The real crisis begins now! Global alarm over rising food prices

While the entire economic debate over the consequences of the war has focused on rising oil prices, another, possibly even more severe crisis is taking shape day by day. This is the inevitable increase in food prices, which could be even more serious than the one triggered by the war in Ukraine.

A major pressure point is linked to chemical fertilizers and pesticides. The Strait of Hormuz, effectively blocked by Tehran, carries around 30% of globally traded fertilizers, and Gulf producers are major suppliers of ammonia and urea, according to the UN Food and Agriculture Organization.

Bank of America warns that the conflict threatens 65% to 70% of global urea supplies, and prices have already risen by 30% to 40%.

“This will affect planting; there will be a lower supply of goods worldwide basic grains, animal feed, and consequently dairy and meat products,” said Maximo Torero, Chief Economist at the Food and Agriculture Organization, regarding the impact if the conflict lasts even a few more weeks. “Very few countries are resistant to this.”

Unlike fuel, fertilizers do not have strategic reserves. However, some countries are more exposed than others.

In the Albanian market, fertilizer prices have already increased by 30% compared to the beginning of the war in Iran, and the rise is expected to continue. This will further hit already weakened domestic production, as farmers are already facing major economic difficulties and high production costs.

From fertilizers to food

Unlike 2022, when Russia’s war in Ukraine suddenly hit grain exports from major food producers, higher fertilizer prices or outright shortages could reduce crop yields, while rising energy prices may affect production and transportation costs.

Global oil and gas prices have risen by more than 50% since the start of the conflict, increasing input costs across supply chains.

Any disruption in fertilizer supply is likely to be felt first in nitrogen-intensive crops such as corn and wheat, according to data from the International Fertilizer Association. Higher animal feed costs will eventually spread to everything from bread to poultry and eggs.

“This is always the problem with these kinds of supply shocks: the energy side is hit first, and as that stabilizes, the food side comes through in a second wave,” said David Rees, head of global economics at Schroders.

From crisis to crisis

Before the U.S. and Israel conflict with Iran escalated in February, global inflation had been moderating and some food prices were even falling. In January, global food inflation had dropped to its lowest levels since at least 2017, Rees said.

Food price increases in the past have triggered social unrest, putting policymakers on alert. The Egyptian government subsidizes bread to help maintain social stability. In 2022, protesters took to the streets from Chile to Tunisia over high prices.

Side effects could deepen the strain. Higher fuel prices may divert crops into biofuels instead of food. An economic slowdown in the Persian Gulf home to millions of migrant workers could reduce remittances to countries including Pakistan, Lebanon, and Jordan.

Markets are already scaling back expectations for rapid monetary easing in emerging markets, as energy-driven inflation risks rising a shift that could affect growth.

The EBRD is considering support packages, including assistance to cope with fertilizer costs. FAO’s Torero urged other development banks and governments to be ready with emergency measures if the war does not end soon.

“If it lasts more than a month… we will have problems with planting and we will have problems with yields,” Torero warned.

“This could have a significant impact on prices food prices over time,” said Odile Renaud-Basso, President of the European Bank for Reconstruction and Development, a key lender in around 40 developing 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 at Moody’s Ratings.

“KORÇA BOOM”