Sharply higher prices for food and fertilizers put pressure on households worldwide. - Kristalina Georgieva, IMF, 2022
Sharply higher prices for food and fertilizers put pressure on households worldwide.
Markets have already priced the most visible consequences of a disruption in the Strait of Hormuz. Oil prices have surged, gasoline prices are moving higher, and inflation concerns have re-emerged. The initial market reaction has been the most visible but least revealing. The tougher question is what happens if the disruption pushes costs deeper into the real economy. This chart points to one of the earliest channels through which an oil shock can spread into a broader inflation problem: fertilizer.
The Strait of Hormuz carries far more than crude. Roughly one-third of global fertilizer exports are tied to the Gulf region, and roughly one-third of traded urea, a key nitrogen-based fertilizer, moves through the strait. Hormuz also matters for sulfur and other agricultural inputs. Fertilizer sits close to the base of the food system, and its economics are deeply linked to energy. Natural gas represents between 60% and 80% of the production cost of nitrogen fertilizer, allowing an energy and shipping disruption to move quickly into farm input costs and ultimately into food prices.
The timing makes the current move more consequential. A fertilizer shock in mid-to-late March arrives during a sensitive part of the crop calendar, when producers are already making key planting and input decisions. That gives the current rise immediate consequences for farm margins and broader food-production costs.
The inflation transmission is straightforward. Higher oil prices lift headline energy inflation first. Higher fertilizer prices then work through agricultural input costs, while diesel, processing, refrigeration and transportation add pressure across the food system. A prolonged Hormuz disruption could make the inflation impulse broader and more persistent than a simple gasoline shock. Markets have already reacted to the direct energy channel. The next stage of inflation pressure may come through the cost of producing food.
Farmers are likely to feel the strain before consumers see the full effect. Higher fertilizer prices raise input costs immediately, squeezing margins in a farm economy already facing tariffs and weak crop prices. That risk is already surfacing in Washington, where additional farm support is under discussion.
Food inflation tends to matter differently than energy inflation. Gasoline prices are visible and immediate, while food prices often prove more politically and socially destabilizing because they reach more directly into daily consumption. The food-price surge that preceded the Arab Spring in 2010 and 2011 remains a reminder that agricultural inflation can carry consequences well beyond headline inflation. The United States may be less exposed than some economies to a direct energy supply shock, but it is far from insulated from higher globally priced oil, fertilizer, and food costs. Investors should not assume that a shock moving through fertilizer and food remains confined to farm economics.
Oil and gasoline have already revived inflation anxiety. Fertilizer points to a broader risk extending into farm input costs and food production. A prolonged Hormuz disruption could keep pressure on energy prices while widening the inflation impulse beyond the pump. Markets have moved quickly to price the barrel. They may be slower to price the cost of growing food.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
