FROM OIL TO SHELF - THE FOOD CRISIS - Filenews 19/3
By Phil Lempert
Let's talk about that bag of lettuce that's in the fridge.
Let's see what is happening in the US. The lettuce probably originated in California's Salina Valley, where it was grown in soil fertilized with nitrogen products derived from natural gas. Its harvest was done with diesel-powered machines. It was washed, dried, and packaged in a specially designed petroleum-based plastic film. It was loaded into a 12-meter-long refrigerated truck that also consumes diesel and travelled 2,800 miles across the country to end up in a distribution center in Northeast America, and there on supermarket shelves.
Think of that bag of lettuce, from the field to the shelf, as a product of petroleum. And right now, oil is in a state of war.
The war with Iran has not only caused gasoline prices to rise. He imposed a hidden tax on every... salad in America — and in all the other products in the shopping cart.
Since the U.S. and Israel launched their attacks on Iran, the Strait of Hormuz—a 21-mile-wide sea route through which about a fifth of the world's oil and a third of fertilizers pass—has been effectively closed for commercial shipping purposes. The effects that have followed are staggering, and certainly their impact on the American food system is not complete.
What happened
U.S. crude prices have risen more than 40% since the start of the war. The average U.S. diesel price for vehicles reached $4.86 a gallon on March 9 — a rise of about 96 cents in one week, the biggest weekly increase since 1994, when diesel prices began to be monitored. Brent exceeded $100 a barrel for the first time since Russia's invasion of Ukraine.
A second price crisis is underway and concerns fertilizers.
In the first week of the war, the price of urea — the nitrogen-rich compound that forms the basis of most fertilizers for crops — rose 30 percent in the New Orleans import hub, according to the Fertilizer Institute. By mid-March, Fortune reported a 35% rise from pre-war levels. Individual spot prices have reportedly reached $850 a tonne.
According to Agriculture Minister Brooke Rollins, the major problem is that around 25% of farmers had not bought fertilisers for the sowing season when the war broke out – and are now facing a 30-35% price increase.
The Persian Gulf region dominates the global supply of fertilizers, as it has some of the cheapest natural gas fields in the world, and natural gas is the main raw material for the production of ammonia, which is converted into urea and then into nitrogen that feeds crops around the world. Nations in the region — Egypt, Iran, Qatar, Saudi Arabia and the United Arab Emirates — account for about 49% of global urea exports and 30% of ammonia exports, according to the American Farm Bureau Federation.
When the Strait of Hormuz closes, the global fertilizer supply chain doesn't just become more expensive. It is structurally disturbed.
The... lettuce is just the beginning
I calculated how much this triple blow actually costs the consumer—fuel, packaging, fertilizers—starting with that bag of lettuce.
Transporting a cargo in a 12-meter-long vehicle, with refrigerators full of bags of lettuce from California to New York, now costs about $1,100-$1,300 more than before the war began, because the price of diesel has risen and the additional fuel charges of carriers have gone up. If we divide that cost into the roughly 25,000 bags of cargo and add in the profit margins of the distributor and retailer, the increase in transportation costs alone adds about 8 to 10 cents to the price that a bag reaches the consumer.
Add the cost of packaging. Each pouch is made from a plastic film derived from petroleum — primarily polypropylene and low-density polyethylene. Plastics prices are following the path of crude oil with a delay of four to six weeks, and are already rising. The increase in packaging costs adds about 2 cents to the retail price.
By the numbers:
– Increase in shipping per bag (shelf price): +$0.09
– Resin cost increase for packaging per bag (shelf price): +$0.02
– Total increase due to war in Iran per bag: ~$0.11
– Lettuce/salad bags sold annually in the U.S.: ~$1.7 billion.
– Total additional annual costs for U.S. consumers (lettuce only): ~$187 million. dollars
Eleven cents. Not much is heard. But lettuce is just one product. There are about 40,000 codes in a medium-sized U.S. supermarket. Apply the same calculation for fuel and packaging to every perishable product in the shopping cart—fresh vegetables, dairy, meat, cold cuts, bread—and the war with Iran adds about $85 to $120 to the food bill of an average American household just for perishable products. And this is if the war ends relatively quickly. If it continues for six months or more, these numbers will increase dramatically.
This amount does not include the "shock" of fertilizers. This has not yet appeared in supermarkets.
What worries me most as I follow the developments of this war is this: everyone is focused on gasoline prices, whose changes are immediately and easily visible: every time you pass in front of a gas station. But the fertilizer issue is slow-moving: it will hit American food consumers 6-12 months from now, long after the initial shock subsides.
As I mentioned, about 25% of farmers in the US, representing $7.3 billion. In planned purchases, they had not closed their orders for fertilizers in the spring, and the additional costs for these buyers alone, for this spring alone, are estimated at $2.3 billion. dollars. If the war continues throughout the sowing and growing season, the numbers will swell. A continuous increase of 30% that will be applied to the total of 29.2 billion. of the base price of fertilizers means about $8.8 billion. additional annual costs for the U.S. agricultural sector. It would be a structural shock to the agricultural economy.
The crop that worries me the most, as well as the food industry, is corn. Corn consumes 78% of all nitrogenous fertilizers used in U.S. crops. Fertilizers make up 33%-44% of the total operating costs of a corn grower. Analysts predict that up to 1.5 million. acres may turn from corn plantations to soybeans this spring, as farmers find they can't afford corn crops.
Corn forms the basis of the food supply chain in the US. It feeds cattle, pigs and chickens. It is turned into corn syrup in thousands of processed food products. It is the raw material for ethanol that is mixed with gasoline. When corn becomes more expensive or when its production decreases, the sharp increase in prices has an impact on every supermarket aisle across the country.
The consumer issue
This is the dynamic that concerns me most as a long-term observer of this industry: In every supply chain crisis that I have covered over the last 30-plus years, the consumer is always the last to learn and the last to be protected.
Every cost increase in this supply chain is passed on at every stage before it reaches the shelf. A 5-cent increase in the cost of transporting raw materials converts into a 10-cent increase in the consumer price, after adding in the profit margins of distributors and retailers. A sharp increase in the cost of fertilizers on farms in March turns into an increase in the price of beef in supermarkets until September. The Fertilizer Institute's own chief economist, Veronica Nigh, said consumers will face more cost pass-through from this crisis than we've ever seen before.
And unlike in 2022, when businesses had some leeway to absorb the blow and some could resort to the now-well-known trick of "shrinking packaging" to disguise price increases, today's food industry is already under pressure. Last year's tariffs have "devoured" profit margins across the entire supply chain Retailers are absorbing costs to protect sales volumes. There are very few profit margins left in the system.
This will be seen on fresh produce, meat shelves, dairy refrigerators, and every corner of U.S. supermarkets — starting today and for the next 6-12 months, no matter how quickly the war stops.
Food prices in the United States are already 24% higher than pre-covid levels. The war with Iran is not an isolated event affecting a resilient economy. It is hitting a food system and a consumer base that has little room left.
