Strait of Hormuz food supply impact: summary
- Iran’s closure of Hormuz sharply drives global energy prices higher
- Rising oil costs push soybean oil prices upward through energy correlation
- Blocked trade routes threaten wheat and corn flows into region
- Dairy and seafood imports face major disruption from halted shipments
- Energy shock raises transport costs and disrupts Asia‑Europe food supply
Following swathes of attacks from the US and Israel, Iran has effectively shut down the Strait of Hormuz. According to country officials, any vessel that tries to pass through the key transport route will be set ablaze.
For the world’s busiest oil shipping channel, the closure has an immediate impact on energy markets. Crude oil and gas prices are already up, with natural gas in Europe jumping 39% in one day.
There’s an obvious ripple effect on the production of energy-intensive products, many of which are used by food and beverage makers, like glass and plastic. But food commodities themselves are also vulnerable, with local producers under threat and freight between Asia and Europe disrupted. Which are worst affected?
Commodities under immediate threat
Soybean oil: The first food product to skyrocket in price is soybean oil, used widely in cooking and industrial food production for frying, baking and roasting. It’s also a common ingredient in margarine, salad dressings, mayonnaise, and various packaged snacks.
Soybean oil is also a major feedstock for producing biodiesel and renewable diesel, meaning it competes directly with petroleum-based diesel. So when oil prices rise, so too does the price of soybean oil.
“Soybean oil is a market that is positively correlated with crude oil,” explains Toisin Jack, director of market reporting at Expana. The market analyst has already seen soybean futures surge – in Chicago, to the highest level in over two years. “Spot prices for soybean oil will be driven by energy prices.”
Wheat and corn: When it comes to grains like wheat and corn, two of the most consumed globally, the threat comes in the form of blocked trade. The Middle East is key to global food trade, and it’s expected the ongoing conflict will disrupt import flows. This could occur in one of two ways, explains Expana’s Jack: either by Iran physically blocking the passage, or more broadly by a drop in import volumes due to escalating insurance costs.
“We’ve already seen wheat and corn futures have moved slightly higher,” says Jack, adding that traders are reporting they’re already building in risk due to geopolitical uncertainty.
Dairy: The dairy market is already reacting to the growing conflict in the Middle East. Iran is the fourth-largest skimmed milk powder exporter for end markets in the region, which could mean a skimmed milk powder shortage is on the horizon.
In terms of imports, New Zealand is a major supplier to the region. Dairy major Fonterra says that although it’s well-versed in coping with supply chain disruptions, the situation remains “unpredictable” – a variety of scenarios could play out in the coming days, weeks, or longer.
Seafood: Seafood is another sector under threat. The primary concern is not production, but the halting of shipments which could suppress Middle East and North Africa imports for weeks. Seafood flows are already being affected, says Expana’s Jack.
Foods and related sectors to watch
Red meat: For the same reason that the Strait of Hormuz’s closure threatens the seafood sector, it’s also an issue for meat. Both products are perishable, and extremely vulnerable to shipping delays. Red meat, says the commodities analyst, is a “watch and see” situation.
The Middle East is one of the world’s largest consumers of lamb, especially for halal products. Major suppliers include Australia and New Zealand, where exporters are putting deliveries on hold.
Freight logistics, ranging from shipping routes to delays and costs, are expected to be the primary factor impacting the red meat supply chain, says Expana’s Jack. “We’re waiting for the data to come in, and market players are watching closely.”
Fertiliser-intensive crops: Fertiliser production is another one to watch in the coming weeks. The Middle East is the world’s largest producing and exporting region of sulphur, which is widely used in fertilisers.
“Sulphur is very important for fertiliser production,” says Jack. “Impacts on refineries are causing concerns for sulphur production. Any reaction will impact prices.”
In Saudi Arabia, a major refinery was struck by debris from intercepted Iranian drones yesterday. The impact could ripple throughout the fertiliser sector. Food makers should keep an eye on pricing for fertiliser-intensive crops, which include common grains like corn and wheat, as well as sugar, potatoes and some vegetables.
Plastic packaging: As energy prices soar, plastic prices are expected to be impacted. Plastic production is heavily reliant on crude oil and refined products as feedstocks. If crude oil prices continue to rise due to conflict-related supply concerns, Expana is betting on the price of plastics to rise in tandem.
Food and drink products that rely on plastic packaging – and a quick stroll down the supermarket aisle suggests that’s the majority – are likely to face energy-driven cost increases.
Foods packaged in glass: Another type of packaging, glass, is also under threat. Jack has already observed price impacts in glass – a material made through a highly energy-intensive process. That’s likely to have an impact on beverage manufacturers, including alcohol given much beer and almost all wine and spirits are sold in glass.
Energy shock to have ripple effects across food
First and foremost, the closure of the Strait of Hormuz is impacting energy. The price of natural gas has skyrocketed, with Qatar announcing it’s suspending liquefied natural gas (LNG) production. “A prolonged shutdown could trigger a major gas market shock,” says Expana senior market reporter Andrew Woods.
Energy-intensive downstream industries will be concerned about their ability to procure natural gas. And the same applies for gas, with Bent crude oil pricing spiking after the weekend.
When energy supply is constrained, transport costs also rise. And if companies are forced to extend transport routes to avoid dangerous shipping channels, those costs compound. That’s an issue for any food or beverage company trading with the Middle East. “Shipping rates are going up massively,” says Woods. “Rerouting increases freight rates and transit times,” he explains, adding that it can also result in a shortage of ships. “It makes transporting goods incredibly difficult.”
As to which region is likely to be most heavily affected, Middle East aside, the answer is very clear: “The bottom line is Asia and Europe face disruption if the Strait of Hormuz remains closed.”
