 million tons were
              imported. Fifty-six percent of the total nitrogen supply was consumed by
              U.S. agricultural demands. Since natural gas is the most costly component
              of nitrogen, the profitability of the U.S. nitrogen fertilizer industry depends,
              to a large degree, on the price
                                            4
                                               of natural gas in the United States. As we
              reported in December 2002, natural gas prices can be volatile, and small
              shifts in the supply of or demand for gas are likely to continue to cause
              relatively large price fluctuations. In addition to facing a volatile natural gas
              market, which sometimes leads to price spikes, America’s nitrogen
              fertilizer producers must also compete in a marketplace where many
              competitors pay much lower prices for natural gas. For example, industry
              data show that recently, when the U.S. market price for natural gas was $5
              per mmBtu, lower gas prices were available to nitrogen fertilizer producers
              in other parts of the world. The price of gas in the Middle East was 60 cents
              per mmBtu; in North Africa, 40 cents; in Russia, 70 cents; and in Venezuela,
              50 cents. According to The Fertilizer Institute (TFI),5 fertilizer products
              operate in a world market, and U.S. prices are influenced by numerous
              variables other than the price of natural gas in the United States.




              4
               U.S. General Accounting Office, Natural Gas: Analysis of Changes in Market Prices,
              GAO-03-46 (Washington, D.C.: Dec. 18, 2002).
              5
               TFI represents, by voluntary membership, manufacturers, retailers, trading firms, and
              equipment manufacturers of the U.S. fertilizer industry. The Institute employs a full-time
              Washington, D.C. staff in various legislative, education, and technical areas.




              Page 4                                                             GAO-03-1148 Natural Gas
Higher Natural Gas              Because the cost of natural gas accounts for such a large percentage—up
                                to 90 percent—of the total costs of manufacturing nitrogen fertilizer,
Prices Have                     nitrogen fertilizer prices tend to increase when gas prices increase. When
Contributed to Higher           gas prices increased in 2001 and 2003, prices for nitrogen fertilizers
                                increased throughout the marketing chain. The higher natural gas prices in
Nitrogen Fertilizer             2001 also led to higher production costs for the U.S. nitrogen fertilizer
Prices and Reduced              manufacturing industry and resulted in a significant reduction in the
Domestic Production             amount of nitrogen produced in this country that year. Despite this decline
                                in the production of nitrogen, supplies of nitrogen fertilizer were adequate
but Have Not Affected           to meet farmers’ needs in 2001 primarily because of a significant increase in
Availability of Fertilizer      imported nitrogen.



Natural Gas and Nitrogen        Higher natural gas prices have contributed to higher prices for nitrogen
Fertilizer Prices Are Closely   fertilizer throughout the marketing chain. When gas prices increased
                                significantly in 2001 and 2003, spot market prices, as well as the prices
Related
                                farmers paid for fertilizer, increased for all three nitrogen-based products
                                included in our analysis—anhydrous ammonia, urea, and UAN. Further, the
                                high prices seen in 2001 could have been even higher, if the volume of
                                fertilizer imports had not increased to compensate for the reduction in
                                domestic production of nitrogen. The relationship between gas prices and
                                fertilizer prices was the strongest for anhydrous ammonia, at least in part,
                                because anhydrous ammonia contains the highest concentration of
                                nitrogen of the three fertilizer products—82 percent—and natural gas is by
                                far the most costly component used in manufacturing nitrogen. Anhydrous
                                ammonia is the nitrogen-based fertilizer used most often in the United
                                States, and is also the primary building block for urea and UAN. As shown
                                in figure 1, prices for anhydrous ammonia and natural gas prices moved
                                closely in relation to each other during the period from January 1998 to
                                March 2003. When gas prices increased or decreased, the spot market price
                                for ammonia tended to follow the same trend. More specifically, both the
                                price of natural gas and the price of ammonia peaked in January 2001 and
                                again in March 2003. Closer review of the data shows that the monthly
                                price of natural gas in January 2000 of $2.52 per mmBtu had risen 1 year




                                Page 5                                                 GAO-03-1148 Natural Gas
                                                                later to $10.16 per mmBtu, an increase of 303 percent. Over the same time
                                                                period, the price of anhydrous ammonia rose from $119 per ton to $290 per
                                                                ton, an increase of 144 percent.6



Figure 1: Anhydrous Ammonia and Natural Gas Prices, 1998–2003

Anhydrous ammonia in dollars per ton                                                                                              Natural gas in dollars per mmBtu
400                                                                                                                                                             12


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       1998                              1999                       2000                       2001                    2002                        2003
                                                                     Anhydrous ammonia - Gulf Port
                                                                     Natural gas
Source: GAO analysis of industry data.




                                                                From January 1998 to March 2003, prices of urea and UAN also reflected
                                                                natural gas prices. However, as shown in figure 2, the relationship between
                                                                the two was not as close as that between natural gas and anhydrous
                                                                ammonia prices because urea and UAN contain considerably less nitrogen

                                                                6
                                                                 Although there is a strong correlation between natural gas prices and nitrogen fertilizer
                                                                prices, many other variables influence the supply and demand market forces that ultimately
                                                                determine fertilizer prices. In addition, U.S. companies that produce nitrogen use various
                                                                purchasing techniques to manage their natural gas price risks; therefore, they do not
                                                                purchase all their gas at the prevailing market price.




