As instability in the Middle East sends international fertilizer feedstock prices surging, upward pressure on agricultural products and food prices is mounting in the second half of the year. There are concerns about structural effects in which rising fertilizer prices lead to higher agricultural production costs and food input costs.
According to the government and related industries on the 5th, after the outbreak of war among the United States, Israel, and Iran, prices of urea, a key raw material for nitrogen fertilizer, have jumped, increasing the burden on farms. According to the global economic indicator platform Trading Economics, as of the 30th of last month, the price of urea stood at $690 per ton (t). Compared with the $531.5 recorded on the 27th of last month, it rose 29.8% in one month. Compared with the same period a year earlier ($385), it soared 79.2%.
Urea is a key raw material for nitrogen fertilizer, and with virtually no substitutes, farms are directly affected when prices rise. If fertilizer input decreases, it can lead to lower yields, making higher production costs unavoidable. According to the Ministry of Agriculture, Food and Rural Affairs, Korea's dependence on the Middle East for imports of fertilizer-grade urea is 43.7%. Of that, 38.4% passes through the Strait of Hormuz.
With the war among the United States, Israel, and Iran stretching beyond a month, the blockade of the Strait of Hormuz is increasingly likely to affect fertilizer supply. About 25% of global nitrogen fertilizer trade is known to pass through the Strait of Hormuz. Fertilizer lacks a robust strategic stockpiling system, making it vulnerable to supply shocks. A reduction in fertilizer supply leads to lower grain production, which can push up feed prices and, in turn, raise prices of livestock products and processed foods.
In fact, as international grain prices surged due to the 2022 Russia-Ukraine war, domestic feed prices rose sharply, leading to higher prices for livestock products and processed foods. With the domestic grain self-sufficiency rate at only about 20% and most feed grains relying on imports, international price fluctuations are directly reflected in domestic food prices.
The government has moved to stabilize supply and demand. Vice Minister Kim Jong-gu of the Ministry of Agriculture, Food and Rural Affairs visited a fertilizer company in Janghang-eup, Seocheon County, on the 25th of last month to check the supply of fertilizer raw materials and production status. Kim said, "We are working with related ministries to devise the necessary support so that there are no disruptions to farming activities and fertilizer production," adding, "We ask the industry to do its best to stabilize raw material supply and production."
The food industry is still taking a wait-and-see approach, but it is concerned that if higher fertilizer prices are reflected in wholesale prices of agricultural products, cost pressures will grow. With profitability in the food sector already deteriorating due to the recent domestic demand slump and rising raw material prices, along with the government's price stabilization stance, companies say this is an additional blow. There are also concerns that consumer food prices, which the government has moderated through its price stabilization stance, could rise.
A food industry official said, "There has not yet been a direct impact on the industry. However, given that spring is the time to begin sowing and that vegetables have short storage periods, a prolonged deterioration in international conditions, such as a blockade of the Strait of Hormuz, could affect future costs," adding, "For processed foods, higher costs are not immediately passed on to consumer prices. But if cost increases persist, there is a high possibility that product prices and consumer inflation will reflect them starting in the second half of this year."