Grain and vegetable oil futures declined on expectations that a potential reopening of the Strait of Hormuz would improve access to vital crop inputs, easing the threat of food inflation from the months-long war in the Middle East. The US and Iran announced they reached an interim agreement to reopen the waterway, potentially halting a conflict that had disrupted global trade.
Hormuz is a key conduit for fertilizer and fuels used by farmers, and its closure had boosted crop prices. The United Nations’ Food and Agriculture Organization had warned in May that a severe global food price crisis could set in within six to 12 months due to the strait’s closure.
Some of the war-driven price premium had already begun to fade across crop markets in recent weeks, partly due to ample global stockpiles and a decline in fertilizer costs. Monday’s losses extended that drop, with wheat and corn futures down more than 1% in Chicago. Soybeans notched smaller declines and palm oil fell as much as 0.8% in Kuala Lumpur.
The rally in crude oil and fuel prices triggered by the war has boosted demand for biofuels such as ethanol that are made from crops. The peace deal could reverse that trend. Lower oil prices tend to erode the biofuel’s competitiveness, increasing the incentive to produce more sugar and adding to global supplies. Soybean oil is also affected by a reduction in the profitability of turning it into biodiesel.
White sugar prices in London dropped. Soybean oil and rapeseed traded on the Paris exchange dropped more than 2%. The decline in palm oil futures was limited as the market was awaiting certainty over a higher biofuels policy mandate by major producer Indonesia.
The reopening of Hormuz to shipping could help ease food inflation, potentially reducing pressure on interest rates and fueling a recovery in agricultural commodity demand. However, concerns remain about potential production impacts from El Niño.