                                                                Page 6                                                                 GAO-03-1148 Natural Gas
                                                                than anhydrous ammonia: 46 percent and 32 percent nitrogen, respectively.
                                                                Because urea and UAN prices reflect lower nitrogen concentrations, they
                                                                did not always move in direct relationship with natural gas prices. For
                                                                example, in May 1998, urea prices increased to $162 per ton, while gas
                                                                prices remained basically flat.



Figure 2: Urea, UAN, and Natural Gas Prices, January 1998–March 2003

UAN and urea in dollars per ton                                                                                                       Natural gas in dollars per mmBtu
250                                                                                                                                                                 12



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       1998                              1999                        2000                       2001                       2002                        2003

                                                                      Urea-Gulf Port
                                                                      UAN-Mid Cornbelt
                                                                      Natural gas
Source: GAO analysis of industry data.


                                                                Note: UAN prices are shown in dollars per ton for a 32 percent nitrogen solution.


                                                                Moreover, the prices of nitrogen fertilizer can differ depending upon how
                                                                much further along the marketing chain prices are recorded. For example,
                                                                as shown in figure 3, the price for anhydrous ammonia in the Mid Cornbelt,
                                                                where this fertilizer is primarily used, was higher than the price in the U.S.
                                                                Gulf. This difference reflects the cost of transporting the ammonia from the
                                                                Gulf, where it is produced, to the Mid Cornbelt. Also, changes in the price



                                                                Page 7                                                                     GAO-03-1148 Natural Gas
                                          of nitrogen fertilizer can lag behind changes in natural gas prices,
                                          depending upon where in the marketing chain prices are recorded. For
                                          example, as shown in figure 3, the price for anhydrous ammonia in the Mid
                                          Cornbelt peaked in February 2001—about 1 month after natural gas prices
                                          spiked that year. Other increases and decreases in the price of Mid
                                          Cornbelt ammonia lagged behind natural gas price changes on other
                                          occasions. We believe these lags reflect the time associated with
                                          transporting the fertilizer from its point of origin to the farmers who
                                          ultimately use the product.



Figure 3: Prices of Anhydrous Ammonia in the U.S. Gulf Port and Mid Cornbelt Relative to Natural Gas Prices, January 1998–
March 2003




                                          Retail prices for nitrogen fertilizer, or those prices paid by farmers, also
                                          tend to rise sharply when natural gas prices increase. As shown in figure 4,
                                          the USDA-reported farmer prices for nitrogen fertilizer reflected the


                                          Page 8                                                     GAO-03-1148 Natural Gas
                                                                    natural gas price spikes that occurred in January 2001 and March 2003.
                                                                    However, the 2001 spike in fertilizer prices lagged behind the increase in
                                                                    gas prices by about 1 month. The February 2001 price for nitrogen fertilizer
                                                                    was about 79 percent higher than it was the previous year.



Figure 4: Farmer Prices for Nitrogen Fertilizer Relative to Natural Gas Prices, January 1998–March 2003

Farmer price for nitrogen fertilizer in dollars per ton                                                                                      Natural gas in dollars per mmBtu
400                                                                                                                                                                        12


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       1998                              1999                               2000                          2001                    2002                         2003
                                                                              Farmer price
                                                                              Natural gas
Sources: GAO analysis of USDA, National Agricultural Statistics Service, and industry data.


                                                                    Note: Nitrogen fertilizer prices were calculated using USDA price indices and the amount of nitrogen
                                                                    contained in anhydrous ammonia, urea, and UAN.


                                                                    Furthermore, according to USDA data, the average U.S. farm-level price for
                                                                    nitrogen fertilizer during the spring, when farmers’ demand for nitrogen
                                                                    fertilizer is the highest, tracked natural gas prices. Specifically, the April
                                                                    monthly price for natural gas increased approximately 84 percent from
                                                                    April 2000 to April 2001. Over the same time period, the April farm-level
                                                                    price for anhydrous ammonia increased 76 percent from $227 to $399 per
                                                                    ton. By April 2002, gas prices had decreased by 39 percent, and ammonia



                                                                    Page 9                                                                        GAO-03-1148 Natural Gas
                            prices had dropped by 37 percent from the previous year’s level. In April
                            2003, the price of natural gas was again higher, increasing by 48 percent,
                            and the average farm-level price of anhydrous ammonia followed this trend
                            by increasing 49 percent. However, it is difficult to determine the extent of
                            financial harm farmers suffered because of increased fertilizer prices in
                            2001. A USDA study directed at determining how corn farmers responded
                            to higher fertilizer prices in 2001 found that about 34 percent of the
                            responding producers of corn—a crop that requires large quantities of
                            nitrogen fertilizer—purchased a majority of their nitrogen fertilizer at
                            prices that were set prior to January 2001 and, therefore, were not affected
                            by the sharp rise in fertilizer prices that year. Further, these producers were
                            among the largest corn-producing farms and applied the most nitrogen
                            fertilizer per acre. Eleven percent of the corn producers that responded to
                            the USDA survey reported adjusting their nitrogen application rates or
                            practices in response to higher prices, and the remaining 55 percent of
                            respondents—generally smaller corn farms that applied the least amount of
                            nitrogen fertilizer—reported they took no action in response to higher
                            nitrogen fertilizer prices in 2001.



