Hormuz blockade drives 45% fertilizer cost split, stagflation fears mount

The Strait of Hormuz blockade has fractured global fertilizer markets — phosphate prices surged 25% on sulfur shortages while urea slumped 20% — as El Niño risks compound the threat of a 1970s-style stagflation cycle.

"Fertilizer supply chains are experiencing a structural divergence we haven't seen in decades, with the sulfur shortage for phosphate production being the most acute bottleneck," said Simon White, macro strategist at Bloomberg.

Before the conflict, roughly one-third of global urea and 15% of ammonia passed through the Strait of Hormuz. The 50% of global sulfur exports originating from the Gulf region has been the critical pinch point for phosphate producers, who rely on sulfuric acid as a key input. Brent crude has surged past $110 a barrel, adding transport and production costs across the agricultural supply chain. Before the war, roughly 15 million barrels of Persian Gulf oil passed through the strait daily, along with about one-fifth of the world's liquefied natural gas.

The dual supply shock — energy at multiyear highs and fertilizer costs diverging by 45 percentage points — threatens to reignite global food inflation just as central banks had begun preparing to ease policy. If El Niño triggers crop shortfalls in major producing regions, the combination could push headline inflation higher by an estimated 1.5 to 2 percentage points across emerging markets, according to historical analogs.

Fertilizer Markets Split 45 Points as Sulfur Shortage Bites

Urea's 20% decline reflects temporary buffers: global inventories remain elevated, Northern Hemisphere farmers completed pre-season purchases before the blockade, and China released additional supply that has capped prices. Ammonia, another nitrogen-based compound, has seen only modest price increases.

Phosphate's trajectory is fundamentally different. With half the world's sulfur supply trapped behind the blockade, phosphate producers face a raw material crisis that cannot be quickly resolved. The divergence means farmers planting nutrient-intensive crops such as corn and wheat face sharply higher costs, while those relying on nitrogen fertilizers for rice and grains benefit from urea's decline. This cost asymmetry will reshape planting decisions across the 2026 growing season, potentially reducing supply of phosphate-dependent crops.

Energy-Food Double Hit Revives 1970s Stagflation Playbook

The last time energy and food supply shocks converged was the 1973 oil embargo, when crude prices quadrupled and global food prices doubled within 18 months. While today's scale is smaller, the transmission mechanism is similar: higher energy costs raise fertilizer production and transport expenses, which feed into food prices, which then feed into core inflation.

Markets have already priced out expectations for Federal Reserve rate cuts this year, with the 2-year Treasury yield rising 40 basis points since the blockade began. Sovereign bonds have sold off across developed markets, equities have declined, and gold — typically a haven — has been sold alongside risk assets as investors hoard cash. This cross-asset liquidation mirrors the pattern seen during the 2008 financial crisis and the early stages of the Covid-19 pandemic.

Gulf oil producers are racing to build alternatives to the Hormuz route. Saudi Arabia's East-West pipeline, built after the Iran-Iraq war, is now running near its full capacity of 5 million barrels per day. The UAE is accelerating a $3 billion, 200-mile pipeline to the port of Fujairah on the Gulf of Oman, targeting completion by early 2027. Iraq is pursuing a pipeline to Ceyhan, Turkey, that could carry 2 million barrels per day. Goldman Sachs estimates these projects could allow 60% of the Gulf's prewar exports of 23 million barrels per day to bypass Hormuz by the end of 2028. But pipelines do nothing for LNG shipments, and alternative Red Sea routes face Houthi attack risks.

For emerging economies that depend on food imports, the risks are acute. Countries in South Asia and sub-Saharan Africa — already grappling with currency weakness and high debt costs — face the prospect of simultaneous food and energy inflation that could trigger social unrest and force central banks to choose between fighting inflation and supporting growth.

This article is for informational purposes only and does not constitute investment advice.