OVERVIEW
You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1, of this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common shares. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC, including our Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2008 and subsequent reports on Form 8-K, which discuss our business in greater detail.
The section entitled "Risk Factors" contained in Part II, Item 1A of this report, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC.
INTRODUCTION
In this discussion and analysis, we explain our business in the following areas:
• Business Strategy;

• Recent Business Environment;

• Results of Operations;

• Liquidity and Capital Resources; and

• Various Quantitative and Qualitative Disclosures.

BUSINESS STRATEGY
We are a leading North American producer and marketer of nitrogen products made from natural gas. Terra is the largest producer of ammonia in the United States and the second largest producer in North America. We also operate production assets in Trinidad and the United Kingdom through joint venture agreements. Our six North American and our international production locations, along with a robust distribution capability, provide us with the ability to effectively serve key agricultural, industrial and environmental markets. Terra has an extensive history of operating as a public entity and managing complex corporate structures including master limited partnerships, joint ventures and corporate alliances. In fact, since the 1980's, Terra has successfully integrated numerous large-scale value enhancing acquisitions that have contributed to our track record of strong cash flows over the business cycle.
Regarding the business cycle, the nitrogen products industry in which Terra operates has periods of oversupply during industry downturns that lead to capacity shutdowns or curtailments at the least cost-effective plants or at major import points such as the Gulf Coast. These shutdowns may be followed by supply shortages that result in higher selling prices and higher industry-wide production rates during any subsequent industry upturns. Higher selling prices can encourage capacity additions that ultimately lead to an oversupply of product, and the cycle repeats.
Successful companies in cyclical businesses, like nitrogen products, pursue conservative capital management and investment strategies. This enables them to weather industry downturns and continue to effectively serve their target markets cost-effectively throughout the business cycle.

Our business strategy seeks to pursue profitable growth in the core, nitrogen-based agricultural products business as a scale operator in North America. We also seek to leverage our current business and manufacturing strength outside the core business in closely-adjacent market segments that help to assure long-term cash flow growth and tend to reduce volatility in earnings. Elements of this strategy include:
• Development of products and markets for upgraded products made from ammonia such as UAN, our primary nitrogen fertilizer product, and TerraCair®, a liquid product for the treatment of diesel exhaust in automotive applications;

• Expansion of our existing asset base to take advantage of logistical or feedstock advantages both domestically and internationally;

• Management of North American and international assets to realize a rate of return that meets or exceeds our cost of capital throughout the business cycle;

• Maintenance of our facilities to be safe, reliable and compliant with environmental regulations, cultivation of relationships with customers whose proximity to our facilities allows them to receive our product most economically, and close management of the supply chain to keep storage, transportation and other costs at an appropriate level; and

• Continued evaluation of business opportunities in nitrogen markets and businesses that leverage Terra's core competencies in chemical manufacturing, distribution and product application.

RECENT BUSINESS ENVIRONMENT
Demand
Short term demand for nitrogen products indicates a delay in restocking of inventories in preparation of the 2010 spring planting season. Due to a late spring 2009 planting, coupled with unfavorable harvest conditions, harvesting is behind schedule leading to a delay in fall ammonia applications. U.S. planted winter wheat acres are expected to decrease an estimated 2.5 to 3.0 million acres as a result of increased foreign production which increased the global wheat supply estimate for 2009/2010. Consequently, fewer acres will be double cropped much like the 2008/2009 season, where there was a switch from double cropping to full season single crops. However, overall crop acres available are expected to increase in the 2010 season, pending the release of the 3 million acres of land that are set to expire in the Conservation Reserve Program (CRP) and the return of 2 million acres in North Dakota that were not utilized in the 2009 season due to wet conditions. Depending on the economics present in the spring more acres could be allocated to corn in the 2010 planting season.
In addition, nitrogen demand is expected to benefit from the enactment of the 2010 Emission Standards of the 1990 Amendments to the Clean Air Act which requires diesel powered vehicles to achieve near-zero emissions of nitrogen oxides on January 1, 2010. In preparation of the new emission standard, truck manufacturing customers will utilize TerraCair Ultrapure® Diesel Exhaust Fluid (TerraCair DEF) for their Selective Catalytic Reduction (SCR) equipped vehicles. An expected increase in long term demand for nitrogen products is supported by the global grain supply. The ending corn stocks to use ratio for the 2008/2009 planting season was estimated to be 14% by the USDA World Agriculture Supply and Demand Estimates (WASDE) September 2009 report, which is a historically low level. Historically, the corn ending stock ratio is approximately 22%. Expected bumper yields in 2009 did not refute this estimate as the US corn use also is projected higher, on a higher expected use for sweeteners resulting from tight sugar supplies. Furthermore, the expected increased demand for corn is supported by the long term outlook for an increased demand for food, seed, industrial markets, increased ethanol demand and higher expected exports. The United Nations Food and Agriculture Organization estimates a 70% increase of food production is needed to meet the populations growing needs by 2050. Pursuant to its September 2009 report, WASDE expects corn prices for 2009 to 2010 to be between $3.05 and $3.65 per bushel, with 2010 corn futures increasing from $3.80 to $3.90 in recent weeks.