Higher Natural Gas Prices   The sharp rise in gas prices in 2001 had financial consequences for the U.S.
Had Financial               nitrogen fertilizer manufacturing industry because of the sharp increase in
                            their production costs. These higher production costs, which could not be
Consequences for U.S.       recovered through higher fertilizer prices, led to plant closures and a
Nitrogen Fertilizer         significant reduction in domestic nitrogen production. According to
Producers and Led to        industry data, several companies that manufacture nitrogen fertilizer
Reduced Production          reported decreased revenues or financial losses in 2001, and each cited
                            higher natural gas prices as contributing to or causing the financial
                            consequences. For example, one large interregional cooperative that
                            produces nitrogen fertilizer for U.S. farmers and ranches reported a loss of
                            more than $60 million in 2001. The company’s 2001 annual report cited high
                            natural gas prices as a primary reason for the financial loss.

                            Industry data obtained from the International Fertilizer Development
                            Center7 showed that between January 2001 and June 2003, eight U.S.
                            nitrogen fertilizer manufacturers permanently closed their plants, and a
                            ninth plant had not operated since 2001. Industry officials also told us that


                            7
                             The International Fertilizer Development Center is a public, nonprofit organization
                            dedicated to increasing agricultural productivity through the development and use of sound
                            plant nutrient technology.




                            Page 10                                                          GAO-03-1148 Natural Gas
natural gas prices in 2003 have remained well above historic averages and
are continuing to exact a financial toll on the domestic nitrogen fertilizer
manufacturing industry. These officials cite the fact that, in June 2003, the
U.S. industry was operating at only 50 percent of capacity as evidence of
this toll. Further, they said the industry has suffered through several years
of extreme financial hardship, caused in part by higher gas prices driving
up production costs and foreign competitors who have access to less
expensive natural gas and, if gas prices in this country remain relatively
high, more U.S manufacturers are likely to curtail nitrogen production, and
some could permanently shut down their plants.

The production and consumption of fertilizer is often measured by the
amount of nutrient content in the fertilizer applied. For nitrogen fertilizer
products, the primary nutrient that is measured is nitrogen. Manufacturers
supply nitrogen that is consumed in both the agricultural and industrial
sectors. Table 1 below provides estimates of nitrogen supply and demand
in the United States over the last 7 years, including the nitrogen nutrient
content in fertilizer products consumed by the agricultural sector. As the
price of natural gas, the key component in the manufacturing of nitrogen
spiked in 2001, nitrogen production fell. As shown in table 1, U.S.
manufacturers produced 25 percent less nitrogen in 2001 than in 2000.




Page 11                                                 GAO-03-1148 Natural Gas
                           Table 1: U.S. Nitrogen Supply and Demand, June 30, 1996–2002

                           000 tons
                           Supply and
                           demand                               1996          1997          1998         1999    2000    2001     2002
                           Producers beginning
                           inventory                           2,415         2,047         1,799        1,956    2,585   1,856    2,468
                           Production                        14,469        14,593        15,092        14,634   14,186 10,583    11,519
                           Imports                             4,963         4,497         5,066        6,114    6,289   8,978    7,273
                           Total supply                      21,847        21,137        21,957        22,704   23,060 21,417    21,260
                           Consumption                       16,813        16,965        17,028        17,270   17,254 16,373    16,809
                            Agricultural                     12,303        12,352        12,313        12,452   12,334 11,535    12,009
                            Industrial                         4,510         4,613         4,715        4,818    4,920   4,838    4,800
                           Exports                             3,292         3,365         3,390        3,458    3,442   2,768    2,945
                           Producers ending
                           inventory                           2,047         1,799         1,956        2,585    1,856   2,468    1,690
                           Total demand                      22,152        22,129        22,374        23,313   22,552 21,609    21,444
                           Sources: GAO analysis of Department of Commerce, Bureau of Census, and TFI data.

                           Note: Total supply and total demand differ primarily because the components are derived from several
                           independent sources, as explained in appendix I.




