How the conflict in the Strait of Hormuz could affect global agriculture prices

The Strait of Hormuz is a critical route for the world’s nitrogen fertilizer market, which is especially important for crops like corn and other grains. Disruption to the Strait because of the war in Iran could drive up prices for fertilizer and agriculture products around the globe, according to Goldman Sachs Research.

Shipping disruptions are already pushing fertilizer costs sharply higher and threatening to tighten grain supplies. More than a quarter of global nitrogen fertilizer trade and about 20% of liquefied natural gas (LNG)—the primary feedstock for nitrogen production—typically transit the Strait.

Will rising fertilizer costs increase food and agriculture prices?

Higher fertilizer prices may eventually feed into grain prices, given fertilizer accounts for about 20% of grain costs. But reduced grain supply is likely to have the biggest potential impact on grain prices, Goldman Sachs Research analyst Lina Thomas writes in the report.

There are two main ways that reduced fertilizer supply can impact crop production. Delayed, or sub-optimal, nitrogen application could result in lower yields from grain crops, Thomas writes. Reduced availability of nitrogen could also spur farmers to shift acreage away from fertilizer-intensive crops like corn and toward more efficient products like soybeans. Nitrogen fertilizers account for roughly 60% of global fertilizer use.

In addition to transit constraints, fertilizer production in Qatar and Iran has reportedly been reduced since the Middle East conflict began. Spare nitrogen capacity elsewhere, such as in Russia and China, is limited.

Which regions are most affected by rising fertilizer prices?

Some regions may be hit harder than others. In the near term, the US appears relatively insulated, according to Goldman Sachs Research. The conflict started just ahead of the main planting window, and most US farmers had probably already secured the bulk of their fertilizer needs. However, US fertilizer imports typically peak between February and April, and cargos from the Persian Gulf usually need about a month to reach US ports. Therefore, disruptions in March could still affect availability in April, which is when demand peaks. 

Moreover, the US does not have a strategic fertilizer reserve and has limited ability to quickly ramp up domestic fertilizer production, even with ample natural gas. Depending on how the season unfolds, US producers may have to contend with a global fertilizer market facing reduced supply.

Regions such as Europe, Australia, and parts of the Southern Hemisphere have greater exposure to near-term fertilizer prices. Their crop calendars are later and their domestic fertilizer production is more vulnerable to volatility in LNG prices.

If fertilizer disruptions persist, more exposed regions could look to import more grain from the US, also pushing up grain prices there.