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The disruption of energy flows through the Strait of Hormuz increases the risk of a global food shock as higher gas prices put pressure on fertilizer production and other sectors outpace agricultural producers for key raw materials and logistics, traders warn.
The narrow Gulf waterway handles roughly a fifth of global oil and liquefied natural gas exports and about a third of seaborne fertilizer trade, making it a crucial artery for both food production and energy markets.
“We are on borrowed time,” said Pablo Galante Escobar, head of LNG at Vitol, during the FT Raw Materials Summit in Lausanne on Tuesday.
Reduced LNG flows through the strait have already curbed industrial consumption. Escobar said about 40 percent of the drop in gas demand came from factories, especially fertilizer plants, since the US and Israel launched attacks on Iran in late February. Natural gas is an important raw material for nitrogen fertilizers such as ammonia.
“This is not sustainable – otherwise the energy crisis will become a food crisis,” he said, warning that reduced fertilizer availability would weigh on crop yields and drive up food prices in coming seasons.
The shipping disruption caused by the war in the Middle East, including Iran’s closure of the strait and the subsequent US naval blockade of the Gulf chokepoint, is also spreading through global logistics.
Congestion at the Panama Canal has increased as Asian buyers focus on crude oil exported from the US Gulf instead of supplies from the Middle East, with tankers outbidding bulk carriers for scarce transit slots.
According to Louisa Follis, head of dry bulk analysis at shipbroker and maritime consultancy Clarksons, this has meant ships carrying lower value cargoes such as grain are facing rising freight costs and delays, with wait times at the canal reaching around 40 days, while oil tanker operators pay millions of dollars to be at the front of the queue.
Shipping costs have already increased by 50 to 60 percent on some grain routes, she said.
That increases pressure on U.S. farmers, who are already struggling to compete with cheaper producers like Brazil, Follis added, as higher freight rates erode margins and make it harder to reach emerging markets.
Higher bunker fuel costs are exacerbating pressure by forcing ships to slow down, reducing effective capacity in dry bulk markets. “That introduces inefficiencies into the system as a whole,” she said.
Agriculture traders warn that markets have not yet fully priced in the risk of a prolonged disruption to fertilizer and other key inputs.
Vijay Chakravarthy, chief risk officer at Louis Dreyfus Company, one of the world’s largest agricultural trading houses, said expectations of a short-lived conflict had caused investors to underestimate the potential impact.
“The market has not priced in longer disruption. No one is prepared for that,” he said, adding that even another six months of disruption could impact the 2027 crop cycle.
He also pointed to increasing competition for other crucial raw materials, such as sulphur, which is being diverted to higher-value industrial applications such as copper smelting, leaving fertilizer makers “at the back of the line”.
Despite relatively ample global grain supplies, Chakravarthy warned that government responses could amplify the shock. Countries concerned about security of supply may begin to build up reserves, further reducing global availability and driving up prices, especially for import-dependent economies.
“Everyone feels like their sovereignty is being compromised somehow in the supply chain,” he said.