Supply
Imports are a major factor in the nitrogen products supply picture, as they account for over half of the total North American nitrogen supply, with the levels varying among the various products. Products containing the highest percentage of nitrogen by weight are the most economical to ship, thus make up the greatest share of those imports. Most producers exporting nitrogen products into North America can afford to do so because they are manufacturing product with cheaper gas than that which is available to North American producers. European and Commonwealth of Independent States (CIS) producers have their own variable gas cost dynamics and we do not expect these producers will be able to consistently export nitrogen products at lower costs than North American producers.
In an effort to maintain inventory at acceptable levels, certain North American production has been curtailed during 2009. Imports have declined as a result of the sluggish demand due to poor import economics during 2009. Currently, the inventory channels are returning to balanced market conditions as a result of the corrective actions in demand and production experienced in the first nine months of 2009. Global ammonia prices and domestic natural gas prices are approaching levels that will encourage Ukrainian and other non advantaged gas producers to restart production.
Natural Gas Costs
As a result of the economic slowdown, natural gas consumption has declined in the industrial sectors, driving near term prices below $4 per MMBtu as of September 30, 2009. The October NYMEX contract closed at $3.73 per MMBtu compared to $2.84 and $3.38, respectively, for September and August contracts. Natural gas prices have recently begun to reflect seasonal adjustments, though U.S. natural gas inventories are at record high levels.
The following is an average NYMEX forward natural gas price for the succeeding twelve month period noted for the respective dates:

                    September 30,       December 31,       March 31,       June 30,       September 30,
(in $ per MMBtu)        2008                2008             2009            2009             2009
                   $          7.90     $         6.09     $      4.69     $     5.09     $          5.72

During the third quarter of 2009, natural gas prices decreased 28% from September 30, 2008. Generally, as customers place advance orders we secure the prices for the natural gas required to produce the inventory to satisfy these orders.
RESULTS OF OPERATIONS
Consolidated Results
We reported for the first nine months of 2009 net income of $156.4 million on revenues of $1.2 billion compared with 2008 first nine month net income of $476.3 million on revenues of $2.2 billion. The decrease in net income and revenue for the first nine months of 2009 is due to lower overall nitrogen prices, lower ammonia and UAN sales volumes, as well as lower equity earnings. Diluted income per share for the nine months ended September 30, 2009 was $1.57 compared with $4.54 for the nine months ended September 30, 2008.

The following table shows the results of operations for the three and nine months ended September 30, 2009 and 2008 (certain percentages that are not considered to be meaningful are represented by NM):

                                           Three Months Ended                Quarter to Date                 Nine Months Ended                  Year to Date
                                              September 30,                     2009-2008                      September 30,                     2009-2008
(in millions except per share data)       2009            2008            Change          Percent          2009            2008            Change          Percent
Net sales                               $   347.0       $   790.2       $   (443.2 )           -56 %     $ 1,220.3       $ 2,208.0       $   (987.7 )           -45 %
Cost of goods sold                          281.6           578.3           (296.7 )           -51 %         921.3         1,532.4           (611.1 )           -40 %

