What impact is the Iran war having on the British food sector?

“Conflict in the Middle East has revealed the reliance of many economies and sectors of fuel and chemicals produced in, and exported from, the Gulf. Cesar Revoredo-Giha and Montserrat Costa-Font look at how Britain’s agricultural, food and retail sectors are being impacted by disruptions to energy and fertiliser markets, and how the government should respond. In the past six weeks strikes by America and Israel on Iran, and that country’s retaliation, have significantly impacted global energy and financial markets. The conflict led to a surge in oil prices, driven by disruptions to key energy facilities and shipping routes. This immediately raised inflation fears. An important measure in Iran’s strategy has been the closure of the Strait of Hormuz , a critical chokepoint. Between 2023 and 2025 about 20 per cent of the world’s liquefied natural gas and 25 per cent of seaborne oil trade passed through the Strait. A two-week ceasefire called between America and Iran on 7 April initially calmed markets. But immediate and sustained peace seems unlikely and many industries, including agriculture and food production, are subject to significant uncertainty. This blog uses the British food sector as a case study to understand how war in the Middle East can impact consumers around the world. What variables have been affected by the war? One of the most significant is fuel prices . Figure 1 shows the weekly evolution of crude oil prices (Brent-Europe) and the pump prices for petrol and diesel in Britain. Although the crude oil price and the UK series are not perfectly correlated, they tend to move very closely, particularly during periods of high rises in international oil prices (such as the Russia-Ukraine conflict in 2022). Source: Department of Business, Energy and Industrial Strategy (BEIS) and Federal Reserve Bank of St. Louis (FRED database). Of particular importance is the price of red diesel, which is a type of diesel fuel that is dyed red (mandated by tax authorities) to indicate that it is intended for off-road use and is taxed at a lower rate than regular diesel. It is commonly used in agricultural machinery, construction equipment and generators, as it is designed for vehicles that do not operate on public highways. As shown in Figure 2, the prices of red diesel and diesel at the pump move very closely. Since 2024 the price of red diesel has been approximately 50 per cent the price of diesel at pump. Source: AHDB. Fertiliser prices are also being affected. Urea is commonly used as a fertiliser and an animal feed additive. And the Strait of Hormuz is a key route for fertiliser and for natural gas used to produce fertilisers. Since 2020 the Gulf has accounted for approximately 30–35 per cent of global urea exports and 20-30 per cent of ammonia exports. In March QatarEnergy , one of the world’s biggest exporters of natural gas and a producer of urea, stopped production following attacks on its facilities. Figure 3 shows a surge in the urea prices since the Iran war. Source: Trading Economics Shipping cost and routes are critical to global trade and can be an important driver of inflation . Since the beginning of the Iran conflict, ship insurance for the Strait increased from 0.125 per cent to between 0.2 per cent and 0.4 per cent of the ship insurance value per transit. For very large oil tankers, the increase in the premium may imply an additional cost of $250,000. By 9 March, insurance rates were reported to have increased by four to six times over the previous week. Data for a similar period from the London Stock Exchange Group showed the cost of hiring a supertanker to move oil from the Middle East to China reached an all-time high of more than £298,300 per day, almost double the cost before the conflict. The rerouting of ships away from the most risky areas also impacts cost. Many shipping companies are rerouting vessels around longer sea paths, such as via the Cape of Good Hope, adding significant transit time and cost to ocean freight. Some carriers have suspended operations in the area entirely due to risk to crews, insurance and infrastructure. (The Iran conflict has also disrupted air cargo networks as major carriers avoid Middle Eastern airspace.) What are the effects on Britain’s food sector? Food imports. Fuel and shipping costs affect the cost of food imports, particularly those travelling long distances. Table 1 shows the importance (on value) of different food exporters to the UK (excluding the EU and the US). Source: Own elaboration based on ONS information. 1/ Other developed are: Australia, Canada, New Zealand and South Korea. 2/ Other Asian and rest of the world. Several imports from the selected regions account for more of 30 per cent of the total imports such as fish and shellfish (51.1 per cent) and fruit and vegetable (35.2 per cent), which contribute to Britain’s supplies when the domestic production is out of season. Domestic production in Britain is being affected by increasing energy, fertilisers and transportation costs. But although the effects are imminent, current stocks of fertilisers and other materials mean that the impacts may take some time to show. Many of these variables also affect agri-food exports . British fruit and vegetable production is affected by increasing energy and transportation costs. Producers may be forced to conclude their growing seasons prematurely as rising wholesale gas prices and other input expenses may render continued production economically unviable. Without government help the surge in energy bills could bring shortages of domestic tomatoes, cucumbers, peppers and aubergines. The inability to afford heating for glasshouses poses a severe threat to crop