FAO warns of global agrifood catastrophe

Despite the ceasefire in the Persian Gulf, the Strait of Hormuz, linking it with the Gulf of Oman, remains largely closed. This could trigger a chain reaction leading to rising food prices, the effects of which could last until 2027, the UN Food and Agriculture Organization (FAO) recently reported. Exports of between 20 and 45 per cent of key agrifood inputs rely on sea passage through the Strait of Hormuz. If farmers produce with fewer inputs, there will be lower yields later this year and in 2027, with higher food commodity prices and retail food price inflation likely for the next few years, the FAO warns. This would likely force countries to put policies in place to lower domestic food prices, triggering higher interest rates and as a result potential slower economic growth around the world.

"We are in an input crisis"

The latest FAO Food Price Index, which covers the month of March, is relatively stable thanks to ample supplies of most food commodities, especially cereals. But pressure is rising in April and will intensify in May, when farmers make decisions on whether to switch planting choices to adapt to fertiliser availability as well as whether to allocate more land and resources to biofuels to benefit from higher oil prices but curtailing global food supplies. 

“We are in an input crisis; we don’t want to make it a catastrophe,” says David Laborde, Director of FAO’s Agrifood Economics Division. “The difference depends on the actions we take.” The FAO urged all countries to closely ponder biofuel mandates and, above all, to avoid export restrictions on energy and fertilisers. 

Learning from the lessons of recent crises

Fertiliser and energy markets are inelastic, so prices can rise much more than changes in traded volume imply. Markets are likely to react very quickly if vessels do not move through the Strait soon, the FAO experts warn. Trade and export restrictions exacerbated food price spikes in past crises, as efforts to insulate domestic markets from world markets worsened global conditions.

Unlike natural disasters or climate stressors such as the natural climate phenomenon El Niño, the Strait of Hormuz blockade “is something governments can resolve and have to resolve”, FAO Chief Economist Maximo Torero says. The risks today are notably greater than in 2022, Torero maintains, adding that conditions are present for a “perfect storm” if the current situation is also affected by a strong El Niño rivalling or exceeding the pandemic crisis.

Considering options for financial support

If the standoff in the Strait of Hormuz is not quickly ended, anticipatory actions should be considered, in particular asking multilateral institutions to provide financing to countries at risk of losing access to basic fertiliser inputs given their planting has started, Torero states. Here, the economist suggests the International Monetary Fund’s balance of payment facilities and the IMF Food Shock Window,  following the Food Import Financing Facility the FAO proposed in 2022, to be used as an input-financing facility allowing countries that need fertilisers today to get them quickly without triggering distorting subsidy competitions. According to him, the FAO has already developed a crop calendar-based prioritisation of countries based on when and how much fertiliser they need.  “The clock is ticking, and crop calendars put poorer countries most at risk of scarce and pricey fertiliser and energy inputs," the FAO Chief Economist maintains.

The World Food Programme warned as early as mid-March that a further 45 million people could go hungry by the summer if oil prices remained above 100 US dollars a barrel. The fertiliser crisis will make the situation even worse.

(FAO/sri)

More information:

FAO Food Price Index

Review of experience with the IMF Food Shock Window