While higher global energy prices are a negative economic shock in their own right, the longer that prices remain elevated due to the conflict in the Middle East, the more likely it is that secondary effects will emerge — such as higher pries for food, says CIBC World Markets Inc.
Given the agriculture industry’s high reliance on energy, food inflation will likely be stoked by a long-lasting conflict, the bank economists write in a new report.
“Agriculture is highly energy-intensive, so as energy costs climb, so does the cost of producing and delivering food,” it said.
Indeed, the report noted that the agriculture industry has been able to meet growing food demand primarily by maximizing yields through the increased use of fertilizers and other chemicals — which are highly energy reliant, as they use natural gas as a raw material, “and as fuel for every stage of production, processing and distribution.”
“Synthetic fertilizers now account for 40% of variable farming costs, twice the share seen in the 1980s,” the report said — adding that fertilizer has surpassed labour as the largest variable expense for farmers.
Alongside the heavy reliance on chemicals, the industry also has high transportation costs.
And, as a result, the agriculture sector now accounts for about 15% of annual energy consumption in the U.S., the report said.
Overall, the report estimates that “a 20% increase in the price of oil raises the food CPI by roughly 0.6 percentage points, eight quarters after the shock.” Additionally, the disruption of fertilizer shipments “implies falling inventories this year, which will result in higher food costs in 2027.”
While it’s possible that these effects will be tempered if the conflict is resolved quickly, “the longer the price pressures are sustained, the more we have to look at the secondary impacts of higher energy prices,” the report said.
“The high energy-intensity of agrifood means that food inflation will be one of the major casualties of the current oil price shock, lifting already high food prices even higher,” it concluded.