Rising food prices due to the war in Iran: causes and consequences

Producing fertiliser requires large amounts of energy, usually from natural gas or oil. Natural gas is also a raw material used to produce fertiliser. It is estimated that about one fifth of all fertiliser worldwide is produced in the Middle East, where natural gas is relatively cheap and readily available. Normally, much of this fertiliser is traded through the Strait of Hormuz, the sea passage between Iran and Oman. At the moment, that trade has come to a halt because of the war in Iran.

In addition to the disruption of roughly 20 percent of global fertiliser production, fertiliser production elsewhere is also becoming more expensive because natural gas prices are rising. Since the US and Israel attacked Iran, the price of urea, a key component of fertiliser, has surged to about 600 dollars per tonne. That represents an increase of around sixty percent compared with the usual price.

This is not the first time such a spike has occurred. When Russia invaded Ukraine, fertiliser prices also rose sharply, even more strongly than they are now. The current increase is still less severe than at that time.

“Farmers have two options. They can buy the more expensive fertiliser and pass the higher costs on through the prices of their products. That will often happen in Europe. The result will be higher food prices in supermarkets. We call that inflation. People complain about it, but in countries such as the Netherlands it generally does not lead to reduced access to food.

Many farmers in Africa, however, will simply use less fertiliser. They often cannot afford it, and they also know their customers cannot pay higher food prices. As a result, they will produce less food. Because global food trade is so interconnected, this creates a kind of butterfly effect. A consumer in a suburb of Nairobi may end up with less to eat because bombs are falling on Iran.”

“No. At the moment there are still fertiliser stocks in warehouses around the world. That fertiliser will be applied to fields, and it takes time before crops are harvested. But once those stocks run out, they have to be replenished. If fertiliser prices are then two or three times higher than normal, the effects will be felt later in the year.

Much depends on how long this war lasts. If it ends next week, existing stocks may be large enough to absorb the shock. But if the conflict continues, there will be consequences.

At the same time, fertiliser prices are already rising sharply, even though large stocks still exist. Those stocks are now being sold at higher prices than they were bought for. It is difficult to prove, but it is plausible that speculation plays a role. Some traders profit from crises like this.”’

“In a sense, yes. This is the third shock in six years: the COVID-19 pandemic, the war in Ukraine, and now this. Three crises in a row make it likely that such disruptions will occur more often in the future. The reason is that the global food system has been designed for maximum efficiency and low prices, not for resilience to shocks. Traders and other major actors in the food system relied on global markets to ensure that food would automatically reach those who needed it.

But that is not how the system works in practice. Markets are increasingly dominated by a limited number of multinational companies, which sell food to the highest bidder, and that is usually not the poorest consumers. At the same time, the world has changed. Food production is under pressure from climate change. Geopolitical tensions are rising, and food is increasingly used as a strategic resource. Countries such as China, India and the United States restrict exports and buy up supplies elsewhere to secure their own food availability.”

“The main goal of our food system has long been to provide food as cheaply as possible. But resilience should also become an objective. That requires policy measures. One option is to build up larger food reserves so that shocks can be absorbed. Households can do this by keeping well stocked pantries. Governments can do it too, although that currently happens only to a limited extent.

Another option is to create more diversity in suppliers and buyers. Consumers should not rely only on supermarkets, but also on local markets or even their own vegetable gardens. Countries and companies should not depend solely on the cheapest suppliers of fertiliser or animal feed, but also purchase more locally or regionally. Food may become slightly more expensive, but the system will also become more resilient.

In the Netherlands, the most vulnerable part of the food system is intensive livestock farming. It relies heavily on imports of cheap animal feed and on exports of relatively cheap meat and dairy products. If that system is disrupted, the sector quickly runs into trouble. A more resilient food system would require reducing the size of the livestock herd.”

“Many African countries are used to importing food cheaply from global markets during stable periods. They have become highly dependent on these imports and often do not produce enough food for their own populations. However, cheap imports disadvantage local farmers, who cannot compete with those low prices. If countries restrict imports, they give their own farmers more opportunities. This could help them develop domestic agriculture and produce more food locally, making them less vulnerable to global shocks. The downside is that food prices for consumers will rise. That is the price of resilience, and it is politically difficult to sell to voters. It is a difficult dilemma.”

“Many people in the Netherlands are wealthy enough to continue buying food even if prices rise somewhat. But there are also large groups in our society who already depend on food banks. If shocks like this become more frequent, they could affect social cohesion in the Netherlands. Historically, food shortages have often triggered widespread unrest and even revolutions.

The Netherlands is not prepared for a crisis in which food would need to be distributed centrally. Food banks exist, but they are private initiatives that cannot operate on a very large scale. Would the government subsidise food if prices rise above a certain level? It is high time that the Netherlands develops policies to make our food system more resilient.”