Middle East conflict: Impacts and implications for UK farmers

Conflict in the Middle East continues since the beginning of March. While there remains limited evidence of physical disruption to agricultural input supply in the UK, gas, oil and freight markets continue to be impacted with implications for agricultural input costs. Here, we cover the expected impacts on fertilisers, oil-based inputs and feed while considering the wider implications for farming.

• Since publishing initial analysis about the impacts of the conflict in the Middle East, tensions have continued to intensify

• Oil prices have been sitting around $100 a barrel over the past week; however strikes on gas plants have caused prices to increase to $110 a barrel on 19 March

• Gas prices, which are a key driver of fertiliser prices, are also impacted by the strikes, reported to be up around 20% on 19 March

• Shipping routes across the Strait of Hormuz continue to be limited. This is a key route for global supplies of oil, gas and urea

• In response to the conflict and expectations of a prolonged energy shock, the Bank of England has held interest rates at 3.75%

Fertiliser prices are impacted by rising gas prices, as gas makes up about 60% of costs in fertiliser production.

The UK also imports urea from the Middle East and North Africa where shipping and distribution may be disturbed.

Most arable farmers have bought fertiliser for this year; however the impacts will be felt by those who haven’t bought forward or as businesses start buying fertiliser for the next year.

Livestock farmers are more likely to buy fertiliser on the spot market due to storage constraints, so will be impacted by higher prices.

The potential of increasing fertiliser prices may impact on farm decision making about planting intentions and the efficiency of application.

Oil prices remain high, sitting around the $100/barrel mark for most of the past week. Strikes on refineries and plants has increased prices over the last couple of days to around $110/barrel.

Oil shipments are being impacted by restrictions on ships passing through the Strait of Hormuz.

The increasing oil price will impact farm business costs both directly and indirectly across fuel, heating oil, transport, plastic wrap and agrochemicals. The increase in diesel price will also affect haulage of both agricultural inputs and produce.

Anecdotal evidence shows that red diesel prices are increasing faster than white diesel prices. There are a number of reasons for this.

Since April 2022, restrictions on red diesel usage mean that a much smaller supply is produced and less stocks held in the UK. This means it is bought in as needed and is more exposed to market volatility.

In addition, the duty on red diesel is much lower than forecourt diesel which means oil makes up a larger percentage of the total price driving higher proportionate increases.

While the short-to-medium term outlook here is less clear due to strong global stocks, feed prices may be impacted by increases in cereal and oilseed prices, as well as increased haulage costs.

This will be felt most by feed-intensive sectors such as dairy and pigs, and we are monitoring it closely.

The Bank of England announced on 19 March that interest rates will remain at 3.75%.

The longevity of the conflict in the Middle East, along with the impacts on UK inflation, will ultimately determine the future impacts on interest rates.

Prolonged increased oil and gas prices would drive inflation and delay interest rates cuts, meaning the cost of borrowing stays higher for longer.

Delayed interest rate cuts could put pressure on capital finance, cash flow and investment.

Dairy prices may increase in the short term due to increased demand for skimmed milk powder (SMP).

Iran is one of the top four exporters of SMP globally, so buyers are seeking alternative supplies. Although prices are creeping up for dairy products, there may be long term impacts to margins due to increased input costs as previously discussed.

Since the conflict began, grain prices have edged a little higher, but there are larger gains for oilseed prices.

The stronger crude oil prices make biodiesel, including that made from vegetable oils, more attractive.

Changes to futures prices for cereals and oilseeds could change spring planting intentions for business but will require consideration on the relationship between output prices and key input costs such as fuel and fertiliser.

• The nitrogen fertiliser adjustment tool was developed to help decision making due to impacts from the conflict in Ukraine. The tool is based on RB209 fertiliser guidance and suggests changes to farm nitrogen rates

• Improved slurry and organic manure utilisations to reduce purchased nitrogen fertiliser. The Nutrient Management Guide (RB209) helps businesses make the most of organic materials and balance the benefits of nutrient use

• Using diverse forage systems is a way to cut input costs and build a more resilient business

• Maximising grassland utilisation and forage performance

• The weekly grain market report will be covering all developments in this area

• Keep up to date on fertiliser prices and analysis