Influence of the Natural Gas Price on the Ammonia Price, 2000 to 2006 Wen-yuan Huang Economic Research Service U.S. Department of Agriculture Presentation at the annual meetings of the Southern Agricultural Economics Association Mobil, Alabama, February 3-6, 2007 The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the USDA. The presenter would like to thank Charlie Hallahan, a mathematician with ERS, from whom the presenter has learned analytical methods and Eview used in the analysis. 1
Figure 1. Monthly natural gas and ammonia prices, 1985-2006 Ammonia $/ton Natural gas $/mmbtu 450 14 400 12 350 10 300 250 8 200 Ammonia 6 150 4 100 50 Natural gas 2 0 0 2 1985 1986 1986 1986 1988 1987 1989 1989 1990 1990 1990 1992 1992 1993 1993 1993 1995 1994 1996 1996 1997 1997 1997 1999 1999 2000 2000 2000 2002 2001 2003 2003 2004 2004 2004 2006 2006 Source: DOE (US Dept. of Energy) and TFI (The fertilizer institute) Year Price correlations from 1985 to 1999 0.17 from 2000 to 2006 0.81
Objectives Background of Ammonia Supply Factors affecting ammonia demand and supply Co-integration Analysis Estimation Results Implications 3
Background Natural gas is the main input to produce ammonia. Accounts for 72-85 percent of the ammonia production cost Contains 82 percent of N The source for all nitrogen fertilizers Declining supply Figure 2. Ammonia supply from all sources in the U.S., 1992-2006 25 On-site inventory 20 Off-site inventory 15 Million tons 10 Production Net import 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fertilizer year 4
Figure 3. Ammonia production capacity and production in U.S. 1990-2006 25000 20000 Capacity 15000 1000 tons Production 10000 5000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fertilizer year 5
Figure 4. Number of ammonia plants in three ranges of production capacity, 1990-2006 50 45 40 35 Total number of plants Number of plants 30 25 20 Lesss than 500 thousand ton capacity 15 10 Between 500 and 1000 thousand ton capacity 5 Greater than 1000 ton capacity 0 1990 1995 2000 2005 2006 Fertilizer year Source: IFDC 6
Factors Affecting Ammonia Demand Demand for nitrogen fertilizers-- acres planted, percent of acres treated, the application rate, and crop rotations Crop prices and the nitrogen fertilizer prices The land price and the opportunity cost of labor Risk perception Changes in crop production technologies 7
Factors Affecting Ammonia Supply Ammonia prices Contract prices of natural gas Opportunity costs of using natural gas to produce ammonia Ammonia production and inventory Production technology and capacity Global competition: ammonia imports and exports 8
Co-integration Analysis Two variables are co-integrated if They are unit root processes A stationary linear combination of them can be found If the price of natural gas, X t, and the price of ammonia, Y t are co-integrated, then β 1 Y t - β 2 X t - β 0 = u t ; u t ~ I (0) N(0, σ 2 ) 9
The Equilibrium Error-Correction Model Co-integration is necessary and sufficient to establish an equilibrium error-correction model. The model expresses changes in ammonia prices as a function of short-run (the contemporaneous) and long-run (the equilibrium) effects, as well as the speed of adjustment from disruptions to the long-run equilibrium. D Y t = θ 1 D Y t-1 + θ 2 D X t + θ 3 D X t-1 + α (β 1 Y t - β 2 X t - β 0 ) t-1 + u t Short-run effect Long-run equilibrium α = Speed of adjustment D Y t = Y t -Y t-1 10
