Disrupted fertiliser shipments and soaring energy prices from the war in Iran are threatening to unleash a fresh food price surge across vulnerable nations, risking a years-long setback as many were recovering from successive global shocks.
Developing countries were strengthening, and attracting investment, after the global pandemic and the Ukraine war sent food, fuel and financial markets into turmoil. The Iran conflict threatens to unravel the gains and leave households struggling to feed families.
“This could have a big impact on prices, food prices, over time,” said Odile Renaud-Basso, president of the European Bank for Reconstruction and Development (EBRD), a core lender across about 40 emerging economies.
Food and fuel make up less than a quarter of the consumer inflation basket in most developed economies, but account for 30% to 50% in many emerging markets, said Marie Diron, managing director with Moody’s Ratings.
“The exposure leaves many economies particularly vulnerable to externally driven price volatility,” Diron said.
Fertiliser squeeze hikes prices
A major pressure point is fertiliser. The Strait of Hormuz, effectively blocked by Tehran, carries about 30% of globally traded fertilisers and Gulf producers are big suppliers of ammonia and urea, according to the UN Food and Agriculture Organisation (FAO). The Bank of America warned the conflict threatens 65% to 70% of global supplies of urea, and prices are up 30% to 40%.
“This will affect planting. There will be a lower supply of commodities in the world, of staple cereals, of feed and therefore of dairy and meat,” Maximo Torero, chief economist with the FAO said of the impact if the conflict lasts even a few more weeks. “Very few countries are resilient to this.”
Unlike fuel, there are no strategic global stockpiles for fertilisers. But some countries are more exposed than others.
Latin America, far from the war and home to energy and agricultural powerhouses Brazil and Argentina, is somewhat more sheltered, though Brazil’s agricultural minister Carlos Favaro warned the country could face fertiliser supply problems. In oil-producing Nigeria, the Dangote fertiliser plant will help cushion the impact.
By contrast, countries such as Somalia, Bangladesh, Kenya and Pakistan typically do not keep large fertiliser stocks and are more reliant on Gulf supply chains. Kenya’s fertiliser costs had risen about 40%, the FAO said.
Rwanda, which sources much of its fertiliser from the Gulf, is weighing steps to protect its farm sector, finance minister Yusuf Murangwa said during a news conference on Monday.
“There’s a lot we are trying to figure out to contain the stress.”
From fertiliser to food
Unlike in 2022, when Russia’s war in Ukraine abruptly hit grain exports from major food producers, higher fertiliser prices, or outright shortages, could cut crop yields, while rising energy prices could feed into production and transportation costs.
Benchmark global oil and gas prices have risen more than 50% since the conflict began, hiking input costs across supply chains.
If it goes further than a month we will have problems of planting, and we will have problems of yields
— Maximo Torero, FAO chief economist
Any hit to fertiliser supply is likely to be felt first in nitrogen‑intensive crops such as corn and wheat, according to data from the International Fertiliser Association. Higher feed costs will eventually spill into everything from bread to poultry and eggs.
“That’s always the issue with these kinds of supply shocks, that you get the energy part first, and as that subsides, you can get the food portion coming through the second wave,” said David Rees, head of global economics at Schroders.
Policy planning, thinner buffers
Before the US-Israeli conflict with Iran erupted in February, global inflation had moderated, and some food prices were even falling. In January, global food inflation had dropped to the lowest levels since at least 2017, Rees said.
Past food price surges have triggered social unrest, putting policymakers on alert. Egypt’s government subsidises bread to help maintain social stability. In 2022, protesters took to the streets from Chile to Tunisia over high prices.
Knock-on effects could deepen the squeeze. Higher fuel prices can divert crops into biofuels rather than food. An economic slowdown in the Gulf, which is home to millions of migrant workers, could cut remittances to countries including Pakistan, Lebanon and Jordan.
Markets are paring back expectations of a swift monetary easing push in emerging markets as energy-led inflation risks build, a shift that could weigh on growth.
The EBRD is considering support packages, including help to afford fertilisers. FAO’s Torero urged other development banks and governments to be ready with contingency measures if the war does not end soon.
Torero warned: “If it goes further than a month we will have problems of planting, and we will have problems of yields.”
Reuters
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