Gulf Crisis: Food Prices & Farmer Strain | Supply Chain

Disruptions to the global fertiliser supply chain are likely if the current restrictions on passage through the Strait of Hormuz continue, raising concerns about crop production and food security, analysts say.

Strait of Hormuz Restrictions Impacting Fertiliser Transport

Passage through the Strait of Hormuz, located off Iran’s southern coast, has largely stopped since recent attacks by the US and Israel. Between a quarter and a third of the global trade in raw materials for fertiliser passes through the strait, alongside a fifth of seaborne crude oil and gas.

The de facto closure is affecting the transport of ammonia and nitrogen, key ingredients in many synthetic fertiliser products. Roughly half of global food production relies on synthetic nitrogen, and crop yields would fall without fertiliser, potentially increasing prices for staples like bread, pasta, and potatoes, as well as animal feed.

Fertiliser Production and Export Concerns

The Gulf region is home to major fertiliser factory sites, and a prolonged transport shutdown could disrupt production and raise costs. Iran is the fourth-largest global exporter of urea, the most widely used nitrogen fertiliser, after Russia, Egypt, and Saudi Arabia.

The availability of raw materials and the rising cost of energy are also impacting fertiliser manufacturing. Fossil gas represents between 60% and 80% of the production cost of nitrogen fertiliser. Shutdowns of fossil gas plants in the Gulf, including Qatar’s largest facility following a drone attack, are expected to further reduce the global nitrogen supply.

Price Increases Mirror 2022 Surge

Fertiliser prices are already increasing, reminiscent of the surges seen in early 2022 following Russia’s invasion of Ukraine. Egyptian urea prices, a benchmark, have risen by more than 25%, reaching $625 (£467) a metric tonne, up from $484-$490 last week, according to CRU Group.

The Middle East provides approximately 45% of the global trade in sulphur, a key raw material for fertiliser production, as well as various metals and industrial chemicals.

Chris Lawson of CRU stated, “While there are many parallels to 2022, the supply and demand implications of the conflict in the Middle East have the potential to be much more severe and wide ranging, particularly if the strait of Hormuz is restricted for longer than two weeks.”

A container ship reported being hit by a projectile in the strait on Wednesday, resulting in a fire in its engine room, according to UK maritime trade operations. This is the latest in a series of attacks, with at least two crew members having died in prior incidents.

Impact on Farmers

These concerns arise at a challenging time for farmers in the UK, Europe, and North America, who are beginning to plant spring crops. While most producers have sufficient fertiliser for the current year, they typically begin purchasing for the following year at this time.

The UK meets approximately 40% of its nitrogen fertiliser requirements domestically, importing the remainder. Any reduction in fertiliser availability would likely lead to lower crop yields and higher food prices.

Food and non-alcoholic drink prices soared by 16.5% in the year to November 2022, following Russia’s invasion of Ukraine, according to the Office for National Statistics. Grocery price inflation rose unexpectedly last month, climbing 4.3% in the four weeks to 22 February, according to Worldpanel by Numerator.

Tom Bradshaw, president of the National Farmers’ Union, said farmers are already experiencing price volatility due to the Gulf conflict. Svein Tore Holsether, chief executive of Yara, the world’s second-largest fertiliser producer, noted that farms were already facing narrow margins before the conflict and called on governments to provide increased support to food producers. “Input prices are increasing but at the same time there hasn’t been much impact to crop prices, so we are putting a very big burden on the shoulders of the farmers now, unless there is a step up in supporting farmers in this challenging time.”