Domino effect: How Iran war impacts farms, transport and banks

• Key Insight: The recent surge in gas prices and other costs has put pressure on small businesses, creating both opportunities and risks for the banks that lend to them.
• Supporting Data: In March, spending on gas by small agriculture and transportation businesses jumped by over 25%.
• Expert Quote: “The pain point is most acute for those industries that rely more heavily on gas,” said Bank of America economist Taylor Bowley.

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The war in Iran is taking a toll on small businesses, particularly in agriculture and transportation, and their banks are starting to feel it.

In general, small businesses saw their fuel costs soar in March, the first full month of Operation Epic Fury. But the surge was particularly steep for firms in agriculture and transportation, whose spending on gasoline jumped by more than 25%, according to a new study by Bank of America .

“We’re seeing that gas prices are really impacting small businesses,” Taylor Bowley, the economist at Bank of America Institute who wrote the study, told American Banker. “That’s on a variety of levels across a variety of different industries, but the pain point is most acute for those industries that rely more heavily on gas.”

BofA traces these effects back to the war in Iran, which began on Feb. 28. The conflict, initiated by the U.S. and Israel, has led to a combination of Iranian and American blockades of the Strait of Hormuz, an important waterway for oil tankers. In March, global oil prices saw their largest monthly increase ever recorded, according to Morningstar.

And that doesn’t just affect gas. Higher oil prices drive up the cost of fertilizers, many of which require petroleum feedstocks to produce. What’s more, the bottleneck at the Strait of Hormuz has blocked up to 30% of the world’s fertilizer shipments, according to the research group IFPRI.

For small farming businesses, the resulting price shocks have chipped away at profits. In March, the BofA study found, deposits for all small businesses grew by a little under 2%, but deposits for agriculture businesses shrank by 2%.

The consequences for commercial banks are complex. By analyzing internal data on BofA’s millions of small-business clients, defined as those with less than $5 million in annual sales revenue, researchers found that the firms’ balance sheets overall remained stable. But as the study noted, the number of businesses seeking external financing hit a 20-year low in March, according to the National Small Business Association.

“They’re still resilient, but increasingly cautious,” Bowley said. “When you’re in an environment that is characterized by a lot of uncertainty, maybe you don’t go forward with that [expansion] plan, and you wait and see what happens.”

Different lenders have felt the impact in different ways. Anker Fanoe is the CEO of Pacific Valley Bank, a $628 million-asset commercial lender in Salinas, California. Recently, he said, his farmer clients have seen their fertilizer costs jump by 50% and their diesel costs rise by 30%.

“It’s a pretty significant hit for them,” Fanoe said.

At least in the short run, he said, these price increases have led to an increased demand for credit, which has been good for the bank. But they’ve also left the clients — and their loans — in a precarious long-term position.

“So far it’s worked out in our favor,” Fanoe said. “One of the farmers, however, mentioned, if this gets to a point where they can’t get fertilizer anymore, then you wouldn’t be able to make a crop. And that would certainly do a lot of damage to the local economy.”

Fanoe’s clients in the transportation industry, he said, have managed to pass on their increased costs to their customers. But everyone is hoping the fighting in Iran comes to an end soon, he said.

“Everything should be OK,” Fanoe recalled two clients saying, “as long as the war wraps up pretty quickly. If this goes on indefinitely, it would have a major impact on their business.”