Demand and Supply Functions for Nitrogen Fertilizers in the United States

The recent high fluctuations in fertilizer prices raise the desirability of better understanding fertilizer markets and estimating elasticities to include in large structural models for policy analysis. This paper aims to estimate demand and supply functions for nitrogen fertilizer in the United States. However, it is widely recognized that specifying an annual structural demand and supply model to estimate elasticities is challenging. An annual structural model must address issues such as endogeneity from simultaneity, frequent structural change, limited observations and highly aggregated data. To address these issues, we use a graphical approach to select time periods for estimating econometric models. Additionally, two-stage least squares is employed in an attempt to overcome endogeneity. Our finding indicates that the demand and supply of nitrogen fertilizer are inelastic, which means price spikes are going to happen and difficult to predict. Furthermore, the result shows that the international market might be more elastic than the domestic market. If so, international markets can provide a moderating effect on prices during domestic market shocks. However, shocks to the international market could result in the high price spikes, as observed historically