The closure of the Strait of Hormuz has sent fertilizer prices soaring and has increased long-term risks to US supplies.

American officeholders have been extremely sensitive to the political implications of recent sharp increases in grocery prices, which already were at historic highs. In response, the Federal Trade Commission has announced “a major industrywide investigation into the precipitous rise of fertilizer prices in this country,” arguing in effect that high fertilizer prices resulting from anticompetitive behavior are to blame for recent increases in food prices. This premise is simply not correct: It is the basic economics of geopolitical shocks to supply chains that is to blame.

How the Strait of Hormuz Crisis Drove Global Fertilizer Prices Higher 

Fertilizer prices indeed have increased by around 50 percent globally since the beginning of the year. That this is the direct result of the Iran war and the closure of the Strait of Hormuz is obvious and acknowledged by the US Farm Bureau, a prominent organization representing the agricultural sector and thus is no fan of high input prices. The Farm Bureau noted:

Spring planting decisions depend heavily on access to fertilizer and diesel fuel, both of which have been impacted by … the escalation of tensions in the Middle East. 

The duration of disruptions in the Middle East and closure of the Strait of Hormuz will ultimately determine farm production expenses in the months ahead. 

Countries exposed to instability in and around the Persian Gulf account for roughly 49 percent of global urea exports and about 30 percent of global ammonia exports. Because these products are essential for crop production, disruptions in the region can influence fertilizer availability and prices well beyond the Middle East.

Production costs for nitrogen fertilizer have increased by over a quarter since December of last year, while for phosphate fertilizers the figure is over 15 percent. The increases reflect higher prices for key inputs. Costs for nitrogen feedstocks—including ammonia, nitric acid, ammonium, and urea—have increased almost 17 percent over the same period. Meanwhile, phosphate costs have increased by 11.5 percent, while sulfur prices have increased by 8.5 percent. With roughly half of all traded sulfur coming from the Persian Gulf region, supply reductions have forced many US producers to idle production at their facilities, in turn reducing US fertilizer production by roughly a quarter of the amounts that farmers can rely on under normal conditions. To give a sense of proportion: Typically, sulfur has been available for between $100-$300 per ton. Recent prices have surged to over $1000 per ton. With every 10 tons of phosphate fertilizer requiring four tons of sulfur, it can surprise no one that fertilizer prices have skyrocketed.

Iran, China, and the Growing Threat to US Fertilizer Supply Chains 

US production is all of 8-9 percent of global production. It is obvious as well that the increased Iranian threat to shipping now is long-term, regardless of whether some sort of ceasefire agreement to open Hormuz is reached. The risk clearly is substantial that the Iranians will mine Hormuz once again, or threaten shipping with shore-based weapons, or demand a fee for safe passage.

Moreover, China, another major fertilizer exporter, has restricted sulfuric acid  exports, thus constraining supplies and increasing prices further. Sulfuric acid is a required input in the phosphate fertilizer every farmer needs for food production.

In short, this means that the US sourcing of fertilizer from international producers economically has become more expensive, a condition that is likely to prove long-term. Accordingly, an increase in US production would be efficient. Indeed, as the basics of market behavior would anticipate, fertilizer producers have begun announcing significant investments in standing up domestic production lines.

Why US Permitting Reform Matters for Fertilizer Production

But critical policy hurdles to making those investments remain. Any such increase would have to overcome the labyrinthine US permitting process for the construction or expansion of fertilizer production facilities. The delays can consume decades and cost tens of millions of dollars. 

Reform has proven difficult at best. But we have some principles for policy reform. 

First, the National Environmental Policy Act (NEPA) should be amended to focus the scope of environmental review far more narrowly. Without this, any potential adverse environmental effect—regardless of how small or speculative or indirect or distant in time—can justify litigation and rejection of a project under NEPA. 

In addition, environmental permitting litigation should be streamlined to prevent courts from rejecting an agency action unless they find that the agency abused its discretion in such a way that it would have reached a different finding otherwise. Strict time limits for the filing of lawsuits must be part of a litigation reform, and additional strict time limits would apply to court resolution of such suits and any appeals. 

Third, regulatory agencies must be directed to eliminate duplicative and inconsistent permitting process requirements across federal, state, and local jurisdictions. 

Finally, the Clean Water Act must be amended to limit state environmental reviews to the water quality impacts of projects that are direct.

All of these measures will help to facilitate investment in domestic infrastructure projects, ensuring greater potential to process fertilizer inputs and helping return to lower prices over the long term.

Strengthening US Food and Fertilizer Security 

The international threat to the fertilizer market is far more than a problem for US farmers. It is a threat to anyone who needs to eat. 

The Trump administration would be wise to focus its attention on two lines of effort. 

First, it should insist upon and enforce a full opening of the Strait of Hormuz. 

Second, it should work more closely with Congress to enact permitting reform to ease US investment in fertilizer production narrowly and in infrastructure projects more generally. 

In combination, these should, over time, provide the real relief farmers and hardworking families need. 

About the Author: Benjamin Zycher

Dr. Benjamin Zycher is a senior fellow at the American Enterprise Institute, where he works on energy and environmental policy. He is a former senior economist at the RAND Corporation, a former adjunct professor of economics at the University of California, Los Angeles (UCLA), and at the California State University Channel Islands, and is a former senior economist at the Jet Propulsion Laboratory, California Institute of Technology.  He served as a senior staff economist for the President’s Council of Economic Advisers, with responsibility for energy and environmental policy issues. Dr. Zycher has a doctorate in economics from UCLA, a master’s in public policy from the University of California, Berkeley, and a bachelor’s in political science from UCLA.

The post Why Geopolitical Supply Chain Shocks Are to Blame for High Food Prices  appeared first on The National Interest.

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