of production, coupled with growing demand for fertilizer materials, led to some tightening in the supply-demand balance beginning in 1971. Since 1971, the situation for nitrogen and phosphates has firmed considerably and the industry now finds itself in a situation where prices are rising. NITROGEN Now, let's look at nitrogen. Despite the claims by some that the controls program discourages an expansion in productive capacity, the primary limitation on expanding nitrogen production in fiscal year 1974 does not appear to result from the rules or regulations of the economic stabilization program. During 1972-73 anhydrous ammonia plants (the major source of nitrogen) operated at 86 percent of сарасity, USDA estimates that operating rates for nitrogen production could rise to 90 percent in 1973-74. However, as pointed out in the USDA report prepared for the Council, potential curtailments in the supply of natural gas to ammonia producers would significantly reduce nitrogen production this season. In the United States virtually all ammonia is produced with natural gas. Because of lower prices for these users, a substantial number of ammonia producers have contracts with gas suppliers that have "interruptable" clauses. This means that if higher priority users, for example, consumers' needs are not met, gas supplies can be temporarily halted to firms who have these clauses. During the past 3 years interruptions have been increasing, and natural gas suppliers have warned ammonia producers to expect curtailments again this winter. Thus, even if fertilizer prices were to be decontrolled it is unlikely that more natural gas could be diverted to ammonia producers. Taking these production restraints into consideration, USDA estimates nitrogen output could expand by 8 percent in 1973-74, but given the domestic and foreign demand, supplies could run as much as 1 million tons below requirements for the current season. This is indicated in table 1. This problem is compounded by the fact that anhydrous ammonia stocks are down to normal levels compared to the unusually large inventory at the beginning of last season. PHOSPHATES The phosphate situation does not appear as tight as in the case of nitrogen. By assuming that phosphate plants can operate at 90 percent of capacity, USDA estimates that domestic requirements will be met in the coming season, although they expect export demand may not be satisfied. (Table 1.) There are some idle phosphate plants that could be activated, as they were temporarily during the past season. It is conceivable that some upward price adjustments for phosphate fertilizers could permit profitable operation of these less efficient plants. We understand that these plants are primarily plants that are able to produce normal superphosphate fertilizer materials. POTASH Potash supplies continue to be more than ample to meet the demand. The potash industry, unlike the nitrogen and phosphate industries, continues to have considerable excess capacity rather than shortages of product. EXPORT DEMAND Growing out of the substantial rise in world prices for grains and the impact of devaluation, the USDA report estimates that exports of nitrogen will total 1.7 million short tons in 1973-74 out of a total supply of 10.8 million tons, an increase of 26 percent over the previous year. Phosphate exports are expected to also climb to 1.7 million tons, out of a total available supply of 6.9 million tons, up one-fifth from the previous season's shipments. This surge in foreign demand is evident from the performance so far in calendar 1973 when exports of ammonium phosphates rose 34 percent from the same period in 1972, and exports of anhydrous ammonia were up 54 percent from the corresponding period a year ago. (Table 2.) In the late 1960's domestic prices averaged above world levels. But beginning in 1971 as world demand for ammonia strengthened and AID shipments picked up, world prices moved above domestic levels. . With the strong world demand continuing this season, the gap between domestic and foreign prices has widened significantly. This is shown in table 3. Still, exports make up only a relatively small proportion of the market for fertilizer. For example, in 1972-73 they absorbed only 13 percent of the available supply of nitrogen and 22 percent of the available supply of phosphates. Accordingly, if the estimated domestic shortfall is to be fully eliminated by diversion of exports, shipments abroad will have to be curtailed dramatically. (Table 1.) DOMESTIC DEMAND By far the major share of domestic fertilizer demand is attributed to farm use, with nonfarm use, residential and recreational uses, et cetera, accounting for only an estimated 15 percent of domestic demand. Best available estimates show that eliminating set-aside restrictions in the coming season will tack on an added 10-12 million acres onto next season's plantings. Assuming normal expansion in industrial demand, the increased acreage next year will contribute to an increase in domestic demand for nitrogen of about 26 percent and phosphate by about 19 percent, as estimated by the Department of Agriculture. Some argue that the economic stabilization program, by holding the line on domestic fertilizer prices, is not allowing domestic users to effectively compete for fertilizer supplies. Crop prices are now running about 66 percent higher than a year ago and farmers are in a good position to absorb higher fertilizer costs. In addition to the economic fact that higher prices for this year's crops are expected to encourage expanded usage of fertilizers, the soil also demands a certain replacement level of nitrogen each year. However, soil scientists tell us phosphates tend to build up in the soil and applications can be reduced in the short run without materially damaging crop yields. In the case of wheat, there have been reports that some suppliers may be holding fertilizer deliveries pending action that might be taken by the Cost of Living Council. Even if controls were to be removed today, alleged increases in availability of supplies would not occur in time to benefit wheat growers. Winter wheat plantings are now between one-third and 50 percent complete, though running somewhat behind normal due to wet weather in some areas. It is estimated, however, that seeding will be completed within the next few weeks. It is important to note also that not all wheat acreage receives fertilizer. This depends to some extent on the moisture situation. Last year, 37 percent of the wheat acreage went without fertilizer. Indeed, the heaviest use of fertilizer is on corn where virtually all of the acreage is fertilized at spring planting time. Fertilizer shipments for spring plantings will begin to move sometime during the February early March period. In the meantime, some wheat