Will the Gulf war trigger a global food crisis? Here’s why the scare is still some distance away

So the war in Iran—and its blockage of the Strait of Hormuz waterway—has prompted warnings about another bout of global food inflation similar to the one that followed Russia’s invasion of Ukraine. Despite such fears, the agricultural market isn’t at risk today, at least in the short term. The price of oil might have been soaring but the world’s plentiful food stocks are acting as a balm on commodity prices.

Of course, the usual caveats apply to the US and Israeli war on Iran: a prolonged or broader conflict would upend all kinds of market assumptions. For now, though, the situation isn’t like 2022, when Vladimir Putin’s forces attacked Europe’s bread-basket, turning farmland into a battlefield. At the time, Russia and Ukraine together accounted for a quarter of the world’s wheat and barley exports, roughly 15% of our corn, and nearly half of all sunflower seeds.

Instead of fertile land, this Gulf war is being fought over deserts and a strip of sea. For central bankers worrying about rising fuel costs, it’s a welcome difference. The stability in farming offers an important reprieve on inflation.

Four years ago, supermarket buys pushed up prices for households. So far this time, our grocery bills are steadier. Since the war started, wheat and corn prices have risen a mere 4%. Soyabeans are up about 1%, while rice is down nearly 6%. In the first two months of the Russia-Ukraine war, by contrast, European wheat prices rose more than 70% to an all-time high of €450. Today, they’re around €200.

The importance of rice is often overlooked in the West, but it’s the staple diet for half the world’s population, including a billion or so undernourished Asians and West Africans. The worst riots during the 2007-08 food crisis were about the cost of rice. Right now, benchmark prices for the cereal in the wholesale Asian market are approaching a 19-year low of $350 a tonne.

It’s not just wholesale commodities offering relief. Electricity prices remain well anchored today, shielding bakeries, food processors and supermarkets from 2022-style cost spikes. Nor is packaging getting more expensive; four years ago, cardboard and steel costs hit record highs.

Still, the food Cassandras aren’t entirely wrong. They argue that the problem is the impact of surging fertilizer prices on future crops. The Gulf’s nitrogen-fertilizer products cannot reach the global market via Hormuz.

At the same time, natural gas shortages are forcing Asian fertilizer plants to curb output. US benchmark urea prices have risen to nearly $690 a tonne, up about 60% from pre-war levels. In 2022, urea peaked at close to $900 as the world briefly lost Russian supply and many European plants had to close as gas prices soared.

Pessimists warn that without fertilizers, farming production will plunge, causing food shortages by the next harvest. Cereal yields typically drop by about 40% after a year without any nitrogen fertilizer. But farmers are unlikely to cut its use to zero immediately; the reduction would be phased. Any impact on crops would be smaller initially.

Moreover, nitrogen fertilizer isn’t the only nutrient used in farming. Phosphate and potash are equally prevalent. The price of potassium chloride, a potash-based fertilizer, jumped more than 400% to $1,200 after the Ukraine war started, as Russia and Belarus had their exports curbed. Today, it trades at $370, little changed since the US and Israelis started bombing Iran.

Worries about fertilizer also overlook how the farm economy of most developing countries works. In Asia in particular, fertilizers are heavily subsidized, so high prices don’t presage a food crisis, rather a fiscal shock as governments bear the brunt of the cost increase.

Thankfully, we are better prepared today to handle war shockwaves. Developing countries have strengthened their farming industries, establishing safety nets to help offset production expenses. Multilateral development banks can and should do more. Wheat and rice global stocks are also plentiful after several good years of harvest.

During the 2007-08 food crisis, global wheat inventories stood at a 26-year low of about 129 million tonnes. Now they’re near a high at 280 million tonnes. The same is true for rice, where stocks were just 75 million tonnes in 2007-08 and are 190 million tonnes today. Much of that is concentrated in India and China, but it creates a buffer.

If the US doesn’t find an off-ramp from the war, energy and fertilizer costs may rise to a point where the farm sector cracks. We’re not there yet. ©Bloomberg

The author is a Bloomberg Opinion columnist covering energy and commodities.