Amid the ongoing US-Israel conflict with Iran, renewed tensions at key maritime blockade points have once again increased pressure on vital global supply chains. Global oil, liquid natural gas and fertilizer traffic has been severely disrupted due to disruptions in the Strait of Hormuz, the key maritime link between the Gulf and the world economy. According to UNCTAD, about 38% of crude oil, 13% of chemicals such as fertilizers and 2.4% of dry bulk including grains are transported through the Strait of Hormuz. With the rise in natural gas prices, the prices of selected nitrogenous fertilizers have increased significantly, making their access particularly poor for less developed countries such as Sudan, Somalia, Tanzania and Mozambique. The data also indicates that Asia remains highly dependent on Gulf fertilizer exports, raising broader risks to agricultural production in the year ahead. As the largest importer of urea and diammonium phosphate (DAP) in the world, India is already looking to diversify purchases from countries like Indonesia, Belarus, Russia and China. With rising input costs, rising agricultural costs and supply side shortages in food production have resulted in the threat of dual food inflation globally. Any further extension of the conflict would adversely impact global food supply chains and water availability for West Asia, potentially increasing food and water insecurity.
The closure of the Strait of Hormuz highlights the vulnerability of the Middle East’s deep reliance on food imports and single trade corridors. Although lessons learned from past global shocks have led to increased domestic food storage capacities and diversified trade routes, these strategies are not immune to increasing logistics pressures. All GCC states have reportedly built up strategic reserves to weather the crisis for six months. However, not all GCC countries have geographic access to alternative shipping routes for food imports. Saudi Arabia’s access to the Red Sea and Oman’s ports on the Arabian Sea provide a partial buffer, but without this advantage countries will need to rely on re-exports from Saudi Arabia or Oman. GCC countries are actively creating alternative sea-road gateways, but these alternatives are unlikely to be sustainable in the long term, lack the capacity to absorb the full trade diversion and are already facing bottlenecks. Along with the rerouting of other food imports through the Cape of Good Hope, fuel and transportation costs have increased, causing food prices to rise.
Water is another emerging issue of concern, surfacing through attacks on physical infrastructure and quietly embedded in food trade patterns. Recent attacks on desalination facilities in Bahrain and Iran raise questions about the sustainability of highly centralized water management and distribution strategies, especially since GCC countries depend on desalination for up to 90% of their freshwater needs. Apart from kinetic attacks, another concern lies in the long-term effects of virtual water importation. As a water-scarce region, the GCC relies heavily on imports of water-intensive products such as meat and grains from water-abundant countries such as Brazil and India. If the conflict escalates beyond grain storage limits and encroaches on the global harvest season, the Gulf risks losing a portion of its water budget, at least temporarily. With rising global fertilizer prices and increasing climate impacts in producing economies, future crop yields could be weakened and major exporters from outside the region could be pressured to halt food exports, as they previously did during the Russia–Ukraine conflict.
The conflict threatens to adversely affect the food security of its Middle East and North African and South Asian (MENSA) neighbours. If the Gulf chooses to increase its agricultural imports from MENA countries such as Morocco, Egypt, Sudan and Jordan, it would lead to an increase in domestic food inflation, rising to levels elevated before the Russia-Ukraine war and the Covid-19 pandemic. Additionally, the Gulf is home to migrant workers from India, Bangladesh and Pakistan, where remittances account for between 3.4 and 9.4% of their national GDP. Even citizens of Egypt, Yemen and Sudan will be affected, as remittances account for between 7.6-15% of their GDP. Uncertainty about migrant income from Gulf workers or the ability to secure work contracts is likely to reduce remittances sent home, putting pressure on household food security.
The conflict in West Asia has far-reaching implications for global food and agricultural supply chains. With food and energy supply chains closely interconnected, energy disruptions through the Strait of Hormuz have led to rising crude oil prices, fertilizer shortages and increased logistics costs, leading to inflation and higher retail food prices.. Higher fertilizer costs are likely to have a detrimental impact on farmers around the world, as they face lower profit margins, often leading them to choose lower-cost crops. Many export deals of agricultural commodities to different countries have also failed due to the chokepoint. Nearly 400,000 metric tons of Indian basmati rice is stuck at ports due to rising freight costs. This largely affects the top five importers of Indian Basmati rice, which include Saudi Arabia, Iran, Iraq, UAE and Yemen. Additionally, approximately 200 containers of perishable goods such as onions, bananas and grapes from India were stranded in ports and holding zones with uncertain outcomes. Similarly, the post-conflict rise in oil prices has had a severe impact on Brazil’s ethanol-sugar demand – pushing up the prices of basic food items. On the other hand, higher logistics costs also increase the risk of higher global grain prices and reduced availability, as Brazil remains the largest supplier of corn and soybeans. For the Sri Lankan tea industry, the conflict has disrupted major shipping consignments of Ceylon tea to the Gulf region, resulting in lower prices for Sri Lankan farmers. In Australia, rising oil prices have raised concerns about food shortages, following farmers’ inability to transport food across the country. The country faces the risk of “going back to the 1940s” when it comes to rationing to deal with food shortages that occurred during World War II.
For West Asia, global food supply chain disruptions underline the need to explore multi-origin procurement systems for cereals, edible oils and pulses by securing supply chains in South Asia, Europe, East Africa and Latin America. Additionally, investments in building last mile inland distribution systems and dedicated food corridors can improve connectivity to alternative ports. At the global level, food security-focused trade agreements should be encouraged to reduce the risk of global food inflation and expand market access to enable farmers around the world to receive fair prices for their produce. The WTO Trade Dialogue on Food concluded that “trade in food is a moral obligation”, underscoring that the multilateral trading system is vital to prevent declines in global food supplies. Trade facilitation agreements in the food sector can address long-standing concerns such as tariff increases, export restrictions and the need for standardized, fast-track and transparent rules on traceability, quality and phytosanitary measures, especially during a global crisis. In addition, FAO proposes a Food Import Financing Facility (FIFF) as an emergency financing mechanism for eligible food-import-dependent countries by providing balance of payments support for essential food imports during a global crisis, allowing countries to continue importing through normal commercial channels.
Commodity market exchanges can help manage risks for farmers and importers by allowing flexibility, providing symmetric information and avoiding panic selling. The heavy reliance on global supply chains for chemical fertilizers also underlines the need to promote climate-smart agricultural practices. Measures such as nutrient management, regenerative farming, bio-fertilizers and precision farming can help reduce the need for chemical fertilizers in the long run. Improving supply-chain infrastructure along nodal trade routes, including storage facilities, digital logistics networks, warehousing and cold chains, can mitigate the impact of geopolitical shocks by extending the shelf life of commodities and enabling real-time tracking and demand forecasting.
This article is written by Shruti Jain, Associate Fellow, Center for Development Studies, Observer Research Foundation and Leigh Mante, Junior Fellow, Energy and Climate Change Programme, Observer Research Foundation, Middle East.
