Iran effectively halted shipping traffic through the Strait of Hormuz on February 28, 2026, in response to the United States and Israel’s bombing. At the time of publishing this post, it is the United States who is blockading the Strait.
About 25% of the world’s seaborne oil trade transits the Strait. Likewise, a significant share of global nitrogen fertilizer ships through the Strait of Hormuz. The closing of the Strait caused sharp increases in oil and fertilizer prices. Oil prices increased as much as 60% in the weeks following the closure, but they have declined since the ceasefire. Nitrogen fertilizer prices increased by about 50%.
Brandon Schaufele examined in a recent post the impact of the Iranian oil shock on the Canadian economy. Brandon finds that the oil shock leads to an increase Canada’s GDP per capita and that the Canadian dollar gains in value. These responses are expected because Canada is a net oil exporter.
There has been some coverage of the impacts of the shocks on food prices, including by CTV News and Global News. The media have a tendency to report positive impacts. That fits with the intuition that higher energy prices impact the whole supply chain and lead to higher food prices for consumers. Likewise, higher fertilizer prices increase the cost of production for farmers, which are then passed down the supply chain.
However, the channels through which the shocks affect food prices are more complex. Canada imports a lot of food, in particular fruits and vegetables. A higher exchange rate means cheaper food imports. Also, the cost share of energy and fertilizer in food is small. In field crops, fuel accounts for about 5% of production costs. Fertilizer costs are more important and can account for a quarter to a third of the cost of production for certain crops.1 This might appear large, but once considering that the farm share of the food dollar is about 12 cents and that energy is only 3.1 cents of the food dollar, according to the USDA, the impact on food prices has to be small.
Given the two opposite shocks, exchange rate and costs of production, it is not obvious that food prices in Canada will increase in response to the Iran shocks.
I follow Brandon’s approach to estimate the impacts of oil and fertilizer shocks on food prices in Canada. Brandon points out that the length of the shock is an important factor to consider. Accordingly, I will consider a one-month shocks and six-month shocks. What the model will not consider, however, are expectations. The model assumes that the shocks will last one or six months, and that market expectations align with the length of the shocks. In practice, we do not know when the Strait of Hormuz will fully reopen, if it ever will, and that does affect market participants’ behaviour. See, for example, how expectations have been shifting on Kalshi prediction market, a prediction market. Another point to consider is that I am examining the impacts of two separate shocks, whereas in practice they occur simultaneously.
Oil price shock
Following the closing of the Strait of Hormuz, oil prices increased by roughly 60%. Accordingly, I consider a 60% increase in the West Texas Intermediate (WTI) oil price and how it ripples through the Canadian economy.2 The model assumes that the oil price affects Canada’s GDP, the exchange rate, gasoline prices, and prices for goods, including food. I will not show results for all variables.
Figure 1 shows responses to a 60% increase in WTI lasting either one month or six months. The shock does not persist and the WTI returns to its previous level rapidly after a shock. The Canadian dollar becomes stronger in response to higher oil prices, rising by about 3% for the one-month shock and up to almost 4% for the six-month shock. In both cases, the exchange rate returns rapidly to its previous level after the end of the shock. The gasoline price follows the same pattern as the oil price, rising by 20% for the one-month shock and up to 30% for the six-month shock. The gasoline price declines quickly when the oil shock ends. In practice, I doubt that will be the case, as gasoline prices tend to rise fast but to fall slowly (rocket and feather pattern).
A higher oil price affects prices for all goods. The price index for All-items increases by about 1% for the one-month shock and by as much as 1.5% for the six months shock. This says that we can expect the oil shock to lead to an inflation rate about 1 to 1.5% higher because of the oil shock. This is consistent with Brandon’s results and those reported by the Scotiabank.
Figure 1 shows that the Food price index decline in response to the oil shock. The impact is small: -0.2% for the one-month shock and up to -0.6% for the six-month shock. It is the change in the exchange rate that drives the decline in food prices. Price indices for Fresh fruit and vegetables and Fresh and frozen meat (excluding poultry) decline more than for food in general. For Fresh or frozen poultry, the price index moves up and down around zero. I do not show confidence intervals in Figure 1, but those for the food price indices all include zero. This tells us that the impacts of the oil shock on food prices are not statistically different from zero, however.