Gross margin                                 65.4           211.9           (146.5 )           -69 %         299.0           675.6           (376.6 )           -56 %
Gross margin percentage                      18.8 %          26.8 %           -8.0 %           -30 %          24.5 %          30.6 %           -6.1 %           -20 %
Selling, general and administrative
expenses                                     17.3            18.3             (1.0 )            -5 %          49.8            58.2             (8.4 )           -14 %
Other operating expenses                        -               -                -               0 %          14.3               -             14.3               0 %
Equity in earnings of North
American affiliates                          (6.1 )         (15.9 )            9.8             -62 %         (10.9 )         (45.7 )           34.8             -76 %

Income from operations                       54.2           209.5           (155.3 )           -74 %         245.8           663.1           (417.3 )           -63 %
Interest income (expense), net               (6.0 )          (1.4 )           (4.6 )           329 %         (16.5 )          (1.3 )          (15.2 )          1169 %

Income before income taxes,
noncontrolling interest and equity
earnings (loss) of GrowHow UK
Limited                                      48.2           208.1           (159.9 )           -77 %         229.3           661.8           (432.5 )           -65 %
Income tax provision                         (5.0 )         (63.2 )           58.2             -92 %         (55.8 )        (229.7 )          173.9             -76 %
Equity earnings (loss) of GrowHow
UK Limited                                    4.9            42.1            (37.2 )         NM                2.5            89.0            (86.5 )         NM

Income from continuing operations,
net of tax                                   48.1           187.0           (138.9 )           -74 %         176.0           521.1           (345.1 )           -66 %
Income from discontinued
operations, net of tax                        0.8             0.1              0.7             700 %           0.8             7.6             (6.8 )           -89 %

Net income before noncontrolling
interest                                     48.9           187.1           (138.2 )           -74 %         176.8           528.7           (351.9 )           -67 %
Net income attributable to
noncontrolling interest                       3.0            15.7            (12.7 )           -81 %          20.4            52.4            (32.0 )           -61 %

Net income attributable to Terra
Industries Inc.                         $    45.9       $   171.4       $   (125.5 )           -73 %     $   156.4       $   476.3       $   (319.9 )           -67 %

Diluted earnings per share              $    0.46       $    1.64            (1.18 )           -72 %     $    1.57       $    4.54            (2.97 )           -65 %
Weighted average diluted shares
outstanding                               100,029         104,605         (4,576.0 )            -4 %        99,956         104,851         (4,895.0 )            -5 %

The following table shows sales volumes and prices and natural gas cost for the three months ended September 30, 2009 and 2008:

                                                2009                              2008
                                      Sales           Average          Sales           Average
(quantities in thousands of tons)    Volumes       Unit Price(1)      Volumes       Unit Price(1)
Ammonia                                   413     $           245          392     $           598
UAN - 32% basis                           928     $           142        1,055     $           349
Urea(2)                                    63     $           298           67     $           520
Ammonium nitrate(3)                       241     $           171          251     $           341
Natural gas cost (4)                        -     $          3.70            -     $          9.94

(1) After deducting $41.5 million and $45.5 million outbound freight costs for 2009 and 2008, respectively.

(2) Urea sales volumes and prices include granular urea and urea solutions data.

(3) Ammonium nitrate sales volumes and prices include agricultural grade AN, industrial grade AN and ammonium nitrate solution (ANS).

(4) Per MMBtu. Includes all transportation and other logistical costs and any gains or losses on financial derivatives related to North American natural gas purchases. Net costs of derivatives for the third quarter of 2009 and 2008 were $9.5 million and $27.1 million. Excluding the impact of 2009 hedge costs, natural gas cost was $3.35 per MMBtu for the 2009 third quarter.

The following table shows sales volumes and prices and natural gas cost for the nine months ended September 30, 2009 and 2008:

                                                2009                             2008
                                     Sales           Average          Sales           Average
(quantities in thousands of tons)   Volumes       Unit Price(1)      Volumes       Unit Price(1)
Ammonia                                1,177     $           314        1,303     $           532
UAN - 32% basis                        2,361     $           214        3,072     $           326
Urea(2)                                  215     $           309          202     $           466
Ammonium nitrate(3)                      650     $           204          761     $           305
Natural gas cost(4)                        -     $          4.98            -     $          8.74

(1) After deducting $111.8 million and $124.5 million outbound freight costs for 2009 and 2008, respectively.