Imports Have Helped        Despite the significant decline in domestic production of nitrogen in 2001,
Maintain Availability of   supplies of nitrogen fertilizer were adequate to meet farmers’ demand that
                           year primarily because of an increase in imports. USDA collected
Nitrogen Fertilizer
                           additional survey information from April to June 2001 to determine
                           whether farmers were facing problems in obtaining nitrogen fertilizer. The
                           results of this survey show that the supply of nitrogen fertilizer was
                           adequate to meet farmers’ 2001 demand. As shown in figure 5, while
                           nitrogen fertilizer supplies were below normal in several states in April
                           2001, they had returned to normal levels in all but one state by June of that
                           year. Nationally, nitrogen fertilizer supplies were at 92 percent of normal
                           levels in early April 2001, while only 12 states reported supplies at less than
                           90 percent of normal levels. Only two states—Pennsylvania and New
                           Jersey—reported supplies at less than 80 percent of normal levels.
                           However, by early June nitrogen fertilizer supplies were at 97 percent of
                           normal levels nationally, and all but one state reported supplies at 95
                           percent or more of normal levels. By June 30, 2001, USDA officials
                           concluded that there were sufficient supplies of nitrogen fertilizer, and they
                           stopped the survey. Furthermore, USDA did not conduct a similar survey in




                           Page 12                                                                              GAO-03-1148 Natural Gas
                                              2003, when gas prices and fertilizer prices again increased, because it was
                                              unaware of any concerns about the availability of nitrogen fertilizer.



Figure 5: Nitrogen Fertilizer Availability, 2001




                                              The results of USDA’s survey are consistent with our analysis, which found
                                              that although domestic production of nitrogen declined 25 percent in 2001,
                                              the overall demand was met primarily because imports increased by about



                                              Page 13                                                GAO-03-1148 Natural Gas
                         43 percent. As shown in table 1, nitrogen imports increased from 6.3 million
                         tons in 2000 to approximately 9 million tons in 2001. Although most
                         nitrogen fertilizer imported into the United States has for the past several
                         years come from Canada, the amount of nitrogen fertilizer imported from
                         Canada decreased by almost 13 percent in 2001. On the other hand,
                         nitrogen fertilizer imports from Trinidad Tobago, Venezuela, and Ukraine
                         increased by 19 percent, 59 percent, and 469 percent, respectively, in 2001.
                         The price of natural gas in these three countries was considerably lower
                         than the price of gas in the United States; thus, fertilizer producers in these
                         countries were able to produce nitrogen fertilizer at much lower costs than
                         domestic producers.

                         Table 1 also shows that domestic agricultural consumption of nitrogen
                         decreased from 12.3 million tons in 2000 to 11.5 million tons in 2001—or
                         about 7 percent. At least part of this reduction can be attributed to the
                         impact of higher fertilizer prices on the country’s farmers. For example,
                         according to USDA’s survey aimed at determining how corn farmers
                         responded to higher fertilizer prices in 2001, 11 percent of responding
                         farmers reported they adjusted their nitrogen fertilizer rates or practices in
                         response to higher nitrogen fertilizer prices that year. About 80 percent of
                         these farmers reduced their nitrogen fertilizer use by an average of 23
                         percent.



Federal Government       The federal government has a limited role in managing the impact of
                         natural gas prices on the domestic fertilizer market. For example, the
Has a Limited Role in    government does not determine the price of natural gas; however, two
Managing the Impact of   federal agencies—the Federal Energy Regulatory Commission (FERC) and
                         the Commodity Futures Trading Commission (CFTC)—play important
Natural Gas Prices on    roles in promoting competitive natural gas markets by deterring
the Fertilizer Market    anticompetitive actions. In addition, the Energy Information
                         Administration (EIA) is responsible for obtaining information about and
                         analyzing trends in the natural gas market that are used by industry and
                         government decision makers. As with natural gas, the federal government
                         does not set or control prices for nitrogen fertilizer. However, as part of its
                         overall mission, USDA does monitor developments in the agricultural
                         sector that could affect farmers. Regarding the fertilizer market, USDA
                         collects, analyzes, and disseminates information on fertilizer prices and
                         uses and, in 2001, collected additional information on the supply of
                         nitrogen fertilizer and how higher fertilizer prices affected farmers. Lastly,
                         USDA provides insurance and commodity price support programs to assist




                         Page 14                                                  GAO-03-1148 Natural Gas
                              America’s farmers in managing risks associated with crop yields and
                              revenues.



Federal Role in the Natural   As we reported in December 2002, in today’s deregulated market the
Gas Market Is Focused on      federal government does not control the price of natural gas. However, two
                              federal agencies are responsible for ensuring that natural gas prices are
Ensuring a Competitive        determined in a competitive marketplace. Specifically, FERC plays a major
Marketplace                   role in overseeing the natural gas marketplace to ensure that prices are just
                              and reasonable and free from fraud and market manipulation. Similarly,
                              CFTC exercises regulatory oversight of natural gas derivatives8 that are
                              traded on federally regulated exchanges, such as the New York Mercantile
                              Exchange, to protect traders and the public from fraud, manipulation, and
                              abusive practices.

                              Following the price increases that occurred in the natural gas market
                              during 2000–2001, both FERC and CFTC initiated investigations into
                              possible fraud or manipulation. In August 2002, FERC reported that it had
                              found indications that several companies may have manipulated spot
                              prices upward for natural gas delivered to California during 2000–2001.9 In
                              March 2003, FERC reported that it had found evidence of manipulation of
                              both electricity and natural gas markets, and that spot market gas prices
                              were not produced by a well-functioning competitive market.10 FERC staff
                              made several recommendations to FERC commissioners aimed at
                              correcting the deficiencies they found in the electric as well as the natural
                              gas market. In a statement before the National Energy Marketers
                              Association on April 4, 2003, the Chairman of CFTC acknowledged that the
                              commission had imposed monetary penalties and filed complaints in
                              federal court against several companies in connection with false reporting
                              and attempts to manipulate natural gas prices and operating an illegal
                              futures exchange. The Chairman also said that CFTC was actively engaged
                              in other energy sector investigations, and further charges might be filed.


