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A perfect storm is gathering over food prices. |
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So concludes a new report from S&P Global. It sees a confluence of three factors at work: the soaring price of diesel, ubiquitous in agriculture; a shrunken supply of fertilizer inputs; and El Niño, the periodic climate pattern that wreaks havoc with weather everywhere. |
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The closure of the Strait of Hormuz revealed the Persian Gulf’s “major role in fertilizer and the inputs that go into fertilizer,” the report notes. “The strait…carries not only oil and [liquefied natural gas] but also substantial volumes of urea, ammonia and sulfur needed to sustain crop production.” Ammonia prices have been brought down by alternative supplies, but sulfur remains bottlenecked, with the price up around 70% in September from January. |
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Farmers tend to reduce fertilizer usage in response to higher prices, which reduces future crop yields, or reduces acreage. S&P notes recent declines in acreage planted in Europe for corn, Brazil for soybeans and Australia for wheat. |
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Meanwhile, exports of diesel, which powers farm machinery and irrigation and transport for crops, are down sharply from the Middle East because of the Iran war and from Russia because of Ukrainian drone attacks. |
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Then there is El Niño, which is shaping up to be the strongest in living memory. It is predicted to bring heavy rain and flooding to some regions, drought and heat to others. Global food prices rose about 10% after the strong El Niño of 2014-15. This time, S&P worries that crops weakened by reduced fertilizer use will be less able to tolerate elevated heat. |
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Agriculture futures had risen sharply this year in anticipation of many of these effects, though they retreated a bit over the past month. Poorer countries, where food is a big part of family budgets, will feel it most. Just how it flows through to U.S. consumer prices is unclear. Wheat prices rose sharply after Russia’s full-scale invasion of Ukraine in 2022 interrupted exports, but the effect in the U.S. was lost amid broader inflation. A strong El Niño in 2023-24 didn’t generate much food inflation. |
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The effect could be subtle and slow-moving. Daniel Yergin, vice chairman of S&P Global and a longtime chronicler of oil, said an energy crisis “registers instantaneously on the screen” while a food crisis “will unfold with the cycle of the seasons.” |
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