RPT-BREAKINGVIEWS-Iran war exposes food security to cascading risks

By Antony Currie

MELBOURNE, March 24 (Reuters Breakingviews) - The U.S.-Israel war on Iran and resulting disruption in the Strait of Hormuz will have a bigger impact on food security than Russia's 2022 invasion of Ukraine. That might not seem obvious by glancing at the relative prices of feedstocks for fertiliser, a $290 billion-a-year market: most are currently lower than four years ago. But the extent of the supply shock is bigger and broader. And that exposes rice, wheat and other crops to cascading risks.

Around a third of global urea volumes travel through the Strait. At just shy of $700 a ton, it costs almost 50% more than before bombing started but is still around a fifth lower than the peak four years ago. That's largely because the price of liquified natural gas used to create urea out of ammonia had spiked in 2021 on supply fears in Europe – and high wheat prices after a poor growing season prompted farmers to plant more. At present, about the only fertiliser ingredient trading above its 2022 level is sulphur: the Middle East supplies almost half of it, and demand has increased from both nickel miners, especially in Indonesia, and manufacturers of semiconductors.

The sudden loss of supply of both chemicals and fuel compounds the problem. India, for example, is heavily reliant on urea and LNG imported via the Strait. Australia, meanwhile, has plenty of LNG but gets more than a third of its fertiliser from the Middle East as well as much of the diesel needed to deliver and apply it. Such shortages have already had some farmers Down Under being quoted more than $1,100 a ton for urea, per the Australian Financial Review.

In the short-term, these problems may only impact the next harvest in those countries where planting season is already over. Cautious governments, though, are likely to cap or outright ban some food exports, as India did with rice in September 2022. The longer the conflict lasts or prices remain high, such measures will increase. And farmers will have to make difficult choices. They can use less fertiliser, reducing yields, or swap to crops that require less or no chemicals, such as lentils and other legumes.

But the Middle East conflagration heightens their exposure to other risks. Norway-based fertiliser producer Yara International YAR.OL, for example, is closing a plant in Australia for two months for repairs. And climate change is making weather, and farmers' choices, more extreme. Just the prospect of an El Nino-sparked drought in 2023, for example, prompted hoards of Australian farmers to sell their cattle early for fear they couldn't feed or water them.

There’s no easy replacement for fertiliser. Ditching it can have dire consequences, as Sri Lanka discovered after banning it and pesticides in 2021. The government reversed course after harvest yields plummeted, but it sowed the seeds of an economic crisis and popular uprising against the government.

For now, such an extreme outcome is unlikely. But the battle to source plant nutrients from other regions will push up food prices. That will create yet another inflation headache for central banks that just two months ago were more likely to cut than raise interest rates. And it will make it even harder for the poor to afford to eat. Food insecurity is set to get much worse.

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CONTEXT NEWS

The price of urea, a key ingredient in certain types of fertiliser, hit $684 a ton on March 20, jumping 47% since the final trading day before the U.S. and Israel attacked Iran. Around a third of global trade in urea passes through the Strait of Hormuz.

The region is also a key exporter of other fertiliser feedstocks, including sulphur, ammonia and natural gas.