Oilseed war premium depends on duration of the conflict
The U.S.-Israeli war with Iran started Feb. 28 and continued unabated last week. This has had a profound impact on commodity markets.
The primary reason for the jump in commodities is that the Strait of Hormuz has been effectively closed by the risk of attack on shipping.
When you think of the Middle East and commodities, oil is likely the first commodity that comes to mind.
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Depending on how long the war in Iran lasts, it could seriously increase farmers’ costs for fuel and fertilizer. 20 per cent of global oil trade flows through what has become a virtual no go zone.
Certainly, crude oil prices have rallied on the news of the closure of the strait. Approximately 25 per cent of world oil trade (by vessels) flows through the strait.
Crude oil futures were up by more than US$20 per barrel last week and were trading slightly more than $75 per barrel.
Crude oil is not the only petroleum-based product that has been impacted by the closure.
Products such as gasoline, diesel and distillates are also shipped through the region. The largest impact is with liquified natural gas with 20 per cent of world trade flowing through the Strait of Hormuz.
Crude oil and petroleum products may be the largest category of commodities that flow through the region, but fertilizer is also a key commodity produced there.
Sulphur exports through the Persian Gulf account for 44 per cent of world trade, and urea exports are 31 per cent of total trade. This has resulted in a jump in global fertilizer prices.
Ammonia exports account for 18 per cent of the world total, while phosphate fertilizers (DAP and MAP) account for 15 per cent.
The major impact from the war will be increased input prices for the 2026 crop.
The Northern Hemisphere winter crops still need to be top-dressed, and fertilizer needs to be applied for the upcoming spring seeding season. This increased demand will be meeting limited supply, which will drive prices higher.
There is some good news for agricultural commodities from the conflict.
The increase in oil prices is driving the vegetable oil markets higher. This has been good news for soybean oil and canola markets.
Canola has gained nearly 2.3 per cent since the start of the war with the nearby contract trading above the C$700 per tonne mark last week.
How long can this war premium last?
The answer lies mostly in the duration of the conflict and more specifically, the time that the Straits of Hormuz are closed.
Most commodities will be able to endure a one to two week disrpution, but anything over that would result in significant shortages.
This in turn would keep prices at higher levels for longer.
Source: producer.com