farmers will be top dressing, that is applying liquid fertilizer to seedlings already in the ground. Indications are that supplies are probably adequate for these needs. Thus, the impact of controls on fertilizer supplies needs to be evaluated in terms of the potential effects on the crops that will be planted next spring. PRICES As a result of the excess capacity that existed in the fertilizer industry during the late 1960's, and plentiful supplies of basic inputs such as natural gas, prices paid by farmers for fertilizer in 1972 averaged only 3.9 percent above the 1960 level. However, markets continued to tighten in 1972 and early 1973. As a result, farmers last spring paid 10 percent more for nitrogen materials than in the previous season. This is shown in table 4. Thus far in phase 4, only a few companies have prenotified the Cost of Living Council for price increases. It is anticipated, however, that other companies will follow suit. Even if the industry implements higher prices consistent with the rules of phase 4-and here I should say they are permitted to increase their prices if they have allowable cost increases. The rules permit firms to pass on price increases arising from higher costs as long as the resulting price increase does not raise the net profit margin over that which existed in the base period-the higher prices farmers received for the 1973 crops will stimulate increased demand for fertilizer. IMPLICATIONS OF REMOVING CONTROLS While on the one hand, elimination of price controls would serve to reduce the differential between domestic and foreign prices and provide incentives for attracting capital necessary for expanding capacity, the issue of exemption raises significant problems with respect to the overall objectives of domestic price stability. Some of these problems are: 1. A substantial portion of 1973-74 export sales are already contracted and we have heard estimates ranging from 50 to 90 percent. Therefore, removing controls would probably not make much more fertilizer available for farmers during the coming season. 2. To the extent that supplies are not tied up in contracts, prices would rise sharply. The USDA report, prepared for the Council, estimates that wholesale prices would rise by as much as 50 percent and at retail the increase would be in the 30-35 percent range if fertilizer prices were entirely removed from controls. 3. Removal of controls at this point in time would not increase the amount of fertilizer available for wheat growers. Between one-third and one-half of this season's crop is already seeded. The critical period is next spring. 4. Fertilizer output response to price changes is relatively slow. It is estimated that it takes 3 years partly because of antipollution requirements, and a minimum of $30 million to build a new plant, and up to $80-$100 million to build a really efficient facility. Higher prices might bring some less efficient phosphate plants back into production, but the primary restraint on ammonia production is the availability of natural gas. Manufacturers of explosives which use somewhere between 10 and 20 percent of anhydrous ammonia and ammonia nitrate supplies, have already cautioned the Cost of Living Council against removing controls on fertilizer. They point out that exempting fertilizer would pull ammonia supplies away from the production of explosives which is essential to the coal and other mining industries. 5. The Council cannot consider decontrolling fertilizer prices without evaluating the impact of removing controls on wages in the fertilizer industry, and the potential effects of such action on the stabilization of wages of workers in other segments of the chemical industry. 6. Finally the removal of controls for fertilizer industry will generate considerable demands for equal treatment from other industries with similar problems. The results of such development could potentially jeopardize the Cost of Living Council's objective to materially reduce the rate of inflation and to systematically decontrol major sectors of the economy in a manner that will not be accompanied by a large surge in prices. EXPORT CONTROLS Now I would like to make a comment on export controls. There has been discussion in some segments of the industry about the possible needs for export controls on fertilizer. As you know the administration has requested the Congress for additional flexibility in administering export controls. Representatives from the Cost of Living Council, the Department of Agriculture and the Department of Commerce are testifying at this very hour before the Senate Banking Committee on this topic. As you know, the administration does not favor export controls as a permanent policy. As the President indicated in his July 18, 1973, statement: "To a considerable degree, export controls are selfdefeating as an anti-inflation measure. Limiting our exports reduces our foreign earnings, depresses the value of the dollar and increases the cost of things we import, which also enter into the costs of living of the American family." In that statement the President was referring to our policy on export controls with respect to the agricultural products, but an analogy can be extended to inputs such as fertilizer used in food production. Moreover, there is the question of imports because the United States does import. some quantities of fertilizer materials each year. Thus, unless it appears that foreign demand is much greater than our expectations, it would not appear to be a wise course of action to impose export controls on shipments of fertilizer. Only under the most severe circumstances should this coures of action be taken. In summary, I have attempted to present a brief description of the facts and circumstances as we see them surrounding the present fertilizer situation. It is clear that the supply for balance for 1973-74 is extremely tight. It is not so clear, however, that the complete removal of controls on this important industry will work to the best interests of all parties involved. There are a number of crucial policy implications associated with this issue that must be worked out. The Cost of Living Council is in the process of deliberating on these matters, and expects to reach a decision shortly. Thank you, Mr. Chairman. TABLE 1.-ESTIMATED SUPPLIES OF N AND P205 IN 1972-73 AND PROJECTED SUPPLIES AND REQUIREMENTS FOR 1973-741 TABLE 3.-COMPARISON OF DOMESTIC (UNITED STATES) AND EXPORT PRICES OF GRANULAR TRIPLE SUPER 1 CF Industries, net selling price to member, f.o.b. Tampa. 2 Award prices on exports as reported by International Commodities Export Corps, f.o.b. Tampa. 3 Not available. In favor of U.S. price. 5 ICEC Report No. 645, Apr. 10, 1973, June delivery. 6 ICEC Report No. 628, Jan. 5, 1973, April delivery. Source: Prepared by USDA. |