Terra Nitrogen Company (NYSE:TNH), owned in majority by Terra Industries, operates the fourth largest nitrogen fertilizer production facility in the U.S. Revenues are driven by rising food prices and greater demand for corn, higher nitrogen fertilizer demand and prices. Corn prices reached a high of $7 per bushel in the summer of 2008, but they have fallen since November of 2008 as a result of the slowing global economy.[1] If corn prices remain low, demand for nitrogen fertilizer will fall.

The largest cost component of ammonia production is natural gas. Natural gas prices fell by more than 50% in 2009 as compared to 2008, thereby helping TNH stay profitable.[2] A 10 cent per million Btu decrease in natural gas prices would result in a reduction of $3.4 million in annual costs for the company, which has significantly helped it post positive earnings.

75% of Terra Nitrogen is owned by Terra Industries (TRA), in an arrangement that clearly benefits the parent company TRA. Terra Industries is entitled a minimum dividend of 60.5 cents per share per quarter, and, as a result, Terra Nitrogen built up a deficit in owed dividends to TRA. Recently, however, the deficit has been payed off, which will allow for stronger returns to non-TRA shareholders.

Business Overview

Background on Nitrogen Industry

The three primary nutrients required for plant growth are phosphorous, potassium, and nitrogen. Nitrogen is an essential element element for most organic compounds in plants, especially proteins and chlorophyll. There are no known substitutes for nitrogen fertilizers in cultivating high-yield crops today. Nitrogen must be reapplied each year after intense agricultural use since nitrogen is quickly absorbed by crops and tends to evaporate from the soil over time. Thus, demand for nitrogen fertilizer tends to be consistent on a year-by-year basis.

Business Financials

For the year 2009, net income was $144.3 million, based off of revenues of $507.7 million.[3] The decrease in net sales was primarily attributable to a significant decline in nitrogen prices across all products and a moderate decrease in sales volumes as compared to 2008. Specifically, 2009 ammonia and UAN pricing were 39 percent and 42 percent, respectively, below 2008 price levels. Compared to the previous year, TNH's performance declined significantly, as its revenues fell by 43% and its net income fell by 66%.

Terra Nitrogen operates a single nitrogen processing plant in Verdigris, Oklahoma. The plant runs at 100% capacity to produce a million tons of ammonia annually, most of which is upgraded to produce 2.2 million tons of UAN annually.


Urea Ammonium Nitrate (UAN)

Marketed under the name TerraSol, UAN is a clean, odorless, and non-hazardous liquid fertilizer.[4] Terra Industries is the largest producer of UAN in the United States, producing 3.85 million tons of UAN annually. [4] UAN is used mostly in North America and only recently has been traded in international markets. Terra Nitrogen's sole production facility is located in Verdigris, Oklahoma, providing a competitive advantage in serving agricultural customers in the Great Plains and Corn Belt regions. Because of its high water content, UAN is expensive to transport, limiting its distribution to local regions.

Anhydrous Ammonia

Ammonia is the simplest nitrogen fertilizer and is used in the production of other nitrogen fertilizers, including UAN. Although generally the least expensive source of nitrogen fertilizer available to agricultural customers, ammonia may be less attractive since it requires specialized equipment and has limited application flexibility.

Trends and Forces

Decreasing natural gas prices lower operating costs

Natural gas is the most important raw material in the production of UAN and other nitrogen-based fertilizers. Terra Nitrogen acquires natural gas through both spot and term purchases, and purchases derivatives instruments to hedge against some price volatility. [5] A 10 cent per million Btu decrease in natural gas prices would result in a reduction of $3.4 million in annual costs for the company, thereby showing how small changes in the price of natural gas can have a large impact on the earnings of TNH.

Rising Worldwide Demand for Food Increases Fertilizer Profit Margins

Higher global grain demand continue to keep crop prices elevated, leading to additional demand for fertilizer. The grain market is expected to continue to be tight for at least the next few years, though tempered in the near term by the global economic downturn. Grain stocks are low worldwide and it will take an extended period of strong production to bring inventories up to satisfy demand. Fertecon forecasts that global nitrogen fertilizer demand will rise around 2% per year from 2005 to 2015, increasing by 21 million tons. In North America, nitrogen fertilizer consumption is expected to increase from 13.9 million tons to 16 million tons, a 15% increase, from 2005 to 2015.[6]

Environmental Regulation Poses Additional Costs in Near Future

Terra Nitrogen announced in July 2008 that it will reduce greenhouse gas emissions by 20% using special ceramic filter technology at two of its plants. The installation of the technology at one plant will cost $1.6 million in its first year and $1.2 million every year thereafter.[4]

Terra is a "Founding Reporter" member of The Climate Registry, a non-profit organization committed to "standards for the measurement, verification, and public reporting of greenhouse gas emissions throughout North America."[4] Terra officials say they support the objective of lowering GHG emissions. The director of Environmental, Health and Safety for Terra Industries has stated that the company believes global warming policy should be reasonable, supported by fact, and implemented in a way amenable to American industry.[4]


Terra Nitrogen competes with domestic and foreign producers of nitrogen products, including some that are government subsidized. [5] Since natural gas is a raw material needed for the production of ammonia, competitors that have better access to natural gas are at an advantage. In the Urea Ammonium Nitrate (UAN) market, Terra Nitrogen primarily competes with local companies due to the high cost of transporting UAN. According to the company's website, TNH's primary competitors are Agrium (AGU), Koch Industries, CF Industries Holdings (CF), Mosaic Company (MOS) and PCS Nitrogen.[7]


  1. UPI "Ethanol producers and corn prices fall"
  2. TNH 10-K 2009 Item 7 Pg. 19
  3. TNH 10-K 2009 Item 6 Pg. 15
  4. 4.0 4.1 4.2 4.3 4.4 Claremore Daily Progress, "Terra Nitrogen Reducing Greenhouse Gas Emissions"
  5. 5.0 5.1 TNH 2007 10-K, Item 1 "Business," page 5
  6. TNH 2007 10-K, Item 1 "Business," page 4
  7. Terra FAQ
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