While markets and governments have largely focused on blocked supplies of oil and natural gas, the restriction of fertilizer threatens farming and food security around the world. Nitrogen and phosphate two major fertilizer nutrients are under immediate threat from the blockade. About half of Gulf fertiliser exports are destined for Asia, and ~33% of world fertilizer passes through the SoH (Strait of Hormuz). Key nitrogen and phosphate fertilizer prices have soared by up to 50%, threatening to lower crop yields and trigger higher food prices for consumers globally. Various measures of international food prices have historically shown strong correlation with crude oil prices; co-movements in both measures are largely synchronised, suggesting fast transmission from rising oil prices to food inflation. This is largely due to an equally strong-and-synchronised historical association between food and fertiliser prices, as fertiliser production is highly energy intensive. IMF estimates that a 10% increase in oil prices over the course of a year could raise global inflation by around 40bps. Crude oil prices are currently up c.40-45% since the war started, but this was only 17 days ago. But even assuming Brent settles at $85-90 levels, i.e. a 30% rise in energy prices implies a 120 bps rise in global inflation. Fertiliser affordability has already been deteriorating in recent months and quarters amid heightened protectionism from major trading economies. China’s nitrogen and phosphate exports remain much lower than the historical trend due to supply-chain security measures (e.g., for electric vehicle production). The ongoing tightening of sanctions and tariffs imposed by the EU on Russia and Belarus has also sustained high fertiliser prices from trade diversion. Then there is the risk of El Nino later this year which could negatively impact snowpack development (this has already caused crop shortages in south-central Asia in recent weeks, and the US in recent months). The US-based Climate Prediction Centre expect El Niño conditions with c.60% probability between August and October. To summarise, though fertilizer prices are currently below the peaks seen after Russia’s invasion of Ukraine, but grain prices were higher then, helping farmers absorb the costs. Grain prices are lower now meaning margins are tighter and farmers may have to switch to less fertilizer-intensive crops such as soybeans in the U.S. or apply less fertilizer, reducing yields. Lower yields lead to higher consumer prices via higher food inflation.
