The rise in fertilizer prices threatens food costs

BarcelonaThe cost of producing food is expected to rise in the coming months due to the war in the Middle East. The reason is the dependence of world agriculture on fertilizers, some of the main producers of which are the Persian Gulf countries. The export of these chemical products has been as affected as oil by the conflict, which has led to price increases that will likely be passed on to the final price of food.

Most fertilizers are made from hydrocarbons. As with oil and gas, the problem for the fertilizer sector is twofold. On the one hand, the military escalation has destroyed hydrocarbon extraction, processing, storage, and refining facilities, which also has an impact on fertilizer production. On the other hand, the closure of the Strait of Hormuz by Iran prevents the transit of ships from producing countries, such as Saudi Arabia or Qatar, to the rest of the world.

Concern in the sector is high, not only among European producers but also among farmers, who are the main users of these substances. The fear is that the increase in agricultural fertilizers that already occurred when Russia invaded Ukraine –two producing countries– in February 2022 will be repeated, which caused an increase in food prices and the cost of living for families.

It should be noted, however, that although it is an important producing region, the Middle East is not where most fertilizers are manufactured. The market is led by East Asia, with countries like Indonesia and China. Other states, such as Russia, Canada, or the United States are also producers. The difference is that, in the Middle East, most of the production is sold abroad. In the other cases, however, a significant part –if not all– does not leave the domestic markets, and the European Union is particularly dependent on the foreign market.

Thus, Hormuz is "one of the most important maritime strategic points for global fertilizer trade," stated the National Association of Fertilizer Manufacturers (Anffe), the Spanish employers' association for the sector, last Monday in a statement. The strait is also "a pillar" for the transport of products necessary "for agriculture," the organization added. Specifically, slightly more than a third of urea – one of the most widely used fertilizers on the planet – that is traded worldwide exits there each year, while almost a quarter of ammonia and 18% of ammonium phosphates, two also essential components, also pass through it. In the case of Spain, most of the urea consumed comes from other parts of the world, but if a part of global production is blocked by the war in Iran, the price will rise globally, which will affect all fertilizer manufacturers regardless of where their suppliers are located.

According to Anffe, producers in Spain themselves are concerned about the situation in the strait, which remains almost closed despite the US administration's ceasefire attempts to allow it to be reopened, even if only partially. "The impact [of the closure of Hormuz] could increase and affect business activity," warned the employers' association, which predicted "the closure of some production plant" if it were prolonged for a long time.

Petition to Brussels

Faced with the possibility of rising fertilizer prices, France and Italy have led a petition to the European Commission to suspend the Carbon Border Adjustment Mechanism (CBAM), a demand to which the Spanish government has joined. CBAM is the EU regulation that obliges European importers of foreign products to pay a tax for carbon dioxide emissions resulting from the product's manufacturing. The rule seeks to reduce the environmental impact of European trade and puts foreign exporters on an equal footing with European producers operating within the common market, as the latter also pay a tax on greenhouse gas emissions.

The Franco-Italian demand, however, has not been well received by Brussels. The Commissioner for Agriculture and Food, Christophe Hansen, opined that a suspension, even if temporary, of CBAM on fertilizers could "worsen" European dependence on imports from third countries, although he announced that the Commission will draw up a plan with "short-term" and "structural" measures to ensure that European farmers and producers have access to the fertilizers and raw materials they need.

Furthermore, the commissioner advocated for "strengthening production" within the EU and promoting the use of "bio-based and low-carbon fertilizers".