Middle East: conflict puts pressure on fertilizers and costs in agribusiness

The escalation of the Conflict in the Middle East has already reverberated in global agribusiness, and Brazil is also on alert. The country imports near 85% of the fertilizers it needs, according to the National Association for Dissemination of Fertilizers (Anda). Consequently, a significant part of nitrogen-based products, like urea, come from the region. Industrial halt and instability in maritime route have been pushing the input to the levels of 500 USD/MT in international market.

Meanwhile, oil has surpassed 80 USD/barrel, pressing the price of diesel. Brazilian National Confederation of Transports indicates that freight may represent 30% of logistics cost for long distances in production flow for grains. The outcome is a combination of more expensive fertilizers and burdensome transportation. Such factors raise the final cost of agricultural production.

Conflict in Middle East and reflex in ag inputs

The rise in fertilizers provoke chain reaction in agricultural production. More expensive fertilizers raise the cost of crops like soybeans and maize, which are base for animal feed. In turn, it also tends to add pressure to the price of beef, eggs and milk.

In addition, higher prices for diesel makes transportation of fruits, vegetables and processed food more expensive, raising the cost of logistics until it reaches final consumers.

Considering the importance of food industry for the Extended National Consumer Price Index (IPCA), prolonged chokes in costs of production may reflect in official inflation.

According to Altair Heitor, CFO of Palin & Martins Consultancy, accountant, psychologist, and specialist in tax management for agribusiness, the consumer feels the effects with certain delay, inevitably though.

“The producer absorbs part of the increase at first, but the margin in agribusiness do not support prolonged chokes. In certain point, the price adjustment reaches the shelves”, he says.

Planning and diversification may reduce impacts in agribusiness

Specialists say that, in case the current geopolitical scenario lingers for couple months, the risk turns from increasing prices to availability of inputs.

“Brazil may face difficulties accessing nitrogen-based inputs, which compromises productivity and the planted area. That would affect the available volumes and sustain higher prices for longer period”, Altair Explains.

In order to reduce cashflow impacts for farmers and companies, the specialist recommends anticipated purchase planning, diversification of suppliers and negotiation of futures contracts.

“Those depending on a single international supplier are more vulnerable. Diversification at origin reduces risk”, he states.