                              8
                               These natural gas derivatives are futures and options contracts whose value is derived from
                              the price of natural gas itself. These contracts can be bought and sold by entities that are
                              interested in protecting themselves against increases in the price of natural gas.
                              9
                               FERC, Initial Report on Company-Specific Separate Proceedings and Generic
                              Reevaluations: Published Natural Gas Price Data; and Enron Trading Strategies, August
                              2002.
                              10
                                   FERC, Final Report on Price Manipulation in Western Markets, March 2003.




                              Page 15                                                           GAO-03-1148 Natural Gas
Following the price spike that occurred in the natural gas market in
February 2003, FERC and CFTC again undertook investigations of possible
market manipulation. On July 23, 2003, they issued a joint statement saying
that neither investigation had identified evidence of market manipulation.
FERC concluded that gas prices had risen in apparent response to
underlying supply and demand conditions and in a manner consistent with
those conditions.11 CFTC said that it found nothing that suggested
manipulative activity in the natural gas futures and options market during
the week of February 24, 2003.

A third federal agency—EIA—analyzes energy price movements and
provides market information that gas industry analysts use as an indicator
of both supply and demand. For example, in May 2002, EIA began reporting
estimates on the volume of gas in storage, which is a key predictor of future
natural gas prices. EIA also provides weekly and monthly updates on the
natural gas market and special reports on various issues affecting the gas
market. In its August 2003 energy outlook, EIA reported that gas prices at
the Henry Hub, one of the largest gas market centers in the United States,
fell below $4.70 per mmBtu during the last week in July 2003. This was
considered significant because these prices had been considerably above
$5 per mmBtu on a monthly basis since the beginning of the year. However,
EIA advised that gas prices are at risk for volatility and industrial users who
rely on spot market purchases for their gas, such as nitrogen fertilizer
producers, face the greatest risk of higher natural gas prices.




11
     FERC, Report on the Natural Gas Price Spike of February 2003, July 2003.




Page 16                                                           GAO-03-1148 Natural Gas
Federal Role in the            The federal government does not control prices for nitrogen fertilizer, and
Fertilizer Market Is Limited   nitrogen fertilizer products imported from other countries are generally not
                               subject to U.S. trade restrictions, such as quotas and tariffs.12 However, as
                               part of its overall mission, USDA does monitor and report on developments
                               in the agricultural sector that could affect farmers and offers certain
                               programs to help farmers manage the risks associated with crop yield and
                               revenues. The National Agricultural Statistics Service (NASS) collects
                               information on agricultural acreage, production, stocks, prices, income,
                               and information on fertilizer prices and uses. For example, the annual
                               Agricultural Chemical Usage report provided by NASS includes
                               information for targeted crops by major producing states on how much and
                               what type of fertilizer was applied per acre. NASS also reports monthly
                               price indices for three major fertilizer types—nitrogen, phosphate, and
                               potassium—and actual prices paid by farmers for several fertilizer
                               products in April of each year.

                               In addition to its routine surveys, USDA collected additional information in
                               2001 about nitrogen fertilizer availability and prices. According to officials
                               from the Office of the Chief Economist, this information was collected
                               because Congress and others had raised concerns about higher natural gas
                               prices and the possible impact these prices would have on the availability
                               and price of fertilizer. In order to collect this information, questions were
                               added to USDA’s ongoing Crop Progress survey aimed at determining the
                               availability of nitrogen fertilizer in 2001 and to the Agricultural Resource
                               Management Survey to determine how corn growers responded to the
                               higher nitrogen fertilizer prices that occurred in 2001. The results of this
                               additional survey information are discussed elsewhere in the report.




                               12
                                  Although nitrogen fertilizer is generally imported into the United States under a free trade
                               arrangement, the United States International Trade Commission has, since 1999, ruled on
                               four cases alleging that certain nitrogen fertilizers exported from several countries were
                               being sold in the United States at less than fair value. In three of these cases —(1) Solid Urea
                               from Armenia, Belarus, Estonia, Lithuania, Romania, Russia, Tajikistan, Turkmenistan,
                               Ukraine, and Uzbekistan, USITC Pub. 3248, Inv. Nos. 731-TA-339 and 340-A-1 (October 1999);
                               (2) Certain Ammonium Nitrate from Russia, USITC Pub. 3338, Inv. No. 731-TA-856, (August
                               2000); and (3) Certain Ammonium Nitrate from Ukraine, USITC Pub. 3448, Inv. No. 731-TA-
                               894, (August 2001) —the Commission found that certain fertilizers imported from the cited
                               countries were being sold at prices that materially injured the industry in the United States.
                               Therefore, the price of certain nitrogen fertilizers imported from Armenia, Belarus, Estonia,
                               Lithuania, Romania, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan was
                               restricted, either by order or agreement. These restrictions are still in effect.




