Iran conflict blocks fertilizer throat: food inflation may rise significantly, US consumers face new impact

With the disruption caused by the Iran war on one of the most critical TRADEXLINK pathways for global fertiliser transportation, global food prices may face upward pressure. While the energy market's focus is on the risks to oil supply, analysts point out that the threat to the fertiliser supply chain through the Strait of Hormuz could lead to long-term economic issues through food inflation. Stephanie Ross, chief economist at Wolf Research, stated in a report on Tuesday, "Besides energy, another risk that has received less attention is the potential chain reaction effects on food prices, as a shortage of fertilisers will raise agricultural production costs." Ross estimates that the current supply chain disruptions could increase the inflation rate of "household food" by about 2 percentage points, on top of the approximately 0.40 percentage points increase in overall inflation rates in the United States driven by energy prices, adding an additional approximately 0.15 percentage points. These potential price increases come at a time when American consumers are already facing rising prices for food, housing, and energy. Data released by the U.S. Bureau of Labor Statistics on Wednesday showed a 2.4% year-on-year increase in household food prices in February. More than one-third of the global trade in fertilisers needs to pass through the Strait of Hormuz, making it a critical artery in the agricultural supply chain. Since the outbreak of the war at the end of last month, commercial traffic along this route has largely stalled, just as farmers in the Northern Hemisphere are preparing for spring planting, disrupting fertiliser transportation. This timing is crucial because fertilisers are typically applied early in the crop growth cycle and play a critical role in determining later yields. Ross points out in the report, "If fertiliser supply tightens during this window, farmers may reduce application rates." This could lead to reduced yields in crops such as corn, soybeans, wheat, and rice, and increase agricultural costs. Economists in the fertiliser industry are also concerned and note that prices are already rising. According to data collected by the U.S. Fertiliser Association, the price of imported urea fertiliser in the U.S. jumped 30% per short ton in the two weeks leading up to February 27 and March 6 (around the time of the outbreak of the war). Urea is a nitrogen-based fertiliser widely used to increase crop yields and is one of the largest traded fertiliser varieties in the region. Veronica Nye, chief economist at the U.S. Fertilizer Association, stated that if the trade interruption continues, the resulting increase in fertiliser prices for farmers and retailers could ultimately be passed on to consumers, raising food costs. Nye pointed out, "This is the impact felt on global fertiliser costs. It can be imagined that in this situation, these costs will be passed on to consumers to an unprecedented degree." The U.S. relies on the global fertiliser market, with about 20% of its total usage dependent on imports, although the sources of nitrogen fertiliser suppliers, including urea, are more diverse, including Canada, Trinidad and Tobago, Russia, among others. The effects of this shockwave may ripple globally, not just limited to the commodities sector. Asia and Africa, in particular, rely heavily on fertiliser exports from the Gulf region. Countries like India heavily depend on supplies from the Gulf region, while some African economies rely on imported raw materials for fertiliser production. While the interruption in fertiliser transportation may lower crop yields for farmers and increase household expenses, fertiliser producers may benefit from it. CF Industries' stock price reached an all-time high on Monday, with a nearly 10% increase over the past week, marking the company's largest multi-day increase since 2022.