Doriana Milenkova
Senior Analyst - Farm Inputs
Rabobank

Following a severe global supply shock triggered by the closure of the Strait of Hormuz, fertilizer markets are shifting toward a gradual rebalancing. Driven by the mid-June US-Iran MoU, a sharp correction in nitrogen prices has accelerated a bearish market outlook, while persistently high production costs and climate risks weigh on 2026 farmer fertilizer demand.

The effective closure of the Strait of Hormuz has triggered a severe global fertilizer shock, constraining around 34% of global urea trade, 23% of ammonia trade, and nearly 49% of sulfur trade, and significantly tightening nutrient availability worldwide. This disruption exposed the vulnerability of global fertilizer supply chains to geopolitical chokepoints, particularly for urea and sulfur, where the Gulf plays a critical role in international trade. The immediate market reaction was a sharp increase in risk premiums across both fertilizer and energy markets, reflecting tighter supply conditions and rising production and logistical costs.

Despite the disruption, fertilizer markets demonstrated notable resilience. Supply chains adapted with cargoes redirected through alternative routes such as the Red Sea, while producers across North Africa, Southeast Asia, the Black Sea, the Baltic, the US, and Europe stepped in to compensate for reduced Gulf exports. Although these adjustments came with higher logistical costs, they helped prevent a deeper supply shock and contributed to the easing of urea prices. At the same time, China’s controlled return to export markets added further downward pressure on nitrogen prices and reinforced the perception that the peak of the supply crisis had passed.

US-IRAN MOU SHIFTS FERTILIZER MARKETS INTO BEARISH TERRITORY

The subsequent US-Iran MoU accelerated this shift from crisis pricing to a more bearish market outlook. The signing of the US-Iran Memorandum of Understanding in mid-June marked a new phase in the conflict. The agreement extended the ceasefire, ended the US naval blockade, introduced a temporary sanctions waiver for Iranian petrochemicals, and reopened the prospect of unrestricted transit through the Strait of Hormuz. This shift in geopolitical dynamics quickly turned market sentiment bearish. Urea markets reacted first: Middle East export prices, which had exceeded USD 900/t FOB during the height of the disruption, more than halved within nine weeks. By late June, prices had declined to around USD 400–410/t FOB, while US NOLA July barges were trading near USD 345–360/st FOB. The speed of the correction exceeded expectations, particularly as buyers largely remained on the sidelines, waiting for further price declines and a clearer market floor.

A clear divergence between nutrients has since emerged. While nitrogen prices have corrected sharply, phosphate prices have softened only marginally, by around 2% to 7%. MAP prices in Brazil remain close to USD 900/t CFR, India DAP prices are holding near USD 930–935/t CFR, and US phosphate prices, although slightly weaker, remain at historically high levels. The phosphate market continues to be constrained by limited Chinese exports and persistently high sulfur and ammonia feedstock costs. Supply is further restricted by production cuts from major producers such as Morocco and Saudi Arabia, combined with ongoing tightness in sulfur availability due to Russia’s extended export ban and restricted Kazakh transit. As a result, the price correction in phosphates is expected to be limited.

FERTILIZER AFFORDABILITY REMAINS A MAJOR CONCERN AMID GRADUAL MARKET NORMALIZATION

Even with the partial reopening of Hormuz, the physical market is not returning quickly to pre-conflict conditions. Fertilizer cargoes have started to move again from the Persian Gulf, including urea, sulfur, ammonia, and phosphates. However, normalization remains slow, as close to 1 million tonnes of urea are in floating storage, awaiting clearance in a congested shipping environment. Logistical costs remain elevated due to mine clearance operations, high insurance premiums, and ongoing uncertainty over tolling and transit conditions. The durability of the ceasefire also remains uncertain, which means the residual effects of the disruption are likely to persist for several months, if not up to a year.

The broader geopolitical context continues to influence energy markets, which in turn affect fertilizer production and farming economics. Although the MoU has brought oil and gas prices down from peak levels, energy costs remain structurally elevated, particularly for diesel and refined products. This is highly relevant for agriculture, where fertilizer represents only one part of broader input cost pressure. Farmers are also facing higher on-farm fuel, crop protection, and financing costs. This means that lower wholesale fertilizer prices are unlikely to translate immediately into meaningful relief at farm level.

Fertilizer affordability therefore remains the key concern for the upcoming crop cycle (see graph). Crop prices have not increased sufficiently to offset rising input costs, and the Iran-US agreement itself has contributed to weaker agricultural commodity sentiment by reducing energy risk premiums. As a result, 2026 farmer margins are compressed and remain below long-term averages across major producing regions, including the US, Europe, Brazil, and Australia. In the US, high nitrogen costs are expected to drive some acreage shifts from corn to soybeans, which require less fertilizer and offer relatively better profitability. In Brazil, farmers are likely to reduce fertilizer application rates and shift toward lower-cost nutrient options, as seen in the earlier shift from urea to ammonium sulfate. For phosphates, substitution toward lower-cost products such as SSP and NP formulations is expected to increase.

Australia provides another clear example of fertilizer demand rationing. Elevated urea prices, combined with weather uncertainty and higher operating costs, are expected to reduce wheat area by around 2.5 million hectares, with part of the land shifting to hay, pasture, and grass systems that require lower nutrient inputs. More broadly, farmers globally are prioritizing cost control, delaying purchases, optimizing input use, and reducing exposure to high-cost production systems.

As a result, global fertilizer demand is expected to decline moderately rather than collapse, limiting the risk of immediate large-scale yield losses. Demand destruction is likely to be selective and most pronounced for phosphates and non-essential applications. Farmers are likely to prioritize key nutrient applications on their most productive land while reducing inputs on marginal acreage where soil fertility allows. While lower fertilizer use does not necessarily lead to immediate yield declines, the cumulative impact over multiple seasons could become more significant, particularly by 2027.

CLIMATE RISKS DEEPEN UNCERTAINTY FOR CROP PRODUCTION AND FARM REVENUES

Lower fertilizer use would leave crop production more exposed if adverse weather materializes. This risk is further amplified by weather and climate factors. Europe is already facing extreme heat conditions that could negatively affect wheat yields and pose an even greater risk to corn production. At the same time, the increasing likelihood of a strong El Niño event adds another layer of uncertainty for the 2027 crop cycle. Potential impacts include reduced rice and sugar output in South and Southeast Asia, as well as lower wheat and canola production in Australia. In SubSaharan Africa, El Niñorelated drought conditions could also reduce maize yields. El Niño could also have longer-term consequences for perennial crops such as palm oil, coffee, and other tropical crops, tightening global supply balances. Conversely, in the Americas, improved rainfall patterns in key growing regions could support soybean production.

At the same time, these emerging production risks are likely to be priced into futures markets. Anticipation of weather-related supply constraints could provide support to agricultural commodity prices, partially offsetting some of the negative pressure from higher production costs. Overall, fertilizer markets are moving away from acute supply stress, but affordability constraints and weather risks continue to limit the scope for a demand recovery.