                               Page 17                                                              GAO-03-1148 Natural Gas
USDA also offers insurance and commodity price support programs to help
farmers manage risk associated with crop yields and revenues, but it
currently does not offer similar programs to cover the risks associated with
farm production costs, such as the cost of fertilizer. For example, in 2002,
USDA’s insurance program covered crops valued at $41 billion, and
commodity price support payments have averaged more than $10 billion
per year since 1996. According to USDA officials, the agency does not offer
insurance to cover the risks associated with farm production costs because
these risks tend to be small compared with the risks associated with crop
prices. Since a farmer’s income per acre from a crop equals the crop price
times the yield, changes in either crop price or yield are directly and fully
reflected in a farmer’s income. As shown in table 2, crop prices can change
significantly over time and from year to year. From 1996 to 2001 the
average price of corn declined by $.98 per bushel, or 35 percent, and
average corn prices declined by $.61 per bushel—24 percent—from 1997 to
1998. Overall, from 1996 to 2001, average corn yields increased only 11
percent—from 130 bushels per acre to 144 bushels per acre. In addition,
while national average yields are relatively stable from year to year, the
actual yields for individual farmers can vary significantly from year to year
as a result of natural causes, such as weather conditions and the extent of
loss caused by insects and diseases.



Table 2: Average Corn Prices, 1996–2001

Crop prices/yields                         1996   1997   1998   1999   2000   2001
Price (dollars per bushel at harvest       2.82   2.52   1.91   1.69   1.77   1.84
Yield (bushels per planted acre)           130    130    136    135     138    144
Source: USDA, Economic Research Service.


In contrast, a farmer faces fewer risks with costs of production because
these costs tend to remain stable from year to year. As shown in table 3,
total production costs per acre for a corn farm remained relatively stable
from 1996 through 2001, and changes in different cost categories often
offset one another. For example, although average fertilizer costs increased
by $8.68 per acre from 2000 to 2001, this large increase was offset by a
decrease of $8.24 in fuel, lube, and electricity costs. Other production costs
also decreased and, as a result, total production costs decreased by $3.84,
or about 2 percent.




Page 18                                                     GAO-03-1148 Natural Gas
                Table 3: Average Costs of Materials Used per Acre on Corn Farms, 1996–2001

                Cost categories                              1996     1997     1998     1999     2000     2001
                Fertilizer                                  $47.04   $46.21   $41.44   $38.75   $39.04   $47.72
                Seed                                         26.65    28.71    30.02    30.29    30.02    32.34
                Chemicals                                    27.42    26.87    27.36    28.40    28.82    26.44
                Fuel, lube, and electricity                  24.43    24.55    22.96    23.04    29.12    20.88
                Repairs                                      15.78    16.17    16.65    17.17    17.55    13.76
                Custom operations                            11.30    11.30    11.29    11.37    11.48    10.94
                Manure                                        0.60     0.56     0.51     0.49     0.48     2.65
                Interest on operating capital                 3.86     3.96     3.61     3.50     4.53     2.60
                Other variable cash expenses                  0.30     0.32     0.31     0.31     0.31     0.22
                Soil conditioners (lime)                      0.16     0.16     0.16     0.17     0.16     0.12
                Total costs                                $157.54 $158.81 $154.31 $153.49 $161.51 $157.67
                Source: USDA, Economic Research Service.


                Similarly, although USDA provides information to farmers through the
                Cooperative State Research, Education and Extension Service to help them
                participate in farm commodity futures markets, there is relatively little
                information regarding farm production costs, such as fertilizer. According
                to a state extension service official, the extension service has issued
                several publications that provide information on farm commodity futures
                markets because farmers are generally familiar with these markets and
                have access to the information needed to participate successfully in these
                markets. However, the extension service generally does not encourage
                farmers to participate in futures markets involving farm production cost
                items, such as fuels, because farmers are not as familiar with these
                markets. Instead, farmers generally use various prepayment methods to
                control the costs of items used in producing crops.



Observations	   Natural gas is the most costly ingredient used in manufacturing nitrogen
                fertilizer products. However, the price of natural gas can vary significantly
                in different markets throughout the world. Unfortunately for domestic
                nitrogen fertilizer manufacturers, the price of natural gas in the United
                States can far exceed its price in other parts of the world. As a result,
                domestic manufacturers are at a competitive disadvantage when domestic
                natural gas prices rise. Manufacturers can close plants in response to
                periodic price spikes and resume production when prices drop again, but
                higher prices sustained over the long term may result in more permanent



                Page 19                                                                 GAO-03-1148 Natural Gas
                   curtailment of domestic production. In the past, farmers’ needs for
                   fertilizer have been met by increases in imports when domestic production
                   has been curtailed, as it was in 2001. However, it remains to be seen how
                   well the market will respond to further reductions in the domestic
                   production of nitrogen fertilizer that may be caused by more sustained
                   higher natural gas prices in the future. Earlier this year, increased natural
                   gas prices once again caused higher production costs for the nation’s
                   fertilizer manufacturing industry, which in turn contributed to a reduction
                   in the amount of nitrogen being produced and an increase in nitrogen
                   fertilizer prices. Although it is too early to determine whether these higher
                   gas prices will have the same adverse effect on the fertilizer manufacturing
                   industry as higher gas prices did in 2001, some within the industry contend
                   that continuing higher gas prices are threatening the industry.