growth, potentially leading to significantly reduced yields. Growers are now urgently calling for retailers to agree to pay higher prices for produce to offset the increased production costs, rather than facing widespread reduced availability. For cereals and oilseeds fertiliser is the largest variable cost for crop production. Nitrogen fertiliser prices are closely linked to gas prices. If fertiliser prices were to stay high, less will be used, potentially impacting yields. Diesel, drying and agrochemicals are also oil-linked, meaning that the situation of crude oil markets can feed directly into farm costs. However, when crude rises, biodiesel made from vegetable oils becomes more competitive , boosting demand for oils such as palm, soy and rapeseed oil and pulling up their prices. However, higher energy prices also raise farming, processing and freight costs. Grass-based dairy systems remain exposed to nitrogen volatility, while electricity, refrigeration and fuel costs are sensitive to energy markets. Purchased feed exposure adds further risk where forage substitution is limited. With milk prices currently providing a narrower margin buffer, cost shocks would transmit more quickly to profitability. Grass-based beef and lamb systems have moderate fertiliser exposure, although finishing systems are sensitive to cereal price movements. Direct energy exposure is generally lower than in dairy or pork, but feed-linked costs remain relevant. Pork production is highly feed-intensive, making it the most sensitive of the sectors to grain and soya volatility. Indoor systems are also exposed to energy costs across housing and processing. Any feed cost escalation would quickly affect margins if pig prices do not adjust in parallel. What effect will fuel prices have on food consumer prices? About 90 per cent of freight in Britain is transported by road, meaning that food production is affected by increased logistics costs as well as increases on input prices. The food sector was already facing big rises in energy, transport and packaging costs, as well as disruptions across its supply chains. Now the Food and Drink Federation has predicted that prices will rise by at least 9 per cent by the end of 2026, almost tripling a forecast of 3.2 per cent that was made before the conflict. And the assumptions behind the 9 per cent forecast are that the strait of Hormuz will reopen to cargo traffic within the next two to three weeks, and most large energy facilities, such as oil, gas and fertiliser sites, return to normal within a year – none of which is guaranteed. Figure 4 illustrates the relationship between the annual increases on the domestic diesel price and consumer price index for food and non-alcoholic drinks. Since there are other factors besides fuel that affect consumer prices, this association is not perfect. Nevertheless, the latter series seems to evolve together albeit with some months of delay (as can be seen in the ten-month lag between the peak fuel price and the peak food price during the Ukraine conflict in 2022 and 2023). Source: Own elaboration based on ONS data. Figure 5 aims at quantifying the relationship between the two series in Figure 4. The horizontal axis measures the delay in which the increase in the diesel price translates into food prices. Thus, 0 means that passing through is immediate, 1 is after a month, so on. The left vertical axis shows the correlation coefficient. This takes values from -1 to 1; the closer to -1 the stronger the linear negative relationship between the series, whilst the closer to 1 is just the opposite. The right vertical axis measures the elasticity of food prices to changes in diesel prices; this is the reaction of food prices to changes in the diesel price. For instance, an increase of 1 per cent in the annual growth of diesel prices, only rises food prices by 0.05 per cent in the current period (so without delay). This is also reflected on a correlation coefficient of 0.14. Source: Own elaboration based on ONS data. Figure 5 shows that it takes a while for the current effect of diesel or fuel to be translated into food prices, with the highest impact being reached after ten months (where correlation between the two series is 0.78 and the elasticity is 0.28). So even a quick resolution to the conflict could cause an increase on prices into 2027. And the longer the price of diesel remains at a high level the longer is the effect on the food sector. What does this crisis mean for policymakers? On 1 April Rachel Reeves, the Chancellor of the Exchequer, and Emma Reynolds, the Environment Secretary met the heads of Tesco, Sainsbury’s, Morrisons, Marks & Spencer, Aldi and Lidl. The food retailers requested that the government take action to ease cost pressures, with help on energy bills and a delay on new regulatory fees or adjustments such as on packaging, unhealthy food and employment rights. Ahead of local elections in May the government is under pressure to protect consumers from further pressure on the cost of living . But this current conflict is just one in a series of shocks, including Ukraine war and Donald Trump’s tariffs. As an open economy, the British system can never be fully isolated from such shocks. But the current conflict is a stark reminder to policymakers and industry to prioritise improving the food sector’s resilience. This article gives the views of the author, not the position of LSE Business Review or the London School of Economics. You are agreeing with our comment policy when you leave a comment. Image credit: Sean Fleming provided by Shutterstock. The post What impact is the Iran war having on the British food sector? first appeared on LSE Business Review .

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