Estimation Results Monthly natural gas and Gulf ammonia prices, 2000-2006 450.00 400.00 350.00 300.00 250.00 200.00 150.00 100.00 50.00 0.00 11 2000.1 2000.4 2000.7 2000.10 2001.1 2001.4 2001.7 2001.10 2002.1 2002.4 2002.7 2002.10 2003.1 2003.4 2003.7 2003.10 2004.1 2004.4 2004.7 2004.10 2005.1 2005.4 $/ton 2005.7 2005.10 2006.1 2006.4 2006.7 Month 14.00 12.00 10.00 8.00 $ /mm Btu Amonia Price Non-stationary time series Natural gas price 6.00 4.00 2.00 0.00
2.8 6.2 2.4 6.0 5.8 2.0 5.6 1.6 5.4 1.2 5.2 5.0 0.8 4.8 0.4 2000 2001 2002 2003 2004 2005 2006 4.6 2000 2001 2002 2003 2004 2005 2006 LX LY LX and LY are X and Y in log scale Non-stationary time series 12
.6.4.4.3.2.2.1.0.0 -.2 -.1 -.2 -.4 -.3 -.6 2000 2001 2002 2003 2004 2005 2006 DLX -.4 2000 2001 2002 2003 2004 2005 2006 DLY DLX = LX t -LX t-1 Stationary time series (Augment Dickey-Fuller Unit Root Test) 13
Johansen Co-integration Test Date: 01/23/07 Time: 13:49 Sample: 2000M01 2006M08 Included observations: 80 Trend assumption: No deterministic trend (restricted constant) Series: LX LY Lags interval (in first differences): 1 to 1 Unrestricted Cointegration Rank Test (Trace) Hypothesized Trace 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None 0.165770 19.57728 20.26184 0.0619 At most 1 0.061498 5.077636 9.164546 0.2750 Trace test indicates no cointegration at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values 14
Estimation Result Dependent Variable: DLY Method: Least Squares Date: 12/20/06 Time: 09:02 Included observations: 80 DLY = C(1)*DLY(-1) +C (2)*DLX +C(3)*DLX(-1) +C(4)*(LY(-1) +C (5) + C(6)*LX(-1)) Coefficien t Std. Error t-statistic Prob. C(1) 0.215459 0.093385 2.307211 0.0238 C(2) 0.251516 0.057984 4.337700 0.0000 C(3) 0.141671 0.070070 2.021836 0.0468 C(4) -0.229730 0.066292-3.465409 0.0009 C(5) -4.112831 0.160902-25.56104 0.0000 C(6) -0.789601 0.096906-8.148134 0.0000 R-squared 0.453489 Mean dependent var 0.010543 Adjusted R-squared 0.416563 S.D. dependent var 0.101829 S.E. of regression 0.077780 Akaike info criterion -2.197830 Sum squared resid 0.447678 Schwarz criterion -2.019178 Log likelihood 93.91319 Durbin-Watson stat 1.896165 15
Residue Tests Breusch-Godfrey Serial Correlation LM Test: F-statistic 1.009765 Prob. F(4,70) 0.408411 Obs*R-squared 4.364248 Prob. Chi-Square(4) 0.358949 ARCH LM Heteroscedasticity Test F-statistic 0.944164 Prob. F(2,75) 0.393579 Obs*R-squared 1.915630 Prob. Chi-Square(2) 0.383730 Normality Test 14 12 10 8 6 4 2 0-0.2-0.1-0.0 0.1 0.2 Series: Residuals Sample 2000M01 2006M08 Observations 80 Mean -9.57e-13 Median 0.001926 Maximum 0.204998 Minimum -0.233859 Std. Dev. 0.075278 Skewness -0.277154 Kurtosis 3.689465 Jarque-Bera 2.608730 Probability 0.271345 16
Forecast.5.4.3.2.1.0 -.1 -.2 Forecast: DLYF Actual: DLY Forecast sample: 2000M01 2006M08 Included observations: 80 Root Mean Squared Error 0.076953 Mean Absolute Error 0.060499 Mean Abs. Percent Error 190.1224 Theil Inequality Coefficient 0.441308 Bias Proportion 0.000001 Variance Proportion 0.145289 Covariance Proportion 0.854711 -.3 2000 2001 2002 2003 2004 2005 2006 DLYF 17
Implications Monthly ammonia prices have been growing at the rate (LY t / LY t-1 = 0.011) same as natural gas prices. Ammonia and Natural gas prices have a stable long-run relationship. The long-run ammonia price elasticity (( Y t / Y t )/( ( X t / X t ) ) with respect to natural gas prices is 0.79. About 23 percent of a disruption from the long-run equilibrium will be recovered in the following period (month). The short-run relationships are: [ (Y t / Y t-1 )/(Y t / Y t-1 )] / [ (Y t-1 / Y t-2 )/( Y t-1 / Y t-2 )] = 0.21. [ (Y t / Y t-1 )/(Y t / Y t-1 )] / [ (X t / X t-1 ) / ( X t / X t-1 )] = 0.25. [ (Y t / Y t-1 )/(Y t / Y t-1 )] / [ (X t-1 / X t-2 )/(X t-1 / X t-2 )] = 0.14. 18