(2) Urea sales volumes and prices include granular urea and urea solutions data.

(3) Ammonium nitrate sales volumes and prices include agricultural grade AN, industrial grade AN and ammonium nitrate solution (ANS).

(4) Per MMBtu. Includes all transportation and other logistical costs and any gains or losses on financial derivatives related to North American natural gas purchases. Net costs of derivatives for the first nine months of 2009 were $107.5 million. Excluding the impact of 2009 hedge costs, natural gas cost was $3.60 per MMBtu for the 2009 first nine months. The net benefit of derivatives for the first nine months of 2008 was $17.0 million.

RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 2009 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2008
Our net sales for the third quarter of 2009 were $347.0 million, a decline of $443.2 million or 56% from the third quarter of 2008 net sales of $790.2 million. Sales price declines contributed 84% ($370.1 million) of the revenue decline, while sales volumes decreased revenues by 16% ($73.1 million). Several factors contributed to the decrease in product price and volume. During the third quarter of 2009, dealers utilized existing inventory and maintained lower inventory levels pending the finalization of their spring 2010 order book, unlike the third quarter of 2008 where product was committed to and purchased in advance of firm orders. Unfavorable harvest conditions across the corn belt have delayed farmers which in turn have delayed the normal fall ammonia application. Other uncertainties including crop and nutrient price have added to the cautious buying behavior of growers. Additionally, the economic downturn continues to negatively affect industrial customers. Our environmental urea sales experienced a decline in demand during the third quarter of 2009 as favorable natural gas prices reduced the use of coal fired generation in favor of less expensive natural gas generation. Urea is used as a reagent to reduce nitrogen oxide (NOx) emissions from coal fired generation plants.
In order to effectively manage inventory levels in the third quarter, aggregate production rates were reduced to 91% and the Donaldsonville, Louisiana facility curtailed production from July 1st to August 5th of 2009. The fixed costs associated with this curtailment were $3.1 million. During the third quarter of 2009 our Verdigris, Oklahoma facility performed a turnaround at one of their ammonia, UAN, and nitric acid plants. The period costs associated with the turnaround were $4.0 million during the third quarter of 2009.
Our gross margin was $65.4 million in the third quarter of 2009 compared to $211.9 million in the third quarter of 2008. Gross margin decreased as a percentage of sales to 18.8% from 26.8%. The gross margin percentage includes a 63% decrease in natural gas costs for the third quarter of 2009. The third quarter natural gas unit costs, net of forward pricing gains and losses, declined from $9.94 per MMBtu in 2008 to $3.70 per MMBtu in 2009. Lower natural gas costs helped to reduce production costs by $171.4 million in the third quarter of 2009, when compared to the third quarter of 2008.

We enter into forward sales commitments by utilizing forward pricing and prepayment programs with customers. We use derivative instruments to hedge a portion of our natural gas requirements. The use of these derivative instruments is designed to hedge exposure to natural gas price fluctuations for production required for forward sales estimates. The net cost of derivatives for the third quarter of 2009 and 2008 was $9.5 million and $27.1 million, respectively. Excluding the impact of the hedge cost, natural gas cost was $3.35 per MMBtu in the third quarter of 2009.
Selling, General and Administrative Costs and Other Operating Expenses Selling, general and administrative (SG&A) costs decreased $1.0 million in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a decrease in bonus and restricted stock compensation expense, and a decrease in contracted and professional services, offset by an increase in phantom stock compensation expense resulting from a 43% appreciation in the market value of our stock price during the three months ended September 30, 2009. Equity Earnings of Unconsolidated Affiliates - North America We recorded income of $6.1 million from our North American equity investments in the third quarter of 2009 as compared to $15.9 million in the third quarter of 2008. In addition, we also received cash distributions of $4.5 million from our North American equity investments in 2009 as compared to $14.5 million in 2008. The decrease in the third quarter results is primarily due to the decrease in Gulf ammonia pricing which affects the results of our Point Lisas facility, as compared to the third quarter of 2008.
Equity Earnings of Unconsolidated Affiliates - GrowHow We recorded income of $4.9 million from GrowHow for the third quarter ended September 30, 2009 as compared to income of $42.1 million for the quarter ended September 30, 2008. The decrease was attributed to a decrease in sales volumes and prices of 13% and 48%, respectively, offset by a 66% decrease in natural gas costs. During the third quarter of 2009, we received balancing consideration and other payments from GrowHow of $10.8 million. Noncontrolling Interests
Noncontrolling interest represents third-party interests in the earnings of the publicly held common units of TNCLP. The 2009 and 2008 amounts are directly related to TNCLP earnings which decreased in 2009 as compared to 2008. During the first quarter of 2008, the cumulative shortfall of the Minimum Quarterly Distribution was satisfied which entitled us to increased income allocations as provided for in the TNCLP Partnership Agreement. The current quarter noncontrolling interest balance reflects the impact of these adjusted income allocations. Our increased income allocation attributed to our General Partner interest was $1.3 million for the quarter ended September 30, 2009, as compared to $10.5 million for the quarter ended September 30, 2008.