This is not too surprising. The cost of producing food domestically increases in response to higher oil prices, but the impact is small. The cost of production for imported food is also higher, but it becomes cheaper to import because of the appreciation in the exchange rate. The net effect appears to be a small decline in food prices, which is not statistically significant.
One impact of the oil shock is to lower the competitiveness of domestically produced food. In addition to an increase in production costs, Canadian food producers must compete with cheaper imported food. We can expect that the profitability of Canadian farms to decline in 2026.
Fertilizer price shock
The Middle East produces about 25% of global urea exports. No surprise then that global nitrogen prices shoot up with the closing of the Strait of Hormuz.3 The Urea FOB US Gulf futures have jumped by about 50% since the start of the conflict.
I trace in this section the impacts of a 50% increase in urea prices on food prices in Canada. The model is similar to the one for the oil shock but adapted to the specificity of the fertilizer market.
Figure 2 shows the impact of a 50% increase in the price of urea in Canada. Again, I consider the impact of one and six months shocks. For the one-month shock, the price of urea increases by 50% in the first month and then declines as rapidly the following month. For the six-month shock, the price of urea increases by 50% and then returns to its previous level rapidly after the end of the shock.
The figure shows movements in the price of corn and soybeans in Canada. But, these changes are not statistically significant (confidence intervals not shown). Nitrogen fertilizers like urea are important for corn production, but the timing and duration of the shock matter. A shock at the end of February comes at a time when planting decisions are already made and most inputs are already purchased.4 Thus, we do not expect that a shock on the price of urea to impact prices for corn or soybeans for 2026. Furthermore, note that changes to corn and soybean prices in response to the urea price shock are not statistically significant.
Figure 2 shows small changes for the price indices for All-items and Food. They are not statistically significant. For Fresh fruit and vegetables, Fresh or frozen meat (excluding poultry) and Fresh or frozen poultry, the changes are larger, but, again, they are not statistically significant.
How can a positive price shock to an input as important as fertilizer not cause crop prices and food prices to increase? There are several reasons. First, as previously mentioned, timing matters a lot. The shock from the Iran conflict came when crop planting decisions were made and inputs mostly already purchased. I expect, in response to the fertilizer shock, small changes in plantings for this crop year, and consequently this means marginal impacts on crop prices. Second, the duration of the shock also matters. A permanent shock on fertilizer prices would affect planting decisions in the following crop years and would then affect crop prices. Third, as the USDA data show, farm costs account for a small share of the value of food to consumers. Therefore, even a large shock on fertilizer prices will result into a small shock to prices paid by consumers for most food products. It is for products with less value-added after the farm, like fresh fruits and vegetables, that we will observe the largest shock. Even for those, we expect a certain rigidity in retail prices, meaning that they adjust slowly.
Conclusion
Results from my model do not align with what some media have reported about the consequences of rising oil and fertilizer prices. Reality is sometimes boring, and there is always a bias in reporting real consequences. However, if the oil and fertilizer shocks last, I expect consumer food prices to eventually rise. Hopefully, the situation in the Middle East will normalize soon, for the best of everyone.
There will be consequences to higher oil and fertilizer prices upstream retail. I did not look into those but they can be important. In particular, it might be tough for fresh fruit and vegetable farms. Their production costs will increase and they will face tougher competition from imports because of a stronger Canadian dollar. Likewise for field crop farms, in particular those growing crops that require nitrogen fertilizers (e.g., corn). Let’s hope that input prices decline soon.
Footnotes
I calculated those values using Manitoba 2026 Cost of production.↩︎
I also model the shock as a drop in global oil supply and obtained very similar results.↩︎
Urea contains about 46% nitrogen.↩︎
This is particularly true in the United States, where planting begins earlier. Prices for field crops in Canada are largely determined by what’s happening in the United States.↩︎