Agency Comments	   We provided USDA and TFI with a draft of this report for review and
                   comment. We received oral comments from USDA and TFI officials, who
                   agreed with our facts and observations.


                   As agreed with your office, unless you publicly announce the contents of
                   this report earlier, we plan no further distribution until 30 days from the
                   report date. At that time, we will send copies to the USDA Secretary, The
                   Fertilizer Institute, and other interested parties. We also will make copies
                   available to others upon request. In addition, the report will be available at
                   no charge on the GAO Web site at http://www.gao.gov.




                   Page 20                                                 GAO-03-1148 Natural Gas
Questions about this report should be directed to me at (202) 512-3841. Key
contributors to this report are listed in appendix II.

Sincerely yours,




Jim Wells
Director, Natural Resources
  and Environment




Page 21                                               GAO-03-1148 Natural Gas
Appendix I

Objectives, Scope, and Methodology



              In our study of the natural gas and nitrogen fertilizer markets, we
              determined (1) how the price of natural gas affects the price, production,
              and availability of nitrogen fertilizer and (2) the federal government’s role
              in managing the impact of natural gas prices on the U.S. fertilizer market.

              To address these objectives, we reviewed pertinent documents and
              obtained information and views from a wide range of officials from both
              the federal government and the private sector. We interviewed staff and/or
              obtained information from the Department of Agriculture’s (USDA) Office
              of the Chief Economist, Economic Research Service, National Agricultural
              Statistics Service, and Cooperative State Research, Education and
              Extension Service; the Department of Commerce; the Department of
              Energy’s Energy Information Administration; the Federal Energy
              Regulatory Commission; the Commodity Futures Trading Commission; and
              the International Trade Commission. We also discussed the relationship
              between the natural gas and nitrogen fertilizer markets with
              representatives from various industry organizations, including The
              Fertilizer Institute (TFI); the International Fertilizer Development Center;
              the American Farm Bureau Federation; Agrium Incorporated; CF
              Industries, Incorporated; and Terra Industries, Incorporated.

              To determine how the price of natural gas affects the price of nitrogen
              fertilizer, we examined industry-supplied natural gas prices and industry, as
              well as government, price data for nitrogen fertilizer and determined how
              fertilizer prices behaved when gas prices increased in 2000–2001 and again
              in 2003. We determined the extent to which a correlation existed between
              the price of natural gas and prices for three nitrogen fertilizers, anhydrous
              ammonia, urea, and urea ammonium nitrate, which were included in our
              analysis because they are widely used by American farmers. We compared
              natural gas and nitrogen fertilizer prices for the period January 1998
              through March 2003. More specifically, we obtained industry prices for
              natural gas at the Henry Hub from Global Insight (USA), Inc. We selected
              Henry Hub prices because this market center is one of the largest in the
              country and often serves as a benchmark for wholesale natural gas prices
              across the country. We obtained monthly spot prices, or the current cash
              prices at which nitrogen-based fertilizers are sold at various locations, from
              an industry source—Green Markets: Fertilizer Market Intelligence Weekly.
              Green Markets, a Pike & Fischer, Inc., publication, collects independent
              spot price quotes for 19 fertilizer commodities every week. Our analysis of
              the market data included fertilizer prices at two major market locations: (1)
              the U.S. Gulf Port, whose prices are considered the benchmark for fertilizer
              prices in North America, and (2) the Mid Cornbelt, where large quantities of



              Page 22                                                 GAO-03-1148 Natural Gas
Appendix I

Objectives, Scope, and Methodology





nitrogen fertilizer are used. In addition, we compared the relationship
between the prices paid by farmers for nitrogen fertilizer and natural gas
prices. To do this, we calculated the monthly prices paid by farmers for
nitrogen fertilizer. We used the April prices paid by farmers for anhydrous
ammonia, urea ammonium nitrate (32 percent nitrogen solution) and urea
(46 percent nitrogen). Since these prices are reported only once a year in
April, we applied the monthly prices paid index for nitrogen fertilizer
published by USDA to the April prices in order to calculate a monthly price
for nitrogen fertilizer. We did this by using the appropriate weights,
supplied by USDA, for each of the fertilizer components (anhydrous
ammonia, urea ammonium nitrate, and urea). The index for nitrogen
fertilizer is based on the Producer Price Index series (PPI) and appropriate
subcomponents from the Bureau of Labor Statistics. The April fertilizer
prices are obtained by survey from establishments selling fertilizers to
farmers.