Income Taxes
Our income tax expense for the third quarter of 2009 and 2008 was $5.0 million and $63.2 million, respectively. The effective tax rate was 10.1% in the quarter ended September 30, 2009. During the third quarter of 2009, we completed the preparation and filing of our 2008 U.S. federal income tax return and recorded adjustments which reduced our effective tax rate for the quarter ended September 30, 2009 by 16.1%. Excluding the effects of the adjustments, our effective tax rate would have been 26.2%. The 26.2% rate reflects the reorganization of Terra's subsidiary operations during the fourth quarter of 2008 and expected utilization of state and federal tax credits. The effective tax rate was 26.9% for the quarter ended September 30, 2008 which reflects income in foreign jurisdictions with lower statutory tax rates compared to the United States as well as the utilization of federal and sate tax credits to reduce the estimated tax liability.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2008
Our net sales for the first nine months of 2009 were $1.2 billion, a decline of $987.7 million or 45% from the first nine months of 2008 net sales of $2.2 billion. Sales price reductions contributed 62% ($610.5 million) of the revenue decline, while sales volume reductions decreased revenues by 38% ($377.2 million).
The year over year decline in ammonia, UAN, and ammonium nitrate sales volumes reflects the continuing trend of delayed purchasing to replenish inventories and a reduction in planted corn acreage for the 2008/2009 season. This cautionary behavior is a result of inventory channel corrections residual of the 2007/2008 fertilizer season in addition to current economic conditions which have driven a conservative approach to capital management.
In response to reduced product movement, we continue to match our production to market demand, in 2009 aggregate production rates were reduced to 85% and production was curtailed at our Donaldsonville, Louisiana and Woodward, Oklahoma facilities at different times throughout the year. The fixed costs associated with these curtailments were $21.2 million. During 2009 several of our facilities have performed turnarounds. The period costs associated with the facilities being offline were $12.5 million for the nine months ending September 30, 2009.
Our gross margin was $299.0 million in the first nine months of 2009 compared to $675.6 million in the first nine months of 2008, and decreased as a percentage of sales to 24.5% from 30.6%. The gross margin percentage movement reflects a 43% decrease in natural gas costs. The first nine months of 2009 natural gas unit costs, net of forward pricing gains and losses, decreased from $8.74 per MMBtu in 2008 to $4.98 per MMBtu in 2009. Lower natural gas costs due to reduced demand and ample supplies helped to decrease production costs by $291.9 million for the nine months ending September 30, 2009, when compared to the nine months ending September 30, 2008.
We enter into forward sales commitments by utilizing forward pricing and prepayment programs with customers. We use derivative instruments to hedge a portion of our natural gas requirements. The use of these derivative instruments is designed to hedge exposure to natural gas price fluctuations for production required for forward sales estimates. The net cost of derivatives for the first nine months of 2009 was $107.5 million as compared to the net benefit of derivatives for the first nine months of 2008 of $17.0 million. Excluding the impact of the hedge cost, natural gas cost was $3.60 per MMBtu in the first nine months of 2009.

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