Iran War Drives Africa’s Fertilizer Crisis

Africa's agriculture sector is essential to food security and economic growth across the continent. Most African farmers and food producers buy fertilizer (the chemical nutrients added to soil to increase crop yield) from global suppliers at prices that fluctuate with geopolitics and energy costs. When fertilizer becomes scarce or expensive—as the article notes—producers must decide how long to hold bags of fertilizer in inventory before using them in production. They also must decide when to harvest and sell crops. These inventory management choices interact directly with how accountants measure the cost of goods sold (the expense that matches inventory costs to revenue) and ending inventory (the value of unsold goods on the balance sheet). The cost flow method chosen—FIFO, LIFO, weighted average, or specific identification—determines which fertilizer costs (or crop costs) flow into expense versus remain on the balance sheet. In a period of rising costs, the choice is not neutral: it affects reported profit.

• Fertilizer price surges force African farmers to hold inventory longer, increasing the balance-sheet value of unsold goods and the accounting choice of which cost to match to revenue.
• In inflationary periods, LIFO (last-in, first-out) matches higher recent fertilizer costs to expense, lowering reported profit; FIFO matches older, lower costs, raising profit—same physical inventory, different bottom line.
• Weighted-average cost smooths the impact of price spikes across all units purchased, offering a middle ground when companies face volatile input costs.
• Once a company chooses an inventory method (FIFO, LIFO, weighted average), GAAP rules generally require consistency year-to-year; switching methods requires disclosure and can signal financial pressure.

Inventory

Goods a company owns but has not yet sold; includes raw materials (fertilizer), work in progress, and finished goods ready for sale.

Cost of goods sold (COGS)

The expense recorded on the income statement that represents the cost of inventory sold during a period; paired with revenue to calculate gross profit.

FIFO (First-In, First-Out)

An inventory cost flow method that assumes the oldest inventory costs are matched to sales first; leaves newest (often higher) costs on the balance sheet.

LIFO (Last-In, Last-Out)

An inventory cost flow method that assumes the newest inventory costs are matched to sales first; leaves oldest (often lower) costs on the balance sheet.

Weighted-average cost

An inventory cost flow method that calculates the average cost of all units available for sale and applies that average to both COGS and ending inventory.

GAAP (Generally Accepted Accounting Principles)

The set of rules and standards that US companies must follow when preparing financial statements; enforces consistency and comparability.

Ending inventory

The value of goods left unsold at the end of an accounting period; appears as an asset on the balance sheet.

Inflationary period

A time when prices for goods and services rise across the economy; makes the choice of inventory cost method especially important to financial reporting.

1. 01

   In a rising-cost environment, which inventory method—FIFO or LIFO—would make an African grain exporter's reported profit appear highest, and why does the choice matter to investors?

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   Answer: FIFO would show the highest profit because it matches older, lower-cost fertilizer purchases to COGS, leaving newer, higher-cost inventory on the balance sheet. This matters because higher reported profit may inflate the company's perceived value to investors and lenders, even though the physical assets are the same. Students should see that profit depends on the accounting method chosen, not just business reality.
2. 02

   If a farmer buys fertilizer at $50 per bag in January and $80 per bag in March, then sells crops in April using both batches, how would FIFO and LIFO differ in the amount of COGS recorded?

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   Answer: Under FIFO, the $50 bags are sold first, so COGS includes 50% of units at $50 and 50% at $80. Under LIFO, the $80 bags are sold first, so COGS is higher (more $80 costs) and ending inventory is lower (more $50 bags left). The key point is that identical crops sold generate different reported profits based solely on the cost flow assumption.
3. 03

   Why can't an African agricultural company simply choose the inventory method that produces the highest profit and switch methods annually based on market conditions?

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   Answer: GAAP requires consistency: once a company adopts FIFO, LIFO, or weighted average, it must use the same method from year to year. Switching methods requires disclosure to auditors and investors, which signals potential manipulation. This constraint prevents companies from gaming earnings by cherry-picking the best method each period.
4. 04

   When fertilizer prices are volatile and unpredictable, what advantage might weighted-average cost offer over FIFO or LIFO for a company trying to forecast earnings?

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   Answer: Weighted average smooths price volatility by averaging all purchase costs, reducing extreme swings in reported profit that occur under FIFO or LIFO. For forecasting, this stability can help investors and managers model future earnings more reliably, though it sacrifices the precision of matching actual costs incurred.

Open by drawing a simple inventory timeline on the board: Jan (50 units @ $50), Mar (50 units @ $80), Apr (sell 50 units). Ask students to calculate COGS under FIFO and LIFO side-by-side. Highlight the gap in reported profit ($1,500 difference on the same sale). Then name the real constraint: GAAP's consistency rule. Use a handheld analogy—"You can't treat the top shelf as FIFO in January and the bottom shelf as LIFO in April. You pick one rule and stick to it." Anchor to the article: fertilizer price spikes make this choice urgent and impactful for African farmers reporting to lenders or investors. Leave students with: "If your business faces volatile input costs, which method do you choose—and what do you tell your bank about why?"