Food price risks as Strait of Hormuz disruption drives up farm costs

Australian farmers are facing rising costs and growing uncertainty as global supply disruptions linked to the Strait of Hormuz push fertiliser and fuel prices higher.

The disruption has already translated into significantly higher farm input costs which is putting pressure on farm profitability.

“You’re having the profit margins of farmers squeezed because their costs keep going up,” CommBank Agricultural and Sustainability Economist Dennis Voznesenski said.

“Apart from a lot of hard work, and rainfall, you also need a lot of fertiliser and a lot of fuel to grow crops in Australia,” Voznesenski told The CommBank View podcast.

“A big chunk of the fertiliser and fertiliser ingredients globally comes from behind the Strait of Hormuz… You have over 40% of the world’s urea… around 15% of the world’s phosphate… and around 40% of the world’s sulphur stuck behind the Strait of Hormuz. So, it’s a big problem.”

What happens if the Strait reopens?

Even if the Strait of Hormuz were to reopen quickly, any relief for Australian farmers would not be immediate, Voznesenski said.

“You can’t instantly get fertiliser… and just pop it over to Australia. It takes about 3 to 4 weeks for that ship to actually leave, arrive and offload.”.

That timing is critical for the growing season.

“It will probably take three to four weeks for that fertiliser to get here,” he said.

“The next one to two weeks is pretty critical, because if the strait can be opened… that fertiliser will get here in time for around mid-July. And that’s when farmers will really be in the critical point of needing that fertiliser.”

Australia’s reliance on imports adds to the challenge, and while grain prices have lifted, it has not been enough to offset rising costs.

“If you look at wheat prices, they’re up around 13 per cent… barley is up around 15 per cent and canola 8 per cent,” Voznesenski said. “Prices have gone up, but not anywhere near as much as the cost of producing them has and that imbalance is weighing heavily on margins.

“Imagine your costs as a business rising anywhere from 20 per cent to 60 per cent, while your revenue increases by only 8 per cent to 15 per cent, margins would be squeezed considerably,” he added.

Farmers adjust as pressure builds

Farmers are already responding by adjusting cropping strategies in response to higher fertiliser costs and uncertainty.

“They are reducing how much wheat they plant because it is a nitrogen-hungry crop. They are planting more feed barley… and pulses to actually put nitrogen back into the soils,” Voznesenski said.

Some farms are also cutting back crop planting or delaying fertiliser use in the hope that prices ease, though this can come at the cost of lower yields and lower crop quality.

Watch for flow-through to food prices

But while farmers are feeling the pressure now, the impact on supermarket prices is likely to emerge later, depending on how long supply disruptions persist, Voznesenski said.

“If we get to July… and fertiliser hasn’t come… or fertiliser prices haven’t come down… that is when the market is going to go: ‘there’s genuinely production issues’,” he said.

“As we move towards the end of the year, the longer this gets stretched out, the more of an impact it can have on commodity prices… and eventually, food prices as well.”

Read Dennis Voznesenski ‘s full research note: Stuck behind the Strait: Agriculture in the firing line.