To determine the effect of natural gas prices on domestic nitrogen fertilizer
production, we examined nitrogen inventory, production, and consumption
data obtained from government and industry sources from 1996 through
2002. These data (shown in table 1) reflect the estimated quantity of
nitrogen in the United States, including the nitrogen nutrient in several
fertilizer products—anhydrous ammonia, ammonium nitrate, ammonium
sulfate, aqua, nitrogen solutions, urea, and other nitrogen materials. The
estimated nitrogen production, imports, and exports were derived from the
Department of Commerce, Bureau of Census, quarterly report Inorganic
Fertilizer Materials and Related Products (MQ325B). The inventory data
were taken from a TFI report, Fertilizer Record, which reflects the results
of a TFI monthly survey of domestic nitrogen fertilizer producers. The
agricultural consumption data were derived from reports filed by fertilizer
users with state fertilizer control officials. These reports are tabulated by
the Association of American Plant Food Control Officials, Inc. (AAPFCO)
and TFI and published by TFI in Commercial Fertilizers. Because of the
incompleteness of the state fertilizer consumption reports, an unknown but
significant amount of missing data, particularly for the most recent year,
are imputed based on historical information by AAPFCO and TFI. The
estimates described above were used in this report for several reasons.
First, the estimates of total supply and total demand, which reflect the
combination of data from several independent sources, differ only slightly.
Second, the trends in consumption from the trade source are consistent
with those in the related Census Bureau series. Third, these data are widely
used by companies that produce nitrogen fertilizer. In addition, we
reviewed financial reports and other industry documents that describe how



Page 23                                                GAO-03-1148 Natural Gas
Appendix I

Objectives, Scope, and Methodology





the nitrogen manufacturing industry responded to higher natural gas prices
and interviewed industry and government officials to obtain their views
and comments.

In determining the effect of higher natural gas prices on the supply of
nitrogen fertilizer, we relied primarily on the results of a USDA survey on
fertilizer availability in 2001. According to USDA officials, they added
questions concerning nitrogen fertilizer supplies to the ongoing Crop
Progress survey1 because this was the most efficient and reliable survey
vehicle available on short notice. USDA asked respondents to report on the
adequacy of nitrogen fertilizer supplies that were available to producers in
their area. Although the responses were subjective, those people providing
the responses are widely respected as the most knowledgeable about
agricultural situations in their respective counties. The results of the survey
questions used to gather information on the availability of nitrogen
fertilizer were presented in the National Agricultural Statistical Service’s
Crop Progress report dated June 4, 2001. We also examined data contained
in our supply and demand table (table 1) to determine sources, supplies,
and consumption of nitrogen fertilizer over the 7-year period ending in June
2002.

To determine what role the federal government plays in managing the
impact of natural gas prices on the U.S. fertilizer market, we reviewed the
responsibilities of federal agencies regarding the natural gas and fertilizer
markets and their efforts to monitor and collect information on these
markets. We reviewed relevant documents provided by agriculture and
fertilizer industry representatives and interviewed these officials to obtain
their views on what actions, if any, the federal government should take to
mitigate the effects of high natural gas prices on the U.S. fertilizer market.
We also reviewed relevant documents and interviewed USDA and state
extension service officials regarding how farmers manage the risks
associated with their production costs and the federal government’s role in
assisting farmers in managing these risks. Finally, we reviewed the results




1
 USDA, National Agricultural Statistics Service conducts crop progress surveys on a weekly
basis from early April to the end of November to collect specific data and the overall
condition of selected crops in major producing states. The surveys are nonprobability
surveys that include a sample of more than 5,000 people who make visual observations and
have contact with farmers in their counties.




Page 24                                                          GAO-03-1148 Natural Gas
Appendix I

Objectives, Scope, and Methodology





of a USDA analysis of the 2001 Agricultural Resource Management
Survey, which was used to gather information on how American farmers2
who grow corn responded to the higher nitrogen fertilizer prices in 2001.
The results of this analysis were presented in the USDA, Economic
Research Service’s Agricultural Income and Finance Outlook report dated
September 26, 2002.

We performed our review from February through August 2003 in
accordance with generally accepted government auditing standards. While
we did not independently verify the accuracy of natural gas and fertilizer
prices and other data obtained from industry sources, we did compare
these data with other relevant data to ascertain the reasonableness of the
data we used. We also interviewed knowledgeable government and
industry officials to determine the reasonableness of the data and our use
of them. We determined that the data were sufficiently reliable for the
purposes of our report.




2
 The Agricultural Resource Management Survey, conducted by USDA’s Economic Research
Service, is an annual, state-by-state survey of farms and agricultural commodities conducted
to obtain information about the financial condition, production practices, resource use, and
economic well being of America’s farm households. Trained enumerators conduct personal
interviews of a statistical sample of farm operators to collect data for this survey.




Page 25                                                           GAO-03-1148 Natural Gas
Appendix II

GAO Contacts and Staff Acknowledgments




GAO Contacts	     Jim Wells (202) 512-3841
                  Mark Gaffigan (202) 512-3168



Staff 	           In addition to the individuals named above, Carol Bray, James Cooksey,
                  Nancy Crothers, Paul Pansini, Robert Parker, and Barbara Timmerman
Acknowledgments   made key contributions to this report.




(360306)          Page 26                                              GAO-03-1148 Natural Gas
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Public Affairs	           Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800
                          U.S. General Accounting Office, 441 G Street NW, Room 7149
                          Washington, D.C. 20548
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