Natural gas prices are back in the news. Unfortunately, the news isn't good. Forecasters predict a continuing escalation of price. That's the last thing we all need. As most of you know, natural gas is the primary component in producing anhydrous ammonia, accounting for 75 to 90 percent of the total cash cost of production. Anhydrous is the seed stock used to produce urea, nitrogen solution and ammonium nitrate. Those prices rise in accordance with natural gas prices--to an extent. Meanwhile, here at MFA, we're doing everything possible to hold down costs and assure our member/owners of an adequate supply.

According to the Associated Press, 90 percent of electricity growth today is coming from plants fueled by natural gas. Natural gas used to run electrical power plants is and has been rising precipitously. In terms of the national market totals, natural-gas-fired electrical plants account for 16 percent of natural gas consumption, more than five times the percentage used by agricultural fertilizer. That percentage is growing rapidly and is expected to increase. Consider, too, that the largest market for natural gas is home heating. Agriculture, specifically fertilizer production, is small potatoes in the natural gas market.

Federal incentives like the Clean Air Act have moved electric power generation away from coal to cleaner-burning natural gas. The phenomenon is especially alarming considering almost all power plants on the drawing board are scheduled to burn natural gas. Even more disturbing, the electric power industry's use of natural gas is forecast to grow at an average rate exceeding 5 percent per year for the next 20 years.

Federal Reserve Chairman Alan Greenspan gave the issue a national focus this past summer in testimony before Congress. Increased market demand, said Greenspan, is exceeding the supply capacity of the aging U.S. natural gas production system. Unfortunately, he expects prices will stay high for quite some time. In fact, industry analysts speculate that natural gas prices will remain at abnormally high levels until 2010, spiking even higher with temperature variations. The effects will be felt nationally and not just in agriculture.

Domestic anhydrous manufacturers historically have shut down production when prices reach these highs. Why? Because as we saw in 2001, it's unprofitable to produce anhydrous at extremely high natural gas prices. Manufacturers know there is a limit to what anhydrous is worth to farmers--we'll only pay so much as opposed to the home-heating market. For manufacturers, the incentive is to dump supplies into the home-heating market for an immediate profit versus no profit or a loss.

This situation occurred in 2001, again in late winter of 2002-03, and now faces U.S. agriculture today. Who's to blame? As I said in 2001, take your pick. There's enough to go around. Remember news accounts of Enron's manipulations? More importantly, it's not hard to make a case against misguided government regulation. Electric utilities are simply switching to natural gas and deserting coal to meet regulatory requirements. Federal regulation as well as environmental laws discourage exploration or retooling of existing wells. That's insane. According to the Wall Street Journal, the United States has vast quantities of natural gas, but "Senate liberals . . . don't seem to understand that energy has to come from somewhere." Additionally, because of current U.S. policy, no nitrogen-production facilities have been built in this country in the last 25 years. Where are the people who argue there's no unintended financial consequences to federal regulation?

What's MFA doing in the face of this? Everything we can to make sure our member/owners have an adequate supply of affordable product. To do that, we're contracting with importers right now to secure product. That's the offset to the domestic situation: the world market. Foreign product enters the equation. Importers like Saudi Arabia (where natural gas is almost waste product) can deliver product to the Gulf of Mexico at a price that will undercut high U.S. prices. So despite high prices now, U.S. cost of production does not necessarily correlate to fertilizer price in season.

At MFA we traditionally import 35 percent of our dry nitrogen needs. I'm not happy about that. I'd rather support the domestic industry and in particular CF Industries, the interregional fertilizer cooperative MFA helped build decades ago. But when domestic producers cannot compete, we simply must go around them to the export markets to support our farmers. We're doing that right now and will continue the practice.

Should farmers and MFA try to lock in prices now? Should we as a cooperative order more nitrogen products than we can store and hope for the best? There's as many opinions as people on this issue. But regardless of viewpoint, one thing can't be overlooked. It's a game of chance. What happens if we lock in a high price and this winter is extremely mild? With domestic heating costs having major impact on supply (and thus cost) and with importers standing by, any shift in the market can have a volatile impact on price either way. I'm not a fan of buying high and selling low. Still, we've already started filling solution and urea. We started buying product as winter fill early in the season. We'll service our customers. But everyone in agriculture today should be watching this market.