A perfect storm for global food prices?
As the conflict in the Middle East persists and extreme weather exerts additional pressure on agricultural supply, food inflation is emerging as one of the most significant risks facing the global economy – one that’s unlikely to go away soon, even under more favorable outcomes.
Inflation has been at the forefront of investors’, policymakers’, and consumers’ thinking ever since conflict erupted in the Middle East. With the conflict showing no signs of easing, commentary has stretched well beyond the impact on energy markets to the knock-on effects across the broader commodity complex. With weather-related disruptions already affecting agricultural production and the potential return of El Niño adding further pressure, food prices are emerging as a key concern, and one that could be with us for some time.
Core Insights
- Farmers face higher costs and tougher growing conditions. The Middle East conflict has disrupted energy and fertilizer supplies, while heat and drought have hurt harvests in parts of Europe. El Niño adds further risk.
- Food prices can keep rising after energy prices ease. Farmers may have already bought inputs at higher prices or missed a planting window. Those effects can take months to reach grocery shelves.
- Persistent food inflation matters beyond the grocery bill. It squeezes household budgets and can influence what consumers expect to pay for other goods and services.
In this article
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Key transmission channel: fertilizers
Food production begins with agriculture, and modern agriculture is extraordinarily energy intensive. Irrigation, farm machinery, transport, refrigeration, and food processing all depend heavily on reliable energy supplies.
Fertilizers are perhaps the most important transmission channel. Nitrogen-based fertilizers, used extensively across global agriculture to support crop yields, depend heavily on natural gas as both a fuel source and feedstock. It’s no surprise, then, that the conflict has squeezed global fertilizer prices, now roughly 30% to 45% above 2025 levels.
According to J.P. Morgan research – “Climate Intuition: Food security under pressure: Iran conflict disruptions and a brewing El Niño” – published in May, damaged fertilizer facilities can take between one and four years to return to full production, while repairs to natural gas infrastructure may take three to five years in some cases. Even after capacity is restored, fertilizer deliveries must align with planting cycles, meaning disruptions can affect entire growing seasons.
This also highlights the lagged aspect of food inflation. Crops planted today rely on inputs purchased months earlier, meaning the full effects of recent energy and fertilizer price shocks may not yet have been felt. In other words, while consumers are still contending with the first-round effects of the energy shock, the next round of food price pressures could only just be starting.
Weather risks add to the pressure
Fertilizer and energy costs are not the only problem for food prices.
Recent weather extremes are adding a fresh layer of uncertainty to the food outlook. Europe has endured another summer of intense heat, while drought conditions in several agricultural regions have raised concerns about crop yields. With grain harvests across parts of Europe reportedly down by around 7%, some analysts are forecasting double-digit inflation for essential foods like dairy products, bread, and flour into mid-next year on the back of steep gains in recent months.
Yet another risk looking ahead is the potential return of El Niño. While its effects vary by crop and geography, the historical relationship between El Niño and food inflation is well documented. Research cited by Royal London Asset Management suggests El Niño events have historically lifted global non-energy commodity prices by around 5%, while stronger episodes have been associated with increases closer to 9%. Crops such as soybeans, corn, and rice have tended to be among those most affected.
Taken together, rising input costs and weather-related disruptions create the potential for a powerful double hit to agricultural production.
Broader economic impact
Unlike many discretionary purchases, food is a recurring household expense, meaning higher prices feed directly into the cost of living.
Policymakers, particularly central banks, are feeling the pressure too. Although food is typically excluded from core inflation (the measure most closely watched by policymakers), sustained increases in food prices can still influence wage demands, broader pricing behavior, and inflation expectations across the economy.
That makes it more difficult for central banks to look through what might otherwise be viewed as temporary commodity shocks. Indeed, concerns over inflation persistence are likely to have played a role in the Fed’s decision to raise interest rates in September. Other major central banks may face similar pressures if food inflation continues to accelerate.
Conclusion
Food production faces a nasty cocktail of higher energy costs, supply-chain disruption, elevated fertilizer prices, and adverse weather conditions. The question, unfortunately, is not whether food prices will feel the effects of these, but how severe those effects prove to be. Even if the conflict in the Middle East were to end tomorrow and weather conditions to prove less disruptive than feared, lag effects and other quirks of agricultural production imply that subsequent improvement would be gradual rather than immediate.
Intuition Know-How has a number of tutorials relevant to the content of this article:
- Commodities – Grains
- Commodities – Physical Trading
- Commodities – An Introduction
- Commodities – Natural Gas
- Climate Change – Physical Risks
- Climate Change – Transition Risks
- Inflation – An Introduction
- Inflation Indicators
