With so much volatility in global politics—and with the situation in Iran shifting almost daily—offering real-time commentary is always a risky business. But instead of sitting back, now is a good time to lean in and consider what may happen if current conditions continue. This isn’t crystal ball territory; it’s simply a practical look at how escalating tensions could ripple through grain markets. Buckle up!
Why the Strait of Hormuz Matters to Agriculture
The Strait of Hormuz is often described as the world’s most important oil passage—and for good reason. Around 20 million barrels of oil per day, roughly 20% of global consumption, move through this narrow waterway. Importantly for Australia, roughly 80% of that oil flows to Asia, where much of our diesel originates.
A disruption wouldn’t just trigger an energy headache. As we have already witnessed, it has created a systemwide shock to global agriculture, because oil underpins almost every stage of the supply chain.
Beyond fuel, the region is also a vital hub for fertiliser components such as urea, sulphur and ammonia. About one-third of global trade in these products passes through the Strait. Unlike the 2022 Russia–Ukraine situation, where cargo could shift away from the Black Sea, oil and fertiliser from the Persian Gulf have no alternative route. If the Strait closes, it stops.
Freight, Costs and Market Behaviour
As shipping becomes more expensive—and at times less available—the cost of moving bulk commodities rises. Importers typically lock in landed costs, meaning exporters temporarily bear the pain through lower prices. Traders, caught between the two, then face a period of uncertainty as they try to determine the new “normal” for shipping grain.
This is the phase we’re in now.
Eventually, increased costs filter through to consumers and importers. At first, they may resist paying higher prices—but as stocks tighten, anxiety increases. Panic buying often follows, leading to a rapid upward spiral in demand and price. Sound familiar?
Shifts in Trade Flows
Higher freight rates can materially reshape global trade flows. The farther you are from a buyer, the more difficult it becomes to remain competitive. For Western Australia, which primarily exports grain into China and Southeast Asia, this dynamic provides a relative advantage.
Our main competitors—Argentina, the Black Sea region and parts of North America—are all further away. Ostensibly, for wheat in particular, higher freight rates provide us with a competitive advantage although this has not yet translated into a significant increase in local prices.
However, not all commodities benefit equally. A large share of WA canola goes to Europe, where we compete with production from the Black Sea, Canada and Europe itself. In this instance, higher freight is a disadvantage for WA growers.
Impacts on Global Production
Rising uncertainty doesn’t just shift markets; it changes behaviour on farms worldwide. Growers are already considering fallowing marginal paddocks, changing rotations to less nitrogen needy crops or willing to take a more cautious approach to seeding schedules if diesel and post-emergent nitrogen supply feels uncertain. Individually, these are small decisions, but multiplied across global production, the cumulative effect can be significant.
Biofuels and Demand Pressure
As oil prices rise, the economic incentive to divert more corn and oilseeds into biofuel production increases. This transition can be slow, especially in developing countries, but it eventually tightens the global grain balance sheet. Even if production remains steady, less grain is available for food and feed.
So What Does This Mean for Grain Prices?
From a market perspective, the bullish factors seem to outweigh the bearish ones. Tightening supplies (stemming from potentially less planted hectares), higher freight costs and increased biofuel demand all point to upward pressure on prices.
However, it’s important to recognise that these gains are unlikely to compensate for the broader challenges generated by the conflict. While the market may look positive on the surface, the overall impact of the Iranian conflict will, without doubt, bring its fair share of challenges.
