The world's farms are about to be hit by a triple whammy that could cause food prices to spike even further next year.
Farms have already been dealing with a broad set of challenges brought on by the Iran war, which has reduced shipments of fertilizers that normally pass through the Strait of Hormuz. But new pressures are coming to bear that could raise costs for farmers, according to a new report released Monday by S&P Global. That, in turn, would increase grocery bills for consumers worldwide.
Three big factors are likely to exacerbate the problems that have plagued the agriculture sector. The Strait of Hormuz remains mostly closed, reducing fertilizer shipments as the Southern Hemisphere's farming season begins. About half of the global sulfur trade runs through the strait, as well as around 29% of urea, the most widely used nitrogen fertilizer, according to S&P Global.
Secondly, the weather is about to take an extreme turn. Forecasters say that an El Niño weather pattern has already begun to change temperatures and precipitation, and will likely cause some parts of the world to fall into drought, while others receive excessive rain. Both could have impacts on crop yields. In Australia, wheat output could fall to 22 million tons, versus current expectations for 28 million, S&P Global says. Rice crop yields in South and Southeast Asia could fall short too, though soybean production could actually rise next year if Argentina gets a lot of rain, according to Capital Economics.
And lastly, a shortage of diesel brought on by the wars in Iran and Ukraine is making farming more expensive -- farmers use a lot of diesel for their tractors and combines, and when those costs go up it tends to increase the price of food, too. High-priced diesel also could have another impact on farmland. Because the fuel is so expensive, farms may divert more of their cropland to making biofuels that can replace diesel. If so, there would be less acreage available for food, potentially causing supplies to drop and prices to rise.
"Energy, fertilizer, food -- these things are all interacting," said Dan Yergin, vice chairman at S&P Global.
The crisis could hit soon. The Northern Hemisphere may be in harvest season, but Southern planting regions around the world are getting ready to apply fertilizer.
"The main application season for Brazil is coming up now, and it's all going to be based on super expensive fertilizers over the summer," said Allen Pickett, head of fertilizer analysis at S&P Global, in an interview. "And this is all relevant to other Southern Hemisphere nations like Australia, or South Africa as well."
Fertilizer shortages can help some fertilizer companies, like CF Industries, depending on how much of its own production is affected by any disruptions. But food companies like Tyson Foods could be hurt.
These issues are unwelcome news for the agricultural industry and consumers alike.
In the U.S., food inflation has risen 2.5% in the past year, with large jumps for beef and some other products. Ground beef prices hit a record high in August. But in the coming year, the rate of food inflation is set to rise, potentially to over 3.5%. The squeeze could get particularly bad if fertilizer remains in short supply early next year, when the Northern Hemisphere gets ready for its next planting season.
"It will make U.S. beef more expensive because all of the input costs for U.S. beef will go up," Pickett said.
Pressures on agriculture have already made some kinds of food much pricier. Next year could be worse.
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