On May 28, the Federal Trade Commission announced an ill-considered investigation into fertilizer pricing in light of rising farming and food costs. This inquiry is unwise, not because people are facing food affordability challenges. Rather, the circumstances creating the drastic rise in critical farm supplies are primarily the result of a confluence of escalating geopolitical conflicts restricting the development and delivery of inputs for fertilizer and food production.
The Middle Eastern conflict that accelerated this challenge in February has given the public an instructive lesson in what transpires when global supply chains are disrupted.
Shipping through the strategically located Strait of Hormuz is constricting the flow of oil and fertilizer, as well as other essential inputs for fertilizer such as sulfur, ammonia, and urea. Beyond that, there are political and economic bottlenecks just as debilitating that will not only affect the price we pay at the pump but also what we pay at the grocery checkout line.
These man-made disruptions are a continuation of similar disturbances that have roiled supply chains since the global shutdown for COVID-19. First, the hoarding of toilet paper evolved into the anchoring of dozens of ships offshore, waiting to unload their cargo for want of harbor capacity. Now, ships no longer want for harbor space, but for safe passage through global trade routes. There has been a roughly 90% collapse in tanker traffic in the Persian Gulf within days of the start of hostilities with Iran.
As these disturbances cause rising prices and declining supply, politicians have reacted predictably. Progressives have targeted vitriol at the Trump administration and at American oil companies, grocers, and fertilizer manufacturers, claiming all are price-gouging consumers. On the other side of the political aisle, the Trump FTC is leading this particular inquiry.
While criticizing isolated cases is politically convenient, the verbal attacks ignore the true root causes of the price increases. These go beyond even the struggles in the Strait of Hormuz. They specifically overlook circumstances such as a drought in the Great Plains, the Russia-Ukraine conflict, and the unfortunate placement of key manufacturing inputs in hostile nations or regions. All of these factors have come together in a perfect storm to work against global supply chains.
Take the global market for fertilizer as an example. The competing blockades in the strait are blocking an estimated 1.3 million metric tons per month. There are also one million tons of granular sulfur, a key ingredient for fertilizers, loaded onto vessels unable to exit the strait.
Roughly 35% of global monthly exports of urea, a nitrogen-rich fertilizer, must pass through this dangerous gauntlet. Likewise, up to half of all global sea-borne sulfur, 17% of global production, originates in the region. If that were not enough, there is also the increased cost of insurance to secure delivery, the price of which nearly quintupled between February and early May.
Other geopolitical conflicts are intensifying the situation. In a recent twist in its war with Russia, Ukraine has used drones to attack the Russians’ nitrogen, energy, and ammonia facilities. As facilities key to producing global fertilizer become battlefield targets, farmers lose access to needed inputs and consumers are faced with higher prices.
The prospect for clear passage through the strait is not without difficulties, either. Up to 70% of sulfur on ships stuck in the strait is subject to existing quarterly contracts. Thus, pricing is already set. While buyers face delays, their orders won’t get canceled. The remaining tonnage is available at spot-market prices. When the strait reopens, the sulfur market will face the possible short-term supply corrections, including, ironically, temporary oversupply.
The Fertilizer Institute CEO, Corey Rosenbusch, testified at a recent Senate hearing, noting that “fertilizer is a commodity sold in bulk, so farmers are largely unaware of its geographic source once it reaches their field. The nitrogen, phosphate, and potash made in the United States are physically indistinguishable from fertilizer that comes from Qatar, Russia, or elsewhere in the world.” Given that the needed inputs for fertilizer are therefore source agnostic, it is misguided to level any punitive treatment on fertilizer sources, foreign or domestic.
FDA’S SUNSCREEN DECISION PROVES THE AGENCY IS DONE BURNING PATIENTS’ WALLETS
If there is a silver lining in all of this, it will come if nodes along supply chains operate under the influence of market forces. Sky-high prices today will induce production from private suppliers, helping reduce prices. At the end of the chain, farmers and other users of fertilizer, fuel, and other elements will adapt to high costs and shortages. U.S. farmers have already shifted production from wheat to less-fertilizer-intensive crops such as soybeans and peas. Likewise, the Agriculture Department projects corn acreage will fall 3% this year.
Unfortunately, the supply chains currently under siege show no signs of easing, and until that occurs, the forces affecting the affordability of food will not cease. Public officials should tailor their proposals and rhetoric accordingly.
James C. Allen is an entrepreneur and owner of Delahaye Advisers, a financial consultancy based in Charlottesville, Virginia.