Ships carrying critical agricultural inputs must start moving through the Strait of Hormuz as soon as possible to ward off the risks of a dangerous spike in food price inflation later this year that could trigger a cascade of effects similar to the aftermath of the COVID-19 pandemic crisis, according to the Food and Agriculture Organization of the United Nations (FAO).
“The clock is ticking,” and crop calendars put poorer countries most at risk of scarce and pricey fertilizer and energy inputs, FAO Chief Economist Maximo Torero said in a wide-ranging podcast published Monday with David Laborde, Director of FAO’s Agrifood Economics Division.
“The last thing we want is lower crop yields and higher commodity prices and food inflation for the next year,” Torero said, noting that would likely force countries to put policies in place to lower domestic food prices, triggering higher interest rates and as a result potential slower economic growth around the world.
The latest FAO Food Price Index covered the month of March and was relatively stable thanks to ample supplies of most food commodities, especially cereals. But pressure is rising in April and will intensify in May as “farmers will make decisions” on whether to switch planting choices to adapt to fertilizer availability as well as whether to allocate more land and resources to biofuels to benefit from higher oil prices but curtailing global food supplies.
“We are in an input crisis; we don’t want to make it a catastrophe,” said Laborde. “The difference depends on the actions we take.”
FAO urged all countries to closely ponder biofuel mandates and above all to avoid export restrictions on energy and fertilizers.
If the standoff in the Strait of Hormuz is not quickly ended, anticipatory actions should be considered, in particular asking multilateral institutions to provide financing to countries at risk of losing access to basic fertilizer inputs given their planting has started. The International Monetary Fund’s balance of payment facilities, and the Food Shock Window, following the Food Import Financing Facility FAO’s suggested in 2022, could be used as an input-financing facility allowing countries that need fertilizers today to get them quickly without triggering distorting subsidy competitions, Torero said.
FAO has already developed a crop calendar-based prioritization of countries based on when and how much fertilizer they need.“The risks are very clear,” Torero said. “If we don’t accelerate…, the risks will exacerbate.”
Key takeaways
Exports of between 20 and 45 percent of key agrifood inputs rely on sea passage through the Strait of Hormuz.
If farmers produce with fewer inputs, there will be lower yields later this year and in 2027, with higher food commodity prices and retail food inflation likely for the next few years.
Most farmers already face thin margins and if they are bankrupted the world food supply situation will be worse for longer.
Trade and export restrictions exacerbated food price spikes in past crises, as efforts to insulate domestic markets from world markets worsened global conditions.
Fertilizer and energy markets are inelastic, so prices can rise much more than changes in traded volume imply. Markets are likely to react very quickly if vessels do not move through the Strait soon.
Unlike natural disasters or climate stressors such as El Niño, the Strait of Hormuz blockade “is something governments can resolve and have to resolve,” Torero said.
Farmers already face thin margins and if they are bankrupted the food supply situation will be worse for longer.
The risks today are notably greater than in 2022, and conditions are present for a “perfect storm” if the current situation is also affected by a strong El Niño rivaling or exceeding the pandemic crisis.
The 30-minute podcast can be accessed here.
