Food prices could rise due to fertilizer shortages

The war in Iran could cause global food prices to rise as it disrupts fertilizer shipments through one of the world’s most critical trade routes.

While energy markets focus on oil supply risks, analysts say threats to fertilizer supply chains via the Strait of Hormuz could also lead to long-term economic problems through food inflation.

“Beyond energy, another risk that receives less attention is the potential knock-on effect on food prices as fertilizer shortages increase agricultural costs,” Stephanie Roth, chief economist at Wolfe Research, said in a note Tuesday.

Roth estimates that the cut could increase “food at home” inflation by roughly 2 percentage points, which would add about 0.15 percentage points to headline inflation in the U.S. on top of the approximately 0.40 percentage point increase from energy.

These potential price increases come as U.S. consumers face persistently high prices on food, housing and energy. Home food inflation rose 2.4% year-over-year in February, the Bureau of Labor Statistics said Wednesday.

More than a third of fertilizer traded globally passes through the Strait of Hormuz, making it a critical artery for agricultural supply chains. Commercial traffic on the route has been largely halted since the war began late last month, disrupting shipments as farmers in the Northern Hemisphere prepare fields for spring planting.

Timing is critical because fertilizers are applied early in the crop cycle and help determine yields later in the year.

“If fertilizer supply shrinks during this period, farmers may reduce application rates,” Roth said in his note. This can reduce yields of crops such as corn, soybeans, wheat and rice and increase agricultural costs.

Economists in the fertilizer industry are equally concerned and say prices are already rising.

The price per short ton of urea fertilizer imports rose 30% in the U.S. between the weeks spanning the beginning of the war on February 27 and ending on March 6, according to data collected by industry advocacy group The Fertilizer Institute.

Urea, a nitrogen-based fertilizer widely used to increase crop yields, is one of the most traded fertilizers in the region.

Veronica Nigh, chief economist at the Fertilizer Institute, said higher fertilizer prices for farmers and retailers could ultimately increase food costs for consumers if trade disruption continues.

“This is a global impact on fertilizer costs,” Nigh said. “I would predict that those costs would be passed on to consumers much more in this scenario, which is something we haven’t seen before.”

The US relies on global fertilizer markets and imports roughly 20% of its total use; but nitrogenous fertilizers such as urea come from a broader set of suppliers, including Canada, Trinidad and Tobago, Russia and elsewhere.

The ripple effect can spread across the world and beyond commodities. Asia and Africa are particularly dependent on fertilizer exports from the Gulf region. Countries like India are heavily dependent on Gulf resources, while some African economies are dependent on imported materials used to produce fertilizer.

While interruptions in fertilizer shipments can reduce farmers’ crop yields and increase costs for households, fertilizer producers can benefit.

CF Industries It hit an all-time high on Monday, with shares rising nearly 10% last week for their biggest multi-day gain since 2022.