Rising fertilizer and fuel prices in the wake of the conflict in the Middle East are squeezing farm margins, which is likely to curb input application rates, weaken crop yields, lower crop production, and eventually lift food inflation, ANZ Research said in a Tuesday report.
In the year to date, fertilizer prices are up nearly 30% in the US, remaining just under 20% below the peak reached in early 2022, per the report. Fertilizer prices are up even higher in other markets.
Australia's wheat area is already set to shrink, with production facing further downside if tighter input supply and El Niño climate conditions worsen. Higher fertilizer costs will also accelerate a shift away from fertilizer-intensive grains towards oilseeds and pulses. Fertilizer intensity for corn and rice is around three times higher than that for soybeans and pulses.
The Bloomberg Grains Subindex is showing year-to-date gains of only 5% to 6%. This is squeezing farm profitability globally, ANZ said. Grain prices are expected to rise gradually and remain higher for longer if there is no de-escalation of the conflict.
With the latest surge in prices, demand is expected to moderate by around 3% to 199 million tonnes in 2026, ANZ said. Countries that rely heavily on fertilizer imports from the Persian Gulf, such as Australia and New Zealand face supply bottlenecks.
Australia imports around 85% of its fertilizer needs, and over 60% of the urea used in Australia's fertilizers is sourced from the Middle East. The area planted with wheat is estimated to fall 5% year over year to 11.8 million hectares. If weather conditions deteriorate, wheat production could fall by over 20%, ANZ said.