Middle East conflict: UK food and drink impacts

What’s happening?

The US and Israel have attacked Iran, killing senior leaders and damaging political and military targets. President Trump has urged Iranians to topple their government.

In response, Iran has launched missiles and drones targeting Israel and several Gulf states, including Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia, and the UAE, with casualties inflicted.

Iran has also claimed to have closed the Strait of Hormuz to all shipping and at least three oil tankers have been hit by weapon fire in this area.

Large oil and gas tanker traffic through the Strait has effectively ceased, according to Lloyds List, although some smaller tankers continue to transit.

Qatar reports that liquefied natural gas (LNG) facilities have been hit, closing down production. Qatar’s accounts for around 20% of global LNG exports.

There has also been renewed fighting between Israel and Iranian-backed Hezbollah in Lebanon, showing the potential for instability to spread quickly.

Strategic impact – from energy to food prices

The Persian Gulf is a vital source of oil and natural gas, most of which transits via the Strait of Hormuz.

If this route is closed, or if tankers operators simply refuse to make the passage, global supply could be threatened, pushing up energy prices.

Energy is a key input for almost every industrial process – including food production. So, if high energy prices are sustained, there are likely to be cascade effects through other markets as prices rise to account for higher costs.

Note that, in the case of food, gas might be an invisible input – it is used in huge amounts to produce basic fertilisers. When the price of gas rises, fertiliser prices go up too.

Biggest shock since Ukraine

The last comparable event for the food industry was the Russian attack on Ukraine in February 2022. This saw oil prices rise from US$73 per barrel before the invasion to peak at US$116 in Summer 2022, before gradually declining.

Food prices responded to this, especially since both Russia and Ukraine were major exporters of food commodities as well as energy.

Global food prices – already rising in the post Covid period – also peaked in mid-2022. They have fallen back slightly but remain elevated by historic standards.

This effect was communicated through to UK consumers in the form of a severe spike in retail food price inflation, beginning at once, but taking some time to peak.

Food inflation hit 19% in Spring 2023, about a year after inflation started (actual price pass-through rates varied by category). Prices have not returned to pre-invasion levels.

In the current round of fighting – markets have already begun to move, but oil prices remain well below those 2022 peaks. As of Monday 2nd March, UK gas futures had risen by more than 40%, while Brent crude oil was up around 8%.

OPEC+ nations have agreed to increase oil production in a bid to stabilise prices. However spare capacity within the group is limited, constraining how much additional supply can be brought to market. With the military situation evolving rapidly, it is also uncertain whether the promised extra oil will materialise.

Even if additional oil is produced, the ability to ship it to market may remain constrained until safe navigation in the area is restored.

Share prices have come under pressure, while the US Dollar, in its role as a safe haven currency, has made some gains versus other currencies.

Key variables to watch

The situation is evolving very fast and there are many factors which might affect the market outcome for energy and other commodities:

• Longer conflict – Previous military action in the region has ended fairly quickly. If this conflict lasts longer, then economic harm would be greater.

• Wider conflict – Iranian weapons have hit military targets in multiple countries. If they choose to strike back, then the conflict could spread rapidly and uncontrollably.

• Attacks on energy infrastructure – Further attacks on vital equipment could have severe economic impact, since it could take years to restore supply, even after fighting ends.

• Iranian government – Historic experience has shown that the collapse of a government can have unpredictable consequences.

• Red Sea – Iranian-backed Houthi militants have previously attacked shipping in the Red Sea area, affecting global movement of goods. If they are willing and able to support Iran again, then disruption of shipping may spread, impacting goods as well as energy.

What to watch for

Beyond the headlines, the clearest picture of the impact of the fighting is likely to be seen in  energy prices, both “current” prices and “futures” (i.e. contracts to deliver energy at a specified time in the future). We will be monitoring this closely at IGD.

What it all means for food and drink  

Higher costs and inflation risk

The last major conflict to impact global commodity markets had direct consequences for UK households, through higher prices for motor fuel, domestic energy, and food.

If the new conflict in the Persian Gulf continues, it is reasonable to expect similar effects, with higher energy and food inflation eroding household prosperity. It may take up to a year for the full impact to be felt.

Pressure on shopper confidence

This would, in turn, affect confidence and behaviour in-store, with consumers likely becoming even more cautious when shopping for food. Businesses would be expected to respond accordingly, for example  range changes and price adjustments – see the IGD article What does the war in the Middle East mean for the global grocery industry

Uneven impact across categories

Not all items are likely to be affected the same way. The most energy-intensive areas of the food system are likely to be most vulnerable, including:

• Controlled environment agriculture – due to heating costs

• Pig and poultry production – due to connection to grain markets

• Arable farming - due to fertiliser inputs

Why this time may be different

However, events may not play out in exactly the same way as before, for two reasons:

• Trade exposure differs - The Persian Gulf primarily exports energy rather than food, whereas the war in Ukraine disrupted energy and food supplies

• Higher starting point for prices - food prices remain elevated following war in Ukraine, meaning inflation effects may be less marked due to higher comparables. although higher gas prices could still push up fertiliser and farming input costs.

The need for resilience

The events of the last few years – Brexit, Covid, severe weather, wars – have demonstrated the need for better resilience and shock-proofing in the food supply chain.

IGD’s studies on resilience have highlighted geo-politics as the second greatest risk to UK food supply after climate change.

This new conflict further underlines the need for food businesses – and the nation overall – to develop greater resilience to global shocks, whether man-made or natural.

Increasing domestic production and re-shoring certain supply chains may be part of the solution, helping to stabilise food prices and availability for households in an increasingly uncertain world.