The next crisis is agriculture: How the 'gas cutoff' at Hormuz could ignite South America’s grain silos

On March 19, Brent crude oil surged to $110 per barrel. Global attention focused on oil prices breaching $100, the U.S. dollar hitting $100, and soaring U.S. Treasury yields—yet few noticed another set of numbers quietly brewing: One million tons of fertilizer stranded in the Gulf region. Urea prices jumped 30% in a single week—the highest level since 2022. Fertilizer production lines in India and Pakistan were sharply curtailed due to natural gas shortages; Turkey began restricting exports to secure domestic supply. These figures point to a single conclusion: the energy crisis is now transmitting into an agricultural crisis—and this time, the most dangerous destination for the shockwave is not the Middle East or Europe, but South America. I. From Energy to Food: Three Transmission Channels To understand why a blockade of the Strait of Hormuz could trigger an agricultural crisis, we must first recognize three tightly interlinked transmission channels between energy and food. The first channel is fertilizer. Natural gas accounts for 60–80% of nitrogen fertilizer production costs. The Middle East is both a major global exporter of liquefied natural gas (LNG) and a leading exporter of nitrogen fertilizers such as urea. Approximately 30% of globally seaborne urea shipments pass through the Strait of Hormuz. When maritime traffic through the strait is disrupted, the problem becomes twofold: first, Middle Eastern fertilizer cannot be shipped out; second, fertilizer plants dependent on Middle Eastern natural gas cannot produce. Following an attack in early March, QatarEnergy suspended operations—directly causing severe output cuts at fertilizer plants in India and Pakistan due to insufficient gas supply. Major fertilizer producers—including Turkey’s and Europe’s Agrofert—have also begun scaling back capacity. According to shipping analytics firm Kpler, nearly one million tons of fertilizer are currently stranded aboard vessels in the Gulf region. Most fertilizer must be applied before crops begin growing; if it arrives late, it will miss this year’s spring planting season. The second channel is transportation. Energy prices further amplify food price increases via transport costs. Data show U.S. trucking costs have risen nearly 30%, while ocean freight costs have climbed 6–8%. In Brazil, inland freight accounts for 10–20% of export prices; given Brazil’s heavy reliance on road transport, diesel constitutes roughly half of trucking operating costs. Transport costs alone represent 2–3% of total food prices. This means that even without supply contraction, cost-driven inflation alone is sufficient to push up prices. The third channel is biofuels. Agricultural commodities serve not only as food—but also as energy. Take soybean oil, for example: as a key feedstock for biodiesel, its price correlates strongly with energy prices. Data indicate soybean oil rose ~10%, while diesel rose ~50%. When energy prices rise, agricultural commodities face not just cost-push pressure—but also demand-pull effects. Together, these three channels form a classic “energy–fertilizer–food” tripartite transmission mechanism. The Russia-Ukraine conflict in 2022 already demonstrated this dynamic once—and this time, South America is squarely in the shockwave’s path. II. South America’s Structural Vulnerability: Why Here? If the Middle East is the source of fertilizer, then South America is its endpoint. Brazil is the world’s largest fertilizer importer: approximately 85% of its fertilizer is imported, including about 20% from the Middle East. Argentina’s fertilizer import dependency exceeds 60%. When urea shipments from the Strait of Hormuz stall and global fertilizer prices surge, South American agriculture faces direct cost shocks. But this is only the surface cause.

Urea: Why is supply uncontrollable and exports unreliable?

Here we must separately address compound fertilizer—it is one of urea’s largest buyers. Yet compound fertilizer producers themselves are currently slashing prices to clear inventory, and their operating rates continue falling. Worse still, all three raw materials—nitrogen, phosphorus, and potassium—are declining in price. Compound fertilizer producers can no longer sustain their costs, so prices are softening—making them even more reluctant to buy urea: they now adopt a just-in-time procurement strategy, refusing to stockpile. When major buyers stop hoarding, spot-market urea becomes even harder to sell. The widening gap between supply and demand ultimately piles up in inventories. Enterprise stockpiles have surged to historically high levels for this time of year, and port inventories are rising too. Mounting unsold goods in warehouses are, in themselves, a sword hanging over prices—the higher the inventory builds, the harder it becomes for prices to rebound. There is another obscure yet highly useful indicator: 'days of backlog orders'—i.e., how many days’ worth of already-confirmed but undelivered orders a factory holds. The lower this number, the more order-starved—and thus price-cutting—factories become. Currently, mainstream producers hold only just over six days of backlog orders—down more than 10% year-on-year and near the lowest level of the year. This signals that factories’ 'remaining inventory' is dwindling; to fill orders, their incentive to cut prices and offer concessions grows stronger. Ultimately, demand-side weakness transmits through this metric, gradually forcing spot prices downward. So where is the floor for prices? We must look to costs. Urea is produced via two main routes: coal-based ('coal-head') and gas-based ('gas-head'), with coal constituting the largest cost component. Currently, anthracite coal prices remain relatively firm—meaning the cost floor has not yet collapsed. Prices are now hovering right at the cost line: integrated profits have plunged to losses of over RMB 100 per ton, and even coal-head theoretical profits are negative. In other words, any further decline would constitute a 'bleeding price.' We must clarify urea’s two production origins. Coal-head urea uses coal for syngas generation; gas-head urea uses natural gas. Cost-wise, coal-head production falls into two generations: older 'fixed-bed' technology (costlier), and newer 'advanced coal gasification' (more economical). With anthracite prices holding firm, both coal-head routes are losing money—though fixed-bed plants suffer deeper losses. Gas-head plants, meanwhile, face winter gas rationing for residential heating: tighter gas supply and higher gas prices either force production cuts or inflate costs. Thus, every winter, market participants trade on 'production cut expectations' for gas-head plants—a recurring supply-constriction narrative. Digging deeper into cost structure: coal remains urea’s dominant cost driver, and coal prices over recent years have undergone a 'structural upward shift in the high-price range'—even short-term corrections occur against a higher baseline than previous years. This implies urea’s 'cost floor' is itself being lifted by coal prices. Hence, a common market saying goes: 'Urea prices hug cost levels, and cost levels hug coal prices.' To assess whether this floor is solid, it is more effective to monitor coal prices than urea itself: if coal prices soften, the cost floor will follow downward; if coal prices stay firm, the floor remains supported. Given widespread losses, why haven’t producers cut output? This circles back to a perennial dilemma: whoever shuts down first forfeits market share—and long-term contracts—to competitors. Moreover, if export demand rebounds unexpectedly, idling plants would miss the rally. So producers prefer to operate at a loss rather than shut down first. This collective 'supply-side restraint from cutting output' is yet another reason why urea’s bottoming process drags on. Let’s briefly explain why everyone watches India. India is the world’s largest urea importer—and a key buyer for Chinese urea.

AGF Nitrogen Weighs Production Shutdowns Amid High Gas Costs, Demand Slump

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AGF Nitrogen halted ammonia production lines and faces further shutdowns due to soaring natural gas costs and weak demand. As Europe's second-largest fertilizer maker, the company is pausing investments and urging EU intervention amid falling sales.

reuters

2026-11-04

AGF Nitrogen Weighs Production Shutdowns Amid High Gas Costs, Demand Slump

AGF Nitrogen Weighs Production Shutdowns Amid High Gas Costs, Demand Slump

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