The Iran war's most insidious economic aftershock may not be measured in oil price spikes or shipping costs, but in the price of the nutrients that grow the world's food.

A sharp and sustained surge in fertiliser prices, driven by the closure of the Strait of Hormuz and the curtailment of Middle Eastern gas production, is set to drive a wave of food inflation that will arrive gradually but persist long after a ceasefire — with its heaviest burden falling on the economies least equipped to bear it.

That is the central conclusion of a note published by Capital Economics, which warns that while the fertiliser shock will not approach the severity of the price spike that followed Russia's invasion of Ukraine in 2022, its macroeconomic consequences will be most acute in lower-income emerging markets across Sub-Saharan Africa and South Asia, where the combination of large agricultural sectors, high food weightings in consumer price baskets and fragile external positions creates compounding vulnerability.

The nitrogen crisis

The arithmetic of the fertiliser shock begins with natural gas. Inorganic fertilisers are typically divided into three categories based on their primary macronutrient: nitrogen, phosphorus and potassium, or potash. Of these, nitrogen-based fertilisers are by far the most exposed to events in the Persian Gulf, because their production is highly energy intensive and relies on natural gas as a direct feedstock.

The price of urea — the world's most widely used nitrogen fertiliser — jumped to around $700 per metric ton, from $400 to $490 before the war began, according to analysts working in the sector. Capital Economics estimates the overall increase at more than 50% since hostilities began — a reflection of two compounding factors: the energy intensity of nitrogen fertiliser production and the fact that approximately 15% of global nitrogen fertiliser output originates within the Middle East itself.

The supply disruption is severe and unusually concentrated.

"We have seen Iranian production shut off. They shut down their gas fields as a precautionary measure. That means their nitrogen production goes offline. Israel did the same to their gas field. So, they're not a nitrogen manufacturer, but Egypt relies a lot on them. They're the fourth-largest exporter in the world. They had to shut down their production. So, we lost numbers three and four for global exporters and very quickly because of these strikes," said Josh Linville, vice-president of fertilisers at StoneX.

Egypt and Iran together accounted for almost 20% of global urea trade last year, according to Chris Lawson, head of fertilisers at consulting firm CRU Group.

QatarEnergy has also announced a halt to downstream urea production following its decision to suspend LNG output after Iranian strikes on its Ras Laffan facilities. China, meanwhile, has moved to restrict fertiliser exports to protect its domestic supply, removing another potential source of relief from the market.

Capital Economics warns that the damage to Qatar's gas infrastructure means supplies of nitrogen-based fertilisers will not return to normal as soon as the Strait of Hormuz reopens — a point that distinguishes this shock from a simple logistics disruption.

Other fertiliser categories, including phosphate and potash, are less energy intensive and less directly exposed to Middle Eastern supply chains, though phosphate production does use sulphur, a meaningful share of which originates from the region, and their prices have also risen.

A survey by the American Farm Bureau Federation found that 70% of US farmers say the price of fertiliser has grown so high that they will not be able to afford all they need for the 2026 planting season.

The transmission channels

Capital Economics identifies three routes through which higher fertiliser prices ripple into the broader economy.

The first — lower fertiliser application and reduced agricultural yields — is likely to be less significant than feared in the near term for many major producers. China and Russia are broadly self-sufficient in fertiliser production. India entered the crisis with large stocks. And the key southern hemisphere producers — Australia, Brazil and Argentina — will not require substantial fertiliser volumes until their planting seasons begin later this year, providing a buffer.

The second channel — food price inflation — is potentially the more consequential one, and its effects will be both delayed and persistent. IMF estimates suggest that about 45% of fertiliser price rises are passed through to food prices.

Capital Economics' own modelling indicates that the peak inflationary impact arrives only after 15 months, due to planting cycles, the drawdown of existing food stocks and lags in the pass-through from input costs to consumer prices. High food stocks — highlighted by the Food and Agriculture Organisation as a material mitigant — and farmers' ability to rotate crops or adjust application volumes may further dampen the transmission.

In developed economies, the impact will be visible but manageable. Capital Economics projects food inflation rising above 6% y/y in the UK by next year, from 3.7% currently, and peaking at around 4% in the eurozone and the US, against current readings of 2.4% and 2.7% respectively. These levels are considerably lower than the double-digit food inflation recorded following the start of the war in Ukraine and are expected to be less significant than the direct effect of higher energy prices on headline inflation.

The picture in lower-income emerging markets is materially worse. Food accounts for as much as 50% of the consumer price basket in some African and Asian economies, against 10 to 15% in developed markets. Agricultural sectors — which typically account for around a quarter of GDP in lower-income EMs, and over a third in some countries such as Ethiopia — are also more exposed to any reduction in yields, since agriculture's share of overall economic activity is so much larger.

Some governments —Egypt, India, Indonesia and Bangladesh as the most likely candidates — may attempt to cushion the blow through food subsidies, but doing so carries a direct fiscal cost.

External vulnerabilities

The third channel involves balance of payments pressures. Higher fertiliser import bills will worsen current accounts, compounding the simultaneous effect of higher energy imports. Capital Economics notes that while fertiliser import bills are not large in absolute terms for most countries, and net food exporters in Southern Africa may gain partly offsetting benefits from higher food export prices, the cumulative pressure on external positions could prove destabilising in the most exposed economies.

The UN Office for Project Services warned that roughly one-third of global fertiliser shipments flow through the Strait of Hormuz, and its closure has caused "a massive disruption in the supply chain of fertilisers," with "clearly a crisis emerging" in the agricultural industry, according to executive director Jorge Moreira da Silva.

Kenya is one of the countries with the most difficult challenges and had a fragile external position before the Iran war began. More broadly, that the fertiliser shock risks amplifying pre-existing vulnerabilities in parts of Sub-Saharan Africa and South Asia precisely because those regions entered the crisis with the least financial resilience.

The lesson of the 2022 fertiliser shock — which ultimately produced less severe agricultural disruption than feared, partly because farmers adapted their behaviour and rotated crops — offers some grounds for cautious optimism. But the structural damage to Middle Eastern gas infrastructure, and the prospect of a prolonged Hormuz disruption, makes this episode harder to dismiss with the same reassurance.