Energy and the Soaring Cost of Food Production

When oil prices surge, the weekly shop is never far behind

The war in Iran has pushed global energy markets back into crisis mode. In the past week alone, oil prices have raced past $100 a barrel, with traders rapidly pricing in the risk of disruption to production and shipping in the Gulf.

For British households and businesses, the consequences will not stay confined to commodity markets for long. Energy shocks have a habit of cascading through the economy: first into fuel prices, then into fertiliser, logistics and food. The end point is a higher cost-of-living and higher business costs.

Geopolitical tensions are travelling from the Middle East to the British supermarket shelf.

The energy shock

Oil has surged past $100 a barrel, rising more than 20% in a matter of days as markets price in the risk of disruption in the Strait of Hormuz – the shipping corridor through which around 20% of global oil supply flows.

Energy is the base cost of the modern economy. When oil rises sharply, almost every sector feels the effects. Transport costs climb. Manufacturing inputs become more expensive. Food processing and refrigeration costs rise.

Consumers notice the impact at the pump first as petrol and diesel prices rise (like a rocket as the industry mantra goes). And then in household energy bills as the cost of gas and electricity increase. But the more persistent pressure often comes later – through the food system.

Agriculture is one of the most energy-intensive sectors in the economy. Fuel powers machinery, logistics and food distribution. Natural gas underpins fertiliser production. Electricity drives storage, refrigeration and processing.

When energy prices surge, the cost of producing food rises almost everywhere at once.

Fertiliser: the hidden price transmission channel

One of the most immediate knock-on effects of the Iran conflict has been in fertiliser markets. Nitrogen fertiliser production is highly dependent on natural gas, making it acutely sensitive to energy volatility.

Since the escalation in the Middle East, fertiliser prices have begun climbing sharply again, with urea and ammonia markets tightening as traders anticipate supply disruption and higher energy costs. UK ammonium nitrate is now around £400 per tonne, roughly 13% higher than last year and global urea prices climbing towards $650 per tonne indicate costs will continue to rise.

This matters because fertiliser costs do not just affect farm balance sheets – they shape next season’s harvest and Britain’s food security. Reducing application rates or delaying purchases could lead to a fall in yields of important food sources. Simultaneously, production costs rise and supply falls.

The effects then move slowly but steadily through the food supply chain. It is one of the reasons food price inflation tends to follow energy shocks with a delay of several months.

The food inflation pipeline

For those working across the food and farming supply chain, the mechanics of what happens next will feel familiar. The UK food system is deeply integrated into global input markets, and even food produced domestically relies heavily on imported fertiliser, feed, fuel and machinery.

When energy markets jolt, the effects move steadily through that system. Higher oil and gas prices quickly feed into fertiliser production, transport and on-farm fuel costs. Input bills rise, margins tighten and the cost of producing food begins to climb. Retail prices tend to follow later, once those pressures work their way through processors, manufacturers and supermarkets.

It is a sequence the industry has seen before; one that rarely moves quickly at first and rarely stops halfway once it begins. The last time energy and fertiliser prices surged simultaneously, after the 2022 invasion of Ukraine, UK food price inflation eventually peaked at over 19%, demonstrating how quickly farm input shocks translate into supermarket prices.

The risk now is that the global economy is facing a second major energy-driven food price shock within just a few years.

What farm businesses can control

Global oil markets may be beyond the farm gate. But resilience is not. For British farm businesses, the immediate challenge is navigating volatility that is likely to persist well beyond the current crisis. 

The first line of defence is input efficiency. Precision farming, soil testing and variable-rate fertiliser application are no longer simply environmental tools – they are financial ones. Every percentage improvement in nutrient efficiency reduces exposure to global fertiliser markets.

The second is energy resilience. Farms investing in solar, anaerobic digestion, biomass or wind generation are increasingly insulated from electricity price spikes. In an era of geopolitical energy shocks, on-farm generation is rapidly becoming a strategic asset.

Third, cashflow planning matters more than ever. Locking in key inputs early, stress-testing budgets for higher fuel and fertiliser costs and building financial buffers can prevent volatility from becoming a liquidity crisis.

And finally, there is productivity. Investment in automation, robotics, genetics and data-driven farm management allows businesses to increase output while containing input use. Precisely the combination needed when both energy and labour costs are rising.

Mark Lumsdon-Taylor, Rural Policy Group President: “Farmers cannot control global commodity markets. But they can control how exposed they are to them”.

The strategic lesson: food security is national security

For policymakers, the conflict in Iran is another reminder of how fragile the global food system remains. Energy security, food production and economic resilience are no longer separate policy conversations because when oil prices surge in the Gulf, the consequences do not stay in energy markets for long. They travel through fertiliser plants, freight networks and farm fields – before eventually landing in the price of dinner.