Iran’s Food Supply Gets Pinched

Washington and Brussels are trying to curb Iranian oil revenue in a bid to convince Tehran to abandon its nuclear weapons program. But it appears financial sanctions imposed by the West are having a more immediate impact on what Iran buys from abroad rather than what it sells. Reports this week suggest Iranian companies are finding it increasingly difficult to import food, raising the specter of a political crisis ahead of the parliamentary elections on March 2^nd. Tehran is trying to a get around the issue by bartering food for oil, but a close look at the data suggests this will only be a partial solution at best.  

Sanctions Hit Food Imports First

Since the passage of US legislation sanctioning the Central Bank of Iran and decision by the EU to ban imports of Iranian crude, attention has been focused on the country’s oil sales and the impact increased Western pressure will have on Tehran’s export revenue. But so far it looks like the most significant trade disruptions are occurring on the import side instead. In the past week Indian firms have held up wheat and rice shipments and Singapore-based traders have stopped selling Malaysian and Indonesian palm oil out of fear they won’t get paid.  

In theory, this shouldn’t be happening. The National Defense Authorization Act signed into law by President Obama on December 31^st explicitly excludes food products (as well as medicine and medical devices) from sanctions. So international agricultural producers should be free to sell to Iran without risk. But given the fragility of the Iranian financial system and the stigma surrounding trade with Iran, many foreign vendors are deciding it’s just not worth it. Because while Tehran is willing to continue selling crude on credit while its customers sort through sanctions-related payment problems, the country’s food suppliers aren’t so sure the small and medium sized Iranian companies they deal with will be able to come through.  

On top of global food producers’ hesitancy to sell, Iranian consumers’ ability to buy has taken a hit as well. In the face of increased international financial isolation, nervous Iranian households are converting their savings from rial to dollars in the country’s informal foreign exchange markets. This has caused the currency to depreciate by 40% over the past two months, making imported food 40% more expensive (Figure 2). Financial sanctions have limited the Central Bank of Iran’s ability to intervene and keep the market exchange rate in line with the official target, so instead the government has had to raise interest rates and attempt to ban unofficial foreign exchange transactions.

A Political Challenge for Tehran

Coming less than a month before the March 2^nd parliamentary elections, this is a troublesome development for Iranian leadership. While not quite as dependent on foreign food as many of their neighbors in the Middle East, Iranians still depend on imports for more than a third of the calories they consume each day. Iran imports more than half the rice and maize it consumes, as well as soy beans and other oil crops or oil products (Figure 2). Most of the maize and soy is used as animal feed, but impacts the price and availability of meat and dairy. Iran is also dependent on foreign barley, though this accounts for a relatively low share of overall caloric intake. Imported wheat accounts for less than 10% of domestic demand. But since half the calories the average Iranian consumes each day comes from wheat even this level of import dependence could be a liability.    

And a Difficult Problem to Solve

In addition to accounting for a large share of domestic demand, Iranian food imports account for meaningful chunk of internationally traded food supply. Iran is the world’s fifth largest importer of wheat and rice, sixth largest importer of maize, makes the top 10 in barley and the top 20 in oil crops and oil products (Table 1). So we’re talking billions of dollars in agricultural trade that needs to get settled each year – not an easy task with increasingly stringent international financial sanctions.

India has reportedly offered to utilize the new rupee arrangement with Iran (see Iran’s Oil for Rupee Program, February 6, 2012) to barter oil imports for wheat, tea and other agricultural exports. Expect to see a significant increase in Indian food sales in the months ahead as the New Delhi looks to maximize exports to Iran under the rupee arrangement and Tehran tries to keep agricultural imports flowing.

But among Iran’s major oil customers, India is the only significant exporter of the cereals, oil crops and oil products Iran needs (Figure 3). And even India doesn’t sell enough globally to meet Iranian demand (or come close to balance out what Indian refineries pay Tehran for oil). So unless India starts transshipping food products from other producers or Iran’s other large food suppliers start buying Iranian crude, “oil-for-food” barter is going to have limited effect. While there is some prospect for both, they will only partially mitigate the payment problems Iranian food importers now face. And foreign suppliers will likely charge a premium for their troubles, which will further inflate domestic food prices already skyrocketing thanks to sanctions-induced rial depreciation.

With Washington and Brussels hoping to shake up Iranian politics by targeting the country’s oil exports, the unintended impact on Iranian food supply appears to be having a greater impact. It just might not play out in the way Western policymakers expect.