Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Food inflation is barrelling down the line. It’s not just the energy that goes into, say, growing greenhouse tomatoes or canning beans. Fertiliser, which has enabled the world to feed a massively expanded populace without sequestering masses more land, is another casualty of the closed Strait of Hormuz.
The disruption affects supply directly: roughly a third of fertilisers — including nitrogen-rich urea — pass through the strait in normal times. But those produced elsewhere are also affected: natural gas is a key feedstock, and its cost has skyrocketed following the war in Iran. The exception to this is the US. There, domestic shale gas production can’t be freely exported, meaning lower local prices and a giant competitive advantage for fertiliser manufacturers such as CF Industries.
Even without blocked shipments and damaged production facilities, fertiliser was becoming thin on the ground. Russian production has been curbed, Europe has shuttered plants in response to higher gas prices and China, the second-biggest exporter, has moved to halt overseas shipments. A US investigation over whether big manufacturers colluded to push up prices doesn’t help.
Hence, just as the northern hemisphere gears up its spring planting, the price of urea, at $760 per tonne, is almost 60 per cent higher than it was before hostilities began, and more than double what it was two years ago. Peter Alexander of the University of Edinburgh estimates that, should urea reach the $1,000 it breached in 2022, the total cost to food commodity producers would swell to $240bn.
Higher prices ripple through the food chain, but the effect is spread unevenly. Fertilisers make up more than a third of operating costs for US corn and wheat, according to the US Department of Agriculture, versus a fifth for soyabeans, for example.
By the time it gets into shopping trolleys, wheat is only a slice of the cost of that loaf of bread — perhaps a tenth, with energy, shipping, packaging and the like contributing the bulk of the cost. It wasn’t always so: at the end of the 18th century, wheat accounted for 80 per cent of the cost of a loaf. But the extra padding won’t offer much of a cushion now, since its price is also inextricably linked with that of oil and gas.
While most fertiliser is bought ahead of time, with farmers mainly relying on spot markets to top up purchases, some inflation is already feeding through. Britain’s National Farmers Union has warned of pricier cucumber and tomatoes as soon as May.
For the rich world, food inflation will probably slow the pace of interest rate cuts or even tempt central banks to reverse course; Australia has already ratcheted up rates twice in as many months. For poorer countries, where food accounts for a bigger portion of incomes, the risks loom larger.
