Gulf Shipping Crisis Raises Risk Of Global Food Price Shock

Tensions in the Middle East are beginning to spill into global food markets as disruption to shipping through the Strait of Hormuz threatens fertiliser supply chains.

The strategic waterway between Iran and the Arabian Peninsula is one of the most important trade routes in the world. Around a fifth of global seaborne oil and gas passes through the strait, but the route is also vital for agricultural inputs. Roughly a quarter to a third of global trade in fertiliser raw materials moves through the same corridor.

In recent days shipping traffic has slowed sharply as the conflict between Iran, the United States and Israel has escalated. Reports of attacks on commercial vessels and heightened security warnings have prompted many ship operators to delay voyages or divert routes.

For farmers and agricultural markets, the concern is clear. Fertiliser is one of the most critical inputs in modern farming, and disruptions to its supply can quickly feed through into food production and prices.

Ammonia and nitrogen products are particularly exposed to shipping disruptions in the Gulf. These compounds form the basis of many synthetic fertilisers used around the world to increase crop yields.

Large volumes of nitrogen fertiliser and related raw materials are produced in the Gulf region and transported by sea to major agricultural markets in Europe, Asia and the Americas. Any interruption to these shipments can tighten supply within weeks.

Synthetic nitrogen fertiliser underpins a large share of modern agriculture. Analysts estimate that roughly half of global food production depends on it. Without sufficient fertiliser farmers harvest less grain, vegetables and other staples from the same land.

Lower yields eventually feed through to consumers. If fertiliser supplies tighten or prices rise sharply, the cost of growing crops increases. That in turn raises the price of basic foods such as bread, pasta and potatoes. Livestock farmers are also affected because fertiliser shortages push up the cost of producing animal feed.

The Middle East plays a central role in the global fertiliser market. The region hosts several of the world’s largest fertiliser plants, many of which rely on abundant natural gas to produce nitrogen-based products.

Iran itself is one of the world’s largest exporters of urea, the most widely used nitrogen fertiliser. After Russia, Egypt and Saudi Arabia, it ranks as the fourth largest supplier to global markets.

Because fertiliser production is concentrated in relatively few countries, disruptions in one region can have an outsized impact on supply and prices worldwide.

Markets have already begun reacting to the latest tensions. Urea prices have climbed sharply in recent days as traders price in the risk of supply disruptions. Egyptian urea, a widely used benchmark in global fertiliser markets, has risen significantly from levels around $485 to roughly $550 a tonne in the space of a week.

Such moves echo the fertiliser market turmoil seen in 2022 after Russia’s invasion of Ukraine sent energy prices soaring and forced some fertiliser producers to shut down plants.

The cost of producing nitrogen fertiliser is closely linked to energy markets. Natural gas is the primary input used in manufacturing ammonia, which is then processed into fertiliser products such as urea.

As a result, gas prices can account for between 60 and 80 per cent of production costs for nitrogen fertiliser. Any disruption to energy supplies in the Gulf region therefore feeds directly into fertiliser prices.

The current conflict has already affected energy infrastructure. In Qatar, production at major gas facilities has been disrupted following drone attacks linked to the escalating tensions. Qatar is one of the world’s largest exporters of liquefied natural gas, and any interruption to its output has implications for fertiliser production because gas is such a critical input.

Other raw materials are also at risk. The Middle East accounts for roughly 45 per cent of global sulphur exports, another key ingredient used in fertiliser manufacturing.

Sulphur is widely used to produce phosphate fertilisers and other agricultural chemicals. If shipments are delayed or disrupted, fertiliser producers elsewhere may struggle to secure sufficient supplies.

Analysts warn that the scale of disruption will depend heavily on how long shipping remains constrained in the Strait of Hormuz.

Chris Lawson of CRU, a consultancy that tracks fertiliser and commodity markets, says the current situation has parallels with the energy and fertiliser shocks triggered by the war in Ukraine.

But he cautions that a prolonged disruption in the Gulf could have even wider consequences because of the region’s central role in global fertiliser and energy supply chains.

“If the Strait of Hormuz is restricted for more than a couple of weeks, the implications could become far more severe,” Lawson said.

For farmers in Europe and North America the timing could hardly be worse. Many are currently planting spring crops, a period when fertiliser demand is at its highest.

In most cases farmers will have already secured fertiliser supplies for this season. However growers typically begin purchasing fertiliser for the following year well in advance. Rising prices and uncertainty over future deliveries therefore create significant challenges.

In the United Kingdom, domestic fertiliser production covers only part of national demand. Roughly 40 per cent of the country’s nitrogen fertiliser requirements are produced locally, with the remainder imported from international markets.

If fertiliser becomes more expensive or difficult to obtain, farmers often respond by applying less to their crops. While that helps control costs, it usually leads to lower yields.

Lower agricultural output can feed directly into food inflation. The experience of recent years has demonstrated how quickly disruptions to fertiliser supply can affect grocery prices.

Following Russia’s invasion of Ukraine in 2022, energy and fertiliser prices surged, pushing up food costs across many countries. In the United Kingdom, food and non-alcoholic drink prices rose by more than 16 per cent in the year to November of that year.

More recent data suggests inflationary pressure may already be building again. Grocery price inflation rose to 4.3 per cent in the four weeks to late February, according to data from market research group Worldpanel.

Farm groups say it remains too early to determine the full impact of the current crisis, but they warn that further disruption could add to the financial pressure already facing farmers.

Tom Bradshaw, president of the National Farmers’ Union, said fertiliser markets are already showing signs of volatility.

“We are seeing immediate price volatility,” he said, adding that it is still too early to assess the medium-term impact on UK agriculture.

Fertiliser producers are also warning that rising input costs are placing increasing pressure on farmers.

Svein Tore Holsether, chief executive of Yara, the world’s second largest fertiliser producer, said growers were already operating on tight margins before the latest tensions drove up the price of fertiliser and fuel.

Input costs are rising again while crop prices have not increased at the same pace. Unless governments provide support or market conditions improve, Holsether said farmers may struggle to absorb the additional costs.

“Farmers were already in a challenging situation,” he said. “Input prices are increasing but crop prices have not moved in the same way. That puts a very big burden on the shoulders of farmers.”

For now the key question is whether shipping through the Strait of Hormuz can return to normal quickly.

If the disruption proves temporary, fertiliser markets may stabilise in the coming weeks. But if tensions escalate and shipping remains restricted, the impact could spread rapidly through global agricultural supply chains.

What began as a regional conflict could therefore carry consequences far beyond the Gulf, potentially reaching farms and supermarket shelves around the world.