Middle East conflict: The impact on Australia's agriculture and economy

The escalation of conflict in the Middle East, and its effects on shipping and access to the Strait of Hormuz, has increased cost pressures across global food and agricultural supply chains, primarily through higher energy and fertiliser prices.

Early increases in crude oil and urea prices are already flowing through to higher diesel and fertiliser costs in Australia, adding to margin pressure for farmers and processors. There is a real risk that refined fuel prices could rise further as Asian refineries cut back on production runs due to shortages of crude.

Global grain supply rose in 2025 and tightened farmer margins, so for the grains and oilseeds sector, this is an added headwind.

Urea markets are particularly exposed, with around 30% of global exports potentially at risk from disruption to flows through the Strait of Hormuz and from reduced ammonia availability, as 20% of global exports pass through the strait.

Beyond inputs, the Middle East is also an increasingly important destination for processed goods from Australia, such as milk powders, as well as live sheep exports and sheepmeat. Approximately 90% of Australian live sheep exports are to the Middle East region and in most cases also require shipping through the Strait of Hormuz. Canola might be one of the few Australian farm products that could see prices rise as its use in biofuel production allows prices to benefit from increased fossil fuel prices.

While the scale and duration of impacts remain uncertain, the conflict underscores the vulnerability created by highly interconnected global energy, fertiliser, and food supply chains, with multiple order impacts in the global supply chains. The duration of the conflict will be key in determining whether recent price increases remain temporary or persist for longer across the economy.

For Australia as a whole, the conflict is likely to lead to higher inflation and – depending on severity – could prompt the RBA to raise interest rates sharply to bring aggregate demand back into alignment with lower aggregate supply. This makes recession likely in some scenarios.

In extreme downside scenarios, where supply cannot be materially reestablished, a government imposition of price controls and rationing becomes probable.