About 20 years ago I spent an evening with a very senior Vietnamese official. Over dinner he told me how much the Vietnamese people revered former UK PM Harold Wilson. Why? Because Wilson kept the UK out of the Vietnam War even while other allies were bullied into it by US President Lyndon Johnson.
Like Wilson, Keir Starmer’s explanation for staying out of the Iran war is strikingly simple: “This war is not in the UK national interest.”
As well as being in line with the views of two-thirds of the electorate, events of the past few days seem also to endorse Starmer’s position. While the US and Israel continue to destroy Iran’s military machine, their expectations that they would be able to stop Iran closing the strategically crucial Strait of Hormuz have been dashed.
The result is the surprising call from President Donald Trump for help from previously disregarded allies, chaos on the world’s energy markets, and growing fears of an energy price crunch and global economic downturn.
Inflationary consequences
So far overlooked by most are the consequences of the closure of the Strait for the world’s food supply.
If the Strait is closed for more than a few weeks, the world will see much higher oil, gas and – crucially – fertiliser prices, and resultant systemic food and crop shortages.
Initially the effects will be felt through significant supply constraints and price rises on that most prosaic of commodities: fertiliser. It’s already happening – urea prices have increased by between a third and a half since the start of the crisis. That is because Saudi Arabia, the UAE, Oman, Qatar and Iran account for between a quarter and a third of global urea production. They also produce about a quarter of liquid ammonia. Both urea and ammonia are critical to nitrogen fertiliser production. Almost all of this is shipped through the Strait of Hormuz, so its closure is uniquely bad news for fertiliser users.
Roughly half of global crop yields depend on synthetic fertilisers. Their production relies heavily on natural gas as both an energy source and feedstock. Those prices have gone significantly higher, pushing up fertiliser manufacturing costs worldwide.
Compounding the impacts, the world’s myriad small-scale farmers are extremely input price sensitive. If fertiliser prices remain elevated, those farmers won’t have the cash to buy and will simply use less. That will mean lower crop yields at harvest time, which, of course, means higher prices.
Farmers globally now face a triple cost pressure on fertiliser, fuel and freight. That brings added jeopardy for the world’s economies: if crop prices don’t rise markedly, long-term farm viability will be hit as revenues are squeezed. If crop prices rise, inflation will see a sharp global uptick.
But for the world economy, the biggest proportionate impact will be in countries which are significant food exporters and also major importers of fertiliser. Most notable are China, India and Brazil. Sectors most at risk are cereals (such as wheat and maize), oilseeds and vegetables.
The outlook for the UK
Back to the UK national interest. The UK food and farming industry is acutely concerned. UK farmers must already cope with increasingly extreme weather conditions – up to a fifth of farm land is unusable because of contamination and inaccessibility caused by repeated flooding. Now farmers face uncertainty on fertiliser availability and prices (indeed they often don’t know the price until the deliveries show up). That means rising input costs for arable farms and vegetable growers.
NFU President Tom Bradshaw warns that later in the year prices of bread, cereals and processed foods will rise fast. One estimate puts this at 5%-7% within the next six to nine months. That in turn will be a further kicker for the UK inflation rate. Supermarkets will, of course, do their best to cajole suppliers into absorbing some of these increases.
Solutions to all of this are limited. Risk-savvy farmers and growers have cast their net wide for alternate sources of supply, but there are few available. If the crisis continues government action will be necessary. That might include: short-term grants or tax exemptions for the cost of farm resilience initiatives; expedited moves to improve EU co-operation and reduce trade costs (for example through even more urgent agreement and implementation of SPS co-operation); and reintroducing measures to ease or suspend competition restrictions which – highly successfully – allowed food businesses to co-operate in a range of areas during the pandemic.
Whatever happens, the real solution is opening the Strait of Hormuz, but that is fraught with military peril. So it is certain food prices will rise significantly and, in some sectors, supply will be seriously impacted. It’s not completely clear that the government is prepared for this course of events. So the prime minister’s calculation of the British national interest will indeed be severely tested in the months to come – though not just from the angle he expected.
Ian Wright is a partner at Acuti Associates
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