Why Middle East tensions could soon push dairy farm costs higher

Geopolitical shocks rarely stop at energy markets. In agriculture, they tend to arrive with a delay, but often with wider consequences.

The recent escalation of tensions involving Iran has already triggered a visible response in global energy markets. In February, oil prices increased by 6.2%, while global feed prices moved up by 2.1%.

The pace accelerated quickly. During the first week of March, oil prices were already 19% higher than the February average, reflecting growing geopolitical risk premiums in energy markets.

At first glance, these movements may appear manageable. Yet agricultural markets rarely react at the same speed as energy markets. Instead, they tend to follow with a delay as higher energy prices gradually work their way through fertilizers, transportation, crop production and feed markets.

What we may be observing now is the beginning of that adjustment.

Oil moves first, agriculture follows

The relationship between energy markets and agricultural costs has been visible before. The last major episode of simultaneous volatility occurred in 2022, when the war in Ukraine disrupted global commodity markets.

That year, oil prices increased by 42.4% year-on-year. Agricultural markets followed quickly. Feed prices had already surged by 39% in 2021, reflecting tightening grain markets, and increased by an additional 19.6% in 2022 as the war disrupted exports of wheat, maize and oilseeds from the Black Sea region.

The pattern was clear: once energy markets move sharply, agricultural input costs rarely remain unaffected.

For dairy farming, this link is particularly important. Feed represents the largest cost component on most dairy farms, accounting for between 30% and nearly 90% of total production costs, depending on the production system. In intensive systems, feed typically represents 30–50% of total costs, making it the most important driver of farm profitability.

Fuel and energy themselves account for a smaller share, usually around 5% of total farm costs. Yet they reinforce the same direction of pressure: rising costs and tightening margins.

Feed markets transmit the shock

Energy price volatility reaches dairy farms primarily through feed markets.

Higher oil prices increase the cost of producing and transporting feed crops such as maize, wheat and soybeans. Fertilizer production becomes more expensive, field operations require more costly fuel, and global shipping costs often rise as well.

These factors collectively push feed prices higher, usually with a delay of several months.

At the farm level, however, feeding costs tend to adjust more gradually than market prices. Many farmers maintain feed stocks or purchase feed months in advance. Others respond by adjusting feed rations, substituting ingredients or optimizing diets to reduce costs while maintaining milk output.

As a result, the initial response to rising feed prices is often an improvement in efficiency rather than an immediate reduction in production.

Fertilizers: the hidden link

Between energy markets and feed production lies another critical layer: fertilizers.

Nitrogen fertilizers such as ammonia and urea are produced through highly energy-intensive processes that rely heavily on natural gas. This makes fertilizer production extremely sensitive to energy price volatility.

The global fertilizer market is also geographically concentrated. Major producers include companies such as CF Industries, Nutrien and Yara, while a significant share of production capacity is located in regions with access to low-cost natural gas, including the United States, Russia and the Middle East.

Large producers in the Gulf region – including facilities in Qatar, Saudi Arabia and the United Arab Emirates – supply significant volumes of ammonia and urea to global agricultural markets.

Europe has already experienced the vulnerability of this system. During the energy crisis of 2022, several European nitrogen fertilizer plants reduced output or temporarily halted production because high natural gas prices made operations uneconomic. As a result, Europe became more dependent on imported fertilizers.

Any renewed volatility in energy markets therefore has direct implications for fertilizer prices, crop production costs and ultimately feed markets.

The strategic risk: global shipping routes

The geopolitical context adds another layer of uncertainty.

One of the most strategically important transport routes for global energy markets is the Strait of Hormuz, located between Iran and Oman. Roughly 20% of global oil trade passes through this narrow maritime corridor every day.

Any disruption to shipping in this region would immediately affect global energy markets and could increase transportation costs across multiple commodity supply chains.

Even temporary disruptions can have significant consequences. In 2021, the grounding of the container vessel Ever Given blocked the Suez Canal for six days, temporarily halting around 12% of global trade passing through the route. The incident caused widespread supply chain disruptions and sharply increased freight rates.

While the Strait of Hormuz remains open, geopolitical tensions in the region highlight how vulnerable global supply chains can be when critical maritime chokepoints are affected.