By Javier Blas
An old saying in the world of commodity traders says that the Middle East "sells hydrocarbons to buy carbohydrates". The desert states export their oil and gas, and import wheat and rice. However, there are a few products produced in the Gulf that are vital to global food production: nitrogen fertilizers, such as urea and ammonia, as well as the gas used to produce them.
Thus, the war in Iran – and the blockade of the Strait of Hormuz – has sounded the alarm about a new wave of global food inflation, similar to the one that followed Russia's invasion of Ukraine. Despite these fears, the agricultural market is not at risk today, at least in the short term. The price of oil may have skyrocketed, but abundant food stocks worldwide are holding back commodity prices.
Of course, the usual caveats also apply to the U.S. and Israel's war against Iran: A prolonged or broader conflict would overturn any kind of prediction about the markets. For now, however, the situation is not like in 2022, when Vladimir Putin's forces attacked the "granary of Europe", turning farmland into a battlefield. At that time, Russia and Ukraine together accounted for a quarter of the world's wheat and barley exports, about 15% of our corn and almost 50% of all sunflower seeds.
Instead of fertile land, the Third Gulf War is fought in deserts and on a strip of sea. For central bankers worried about rising fuel costs, this is a rather welcome difference. Stability in the agricultural sector offers a significant breather in terms of inflation. Four years ago, households felt the increase in prices in the supermarket basket. So far, this time, the amounts we pay for food items remain more stable.
Since the start of the war on February 28, wheat and corn prices have risen by just 4%. Soybeans have risen about 1%, while rice has fallen nearly 6%. In contrast, during the first two months of the war between Russia and Ukraine, European wheat prices climbed by more than 70%, reaching an all-time high of €450. Today, they are around €200.
The importance of rice is often overlooked in the West, but it is the staple diet for 50% of the world's population, including the approximately 1 billion undernourished people in Asia and West Africa. The worst protests during the food crisis of 2007-08 were not about the price of bread, but about the cost of a plate of rice. At the moment, reference prices for cereals in the Asian wholesale market are approaching the lowest level in 19 years, at $350 per tonne.
It is not only the wholesale trade in these items that offers a relief. Electricity prices remain stable today, protecting bakeries, food processing businesses, and supermarkets from the sharp increases in costs seen in 2022. Packaging is not getting more expensive either – four years ago, the cost of cardboard and steel reached historically high levels.
However, the "Cassandras" of the food industry are not entirely wrong. They argue that the problem today is not the cost of food, but the impact of the rapid rise in fertilizer prices on future harvests. Gulf nitrogen fertilizers cannot reach the world market through Hormuz. At the same time, the lack of natural gas is forcing Asia's fertilizer factories to limit their production.
U.S. urea prices have reached nearly $690 per tonne, up about 60 percent from pre-war levels. In 2022, urea reached an all-time high of close to $900 as the world temporarily lost supply from Russia and many European factories were forced to shut down due to the rapid rise in gas prices.
Pessimists warn that without fertilizers, agricultural production will collapse, causing food shortages until the next harvest. Cereal yields usually decrease by about 40% after a year without any nitrogen fertilizers. However, it is unlikely that farmers will immediately stop using them – the reduction will take place gradually. Any effect on crops will initially be more limited.
In addition, nitrogen fertilizers are not the only nutrient used in agriculture. Phosphates and potash are equally common. The price of potassium chloride, a potash-based fertilizer, gained more than 400% to $1.200 after the start of the war in Ukraine, as Russian and Belarusian exports were curtailed. Today, it is trading at $370, almost unchanged since the U.S. and Israel began bombing Iran.
Fertilizer concerns also overlook how the agricultural economy of most developing countries works. Especially in Asia, fertilizers are heavily subsidized, so high prices do not portend a food crisis, but rather a fiscal shock, as governments shoulder the burden of rising costs.
Fortunately, today we are better prepared to deal with the effects of war. Developing countries have made great efforts to strengthen their agricultural sector, creating safety nets that help offset rising production costs. Multilateral development banks can and should do more to offer help where needed. Global wheat and rice stocks are also plentiful, after several good harvest years.
During the 2007-08 food crisis, global wheat stocks were at their lowest level in 26 years, at around 129 million tonnes. Now they are close to the high, at 280 million tons. The same applies to rice, where stocks amounted to only 75 million tonnes in 2007-08 and today to 190 million tonnes. It is true that much of them are concentrated in India and China, but it creates a buffer of security.
If the U.S. fails to find a way out of this war, the cost of energy and fertilizers may rise to the point where the agricultural industry collapses. We have not yet reached this point.
