A secondary wave of global food inflation looms as nitrogen-based fertilizer prices are soaring due to the ongoing conflict in West Asia. Assessing physical supply has become difficult, leading to increased hedging activities, analysts said. 

According to Capital Economics, while the direct energy price shock remains the primary market concern, the surging cost of agricultural inputs, specifically urea, threatens to exert upward pressure on global food prices over the next 15 months. 

Global urea prices, alongside the wider nitrogen-based fertiliser complex, have rallied sharply since the onset of the conflict. US Gulf diammonium phosphate (DAP) settled at $723/tonne on April 20, up 13 per cent year-on-year, while front-month US Gulf Urea climbed 50 per cent between the February 27 settlement and April 20 to $693/tonne, said research agency BMI, a unit of Fitch Solutions.

The more directly exposed West Asia (Middle East) front-month contract rose 76 per cent to $850/tonne, as the effective closure of the Strait of Hormuz shut off the principal export route for roughly a third of global urea shipments. 

China, an exception

“We expect West Asia (Middle East) urea prices to average $586/tonne in 2026, with a Q2 average of $716/tonne, followed by $592/tonne in Q3 and $510/tonne in Q4,” said BMI.

The Agricultural Marketing Information Sytem (AMIS) of UN arm Food and Agriculture Organisation (FAO) said that in March 2026, the crop-location indicators rose sharply, reflecting the tightening of nitrogen and phosphate global markets – with the notable exception of the China. 

In the European Union (France), the average fertilizer cost index for wheat reached 139 per cent above its baseline, a monthly increase of 46 points, and its highest level since February 2023. 

In the US, fertilizer costs for maize surged to 139 per cent above the reference, compared with 83 per cent in February. In Brazil, fertilizer costs for soybean increased moderately, reflecting the crop’s comparatively lower exposure to nitrogen price fluctuations, it said.

Gradual impact

“Unlike the immediate volatility witnessed after the onset of the war in Ukraine, this impact is expected to be more gradual, yet disproportionately severe for lower-income emerging markets,” said Capital Economics.

The war’s impact is most pronounced in nitrogen-based fertilizers, which are energy-intensive and rely heavily on natural gas. If maritime traffic resumes, production may struggle to normalise quickly due to damaged infrastructure at key hubs, it said. 

BMI said: “The conflict has driven a significant reorientation of hedging activity. Concerns over physical trade flows from West Asia priced at a 23 per cent premium to US Gulf, well above the 6 per cent average over 2024-2026, prompted a notable rise in participation in US Gulf Urea futures.” 

The research agency said average daily traded volumes through March 2026 rose 490 per cent year-on-year, while West Asia urea volumes eased by 15 per cent.

West Asia contracts up

However, market activity now points to an unwinding of this, and West Asia premium will likely peak at around 19 per cent in Q2 before moderating to 9 per cent in Q3 and 8 per cent in Q4, tracking back toward the 6 per cent historical average, it said. 

“By 2027, we forecast the premium to fluctuate between 4 per cent and 7 per cent, consistent with a full normalisation of regional trade flows,” said BMI, pointing out that the second-month US Gulf May futures have seen average daily trading volumes of 12.1 contracts, down 70 per cent month-on-month and 52 per cent year-on-year.

On the other hand, May West Asia contracts have seen average daily volumes of 35.7 contracts, up 42 per cent month-on-month and 13 per cent year-on-year. 

“Given the elevated margin requirements and volatility risk associated with West Asia urea futures in the current environment, we consider it unlikely that this activity is speculative in nature. Rather, this points to commercial participants actively positioning for a near-term resumption in physical exports from the region,” said BMI.

Urgency to hedge

Capital Economics said several major global producers remain relatively insulated for the current season, which may act as a buffer against broader systemic supply failure. 

BMI said the urgency to hedge forward price exposure would ease as confidence in a resumption of physical trade flows from West Asia builds. 

Combined volumes across West Asia and the US Gulf, the two primary contracts, reached 1,440 in March 2026, up from 800 in March 2025. This indicated that beyond the shift in participation from West Asia to US Gulf contracts, the escalation of the conflict and its potential to restrict global supplies prompted broader demand to hedge forward price exposure. 

“That initial surge has already begun to wane, with average combined daily traded volumes in April 2026, through April 20, down 16 per cent year-on-year. The decline is consistent with a market that believes supply is returning, a reading reinforced by the steep backwardation in the US Gulf curve,” said BMI.

Unfavourable conditions

The concurrent shift in contract selection back toward West Asia Benchmark suggests that commercial participants are not simply reducing exposure but actively repositioning for a normalisation of regional trade, the research agency said.

Capital Economics, on the other hand, said the inflationary impact of the fertilizer shock will not be immediate. Due to planting cycles and the depletion of existing stocks, the peak effect on headline inflation to arrive more than a year from now. 

AMIS said fertilizer purchase conditions were the “most unfavourable” since 2022. 

“The (fertilizer) outlook depends mainly on the duration of the closure of the Hormuz Strait and the pace at which liquefied natural gas (LNG) flows and fertilizer production in the Gulf can resume,” it said.

Published on April 29, 2026