Word of a memo of understanding between the United States and Iran sent oil prices plunging Monday amid hopes the Strait of Hormuz soon will be open, but don’t expect as swift a slide at the gas pump or in food aisles.
The price of oil and its availability has a major impact on every aspect of the economy. For the food industry, the impact starts on the farm with the availability of fertilizer. Further into the pipeline are processing and packaging all the way to delivery by truck to the grocery store.
“The reopening of the strait is very positive news for F&B supply chains,” Barry Bradley, head of supply chain at Crisp, told FI.
“With the strait reopening, the supply of these critical inputs should start to loosen and help alleviate the pressure on costs and, therefore, impact consumer demand.”
Bradley added that any reopening would not be immediate and noted details were still being negotiated, making constant contact with partners critical. Shipping insurance rates also remain a critical factor.
It will take time for oil and gas supplies to return to normal and other commodities to get where they need to be.
“Blockage of the strait is one problem, but in addition to that, drone strikes damaged gas infrastructure that’s essential for fertilizer production,” said Marty Bauer, director of partnerships and ecommerce at Omnisend. “It will take months or even years to fix them. The World Food Program is unceremonious about this: Fertilizer shortages will affect crop yields for months to come.”
Will Food Prices Drop Soon?
Colin Houchins, director of sales at Tosca, told FI it’s unlikely food prices will drop significantly in the near future, because prices depend on broader economic conditions. Whatever savings are achieved through lower energy costs will take time to trickle down through the production process.
The U.S.-Israeli attacks on Iran and Tehran’s subsequent closure of the Strait of Hormuz sent oil prices up as much as 55%. On Monday, traders saw a 5% drop to $80.75 for West Texas Intermediate crude and a 4.8% drop to $83.17 for Brent crude – the lowest levels since March 5. The U.S. Energy Information Administration estimates crude oil makes up about 47% of the pump price.
Nationally the average pump price for a gallon of gas Monday was $4.07, down 9 cents from last week’s average, according to AAA, and a gallon of diesel was $5.197, down from $5.318 a week ago and $5.662 a month ago.
Iran mined the Strait of Hormuz and fired on ships that tried to move through the narrow waterway without first seeking permission. The U.S. then imposed a blockade on Iranian vessels.
About 20% of the world’s oil ships through the strait. As many as 112 tankers are believed stranded in the strait along with hundreds of other ships carrying fertilizer and other commodities.
What will reopening the strait do to stabilize the supply chain?
“There’s a great outlook for better stability among food and beverage companies as energy markets stabilize, easing some pressure on operating costs while confidence improves across planning, procurement, and distribution decisions. The industry is far more resilient than it has been in recent years, but a reduced geopolitical risk on the supply chain is definitely beneficial,” Houchins said.
Omnisend’s Bauer reminded, however, that though the outlook for lower prices is promising, there are other pressures.
“Keep in mind that the food industry operates on forward contracts. Most manufacturers and grocery chains buy their ingredients and packaging in advance. Those heightened transportation and energy costs are already included in current prices. It will take a few months of more favorable costs for them to burn through current inventories and adjust their pricing,” Bauer said.
President Trump indicated Monday ships had started to move unmolested, but the claim was not immediately verified, Radio Free Europe reported.
“Even if ships now have safe passage, tankers are in the wrong place, oil production/refining facilities need to get up to full capacity, and questions over the cost and availability of insurance for ships traversing the strait will remain,” Neil Shearing, group chief economist for Capital Economics, told the BBC.
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