The closure of the Strait of Hormuz is hurting agriculture and food security. The Middle Eastern countries that border the Persian Gulf are minnows in respect of food exports but giants in respect of supplies to grow food, specifically fertilizers and diesel. The severity of the situation is similar to the one that resulted after the start of the war in Ukraine in early 2022 (refer to our blog “Short of Grain”, March 2022).

There are three important inorganic fertilizers (which often are applied in combination): nitrogen (N), phosphorus (and phosphate, a crystal form of phosphorus) (P) and potassium (K). In 2022, supplies of K, essential for moisture management and plant metabolism, were negatively affected as Russia and Belarus are large exporters of this ore and financing dried up on the back of sanctions against the two countries (in addition, grain prices went up as Russia and Ukraine are also large grain producers, exports of which were much reduced because of the war). The Middle East is a large exporter of N-based fertilizers, being ammonium nitrate and urea. N is the most important nutrient for growth and development of crops. You can’t farm without N unless you are willing to suffer lower crop yields. Even farmers that use organic fertilizers (which are made from natural materials, like compost and manure) and have implemented no-till farming combined with crop rotation and cover crops, will still use N-based fertilizers to increase yields. Ammonium nitrate (which also can be used to blow things up, think of Tim McVeigh’s attack on a federal building in Oklahoma City in 1995 or the explosion of a cargo ship in the port of Beirut in 2020) and urea are made from ammonia, being a mixture of nitrogen from the air and hydrogen from natural gas. And natural gas obviously is ubiquitous in the Middle East, which is why about 30% of global seaborne trade in fertilizers (mostly urea) passes through the Strait. According to Unctad, important importers from the Persian Gulf are Sri Lanka (36% of supplies), Australia (32%), Tanzania (31%), Pakistan (27%), Thailand (27%) and Kenya (26%). War-ravaged Sudan even gets 54% of its fertilizer needs from the Gulf.

Is there anything left for me…?

As N-fertilizers are commodities, reduced supply will increase prices worldwide, also for countries that do not import from the region. Especially in Emerging Markets (EM) we would expect use of N-fertilizers to decrease, either because of supply issues (cargoes blocked) or, indirectly, because of credit issues. Clearly, supply is an issue (if it ain’t there, you can’t use it) and time-sensitive as well. Applying fertilizers is done during planting season (not when harvesting). For example, in Thailand planting starts in May with arrival of the rainy season. The same applies to India for rice planting. Fertilizers shortages may mean that farmers simply will leave land fallow. Further, more financing will be needed due to higher prices. For example, futures prices of urea went up from USD 460 p/ton at end of February to USD 690 FOB U.S. Gulf whereas FOB Middle East futures trades even at USD 850 per ton. Prices of P-based fertilizers also increased because these use sulfur, which is a by-product of oil & gas exploration. The Gulf accounts for 40% of global sulfur supply. Many farmers aim to reduce the impact of higher fertilizer prices, for example by switching from corn or wheat to soybeans which requires less fertilizer (but is useless for baking bread). If farmers can’t get sufficient financing for fertilizers and, thus, use less of it, crop yields will fall and could result in food shortages. Margins are also likely to tighten as fertilizer prices tend to react more quicky than food prices to market circumstances.

For manufacturers of fertilizers outside the Gulf, the disruption of LNG supply (used in production of N-fertilizers) is causing problems. LNG supply has reduced by about 20% (Ras Laffan in Qatar, the largest LNG plant in the world, is offline and damaged by Iranian attacks on the facility), according to IAE, and got much more expensive. Dutch TTF prices, a benchmark for gas in Europe, doubled from EUR 30 p/MWh to EUR 60 before falling back to EUR 42 now. Likewise, higher oil prices resulting from the supply disruption in the Strait (oil production in the Gulf has declined by 12 million b/d according to Vitol, an oil trader; oil exports represent 25% of global seaborne trade and 80% goes to Asia) results in higher diesel prices. Farmers need diesel to fuel their planters and harvesters as well as for transport of crops to silos or end-markets (bunker prices for ships transporting gas, diesel or fertilizers also rose). Some farmers are able to produce biofuels but this could endanger food security if switching to biofuels will be material (low risk, in our view).

If the Middle East oil & gas crisis is not yet grave enough, farming may later this year also be hit by a weather phenomenon called El Niño (unfortunately, many people mistakenly believe that El Niño is named after the Christ Child because the phenomenon is usually observed around Christmas, but, of course, El Niño is a reference to Donald J. Trump). El Niño brings dry weather to South (India, Pakistan, Bangladesh) and South-East Asia, Northern Australia and Southern Africa (bad for crop yields) and wetter weather in the south of the U.S., Peru (good for crops but bad for fishing!) and the southern cone of South America (okay for crop yields). Especially the impact of El Niño on crop yields in Africa and South Asia may result in food shortages. Although there is no certainty that there will be a El Niño this year, most reputable research institutes believe it is highly likely (a probability of 70%, say). Some scientists believe that this year’s El Niño could be very strong (a “super” El Niño, where temperatures might increase by 2-3%), aggravating food insecurity.

In EM food and energy accounts for a large share in the consumption basket (around 30% for EMEA and LatAm and 40% for Asia; note that energy includes renewables). The Middle East crisis almost certainly will drive up inflation, forcing central banks to act and hike policy rates. Growth will fall, most notably in oil-importing countries, like Turkey, South Africa, India, Korea and South-East Asia. The IMF projects a decline in economic growth at market exchange rates for EM in 2026 of 0.6% compared to 2025 to 3.7% (growth in the Middle East drops by 2.2%, whereas Emerging Europe and Latin America hold up well). Inflation for 2026 is projected at 5.5%, up 0.3%. Clearly, the impact on growth and inflation is dependent on how long the blockage of the Strait will last. The IMF assumes a short-lived conflict with disruptions fading away by mid-year, which may prove to be optimistic (it will take considerable time before oil, gas and fertilizer supplies normalize and, anyway, some capacity will be out for quite some time, like Ras Laffan). The IMF also have published two alternative, more pessimistic, scenarios (called “adverse” and “severe”). In the adverse scenario global growth reduces further by about 0.6% and global inflation increases by 1.0%.

After the covid-19 pandemic and the invasion of Russia into Ukraine, the crisis in the Middle East is the third shock to the global economy in a rather short period of time (not counting Trump’s confusing and ill-advised tariffs exclamations). We enter this crisis with high deficits and debt levels. For EM excluding China, the IMF expects gross general government debt to rise from 51.9% of GDP in 2019 to 58.5% this year (81.7% excluding the Middle East oil producers!). This implies that financial support only can be limited and temporary. Measures should be targeted (to poor households, for example) and preferably should be aligned with market signals (prefer income support above subsidies, which ignore market signals to reduce demand). By lack of other safe havens, the dollar is likely to strengthen, putting more pressure on EM, especially for those countries that rely on external debt. Not surprisingly, we expect EM to be in dire straits this year…