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August 16, 2012Top global asset manager Grantham has been calling that the rising commodity prices is not a cyclical phenomenon but rather a major structural inflection point. Note GMO has been one of the most successful asset managers over the last two decades and their word cannot be taken lightly. Commodity prices from the past 200 year history has mainly traded in 20 year cycles and the rate of increase in commodity prices over the long term has lagged behind other assets. The recent crash in commodity prices in 2012 has made many investors look askance at commodities as an asset class. However Grantham says that the massive increase in population and improving lifestyles will put too much pressure on the supply of food and farmland causing prices to increase sharply.
Food prices are inelastic and the sharp jump in food prices in recent year to drought and floods indicate that there is not a lot of buffer left. Food prices have been rising for a number of reasons which include:
a) Global Warming
b) Increasing Population
c) Increasing Prosperity leading to demand for higher types of food like Meat
d) Diversion of Food Crops like Corn for making of Ethanol
e) Arable area has reached a limit around the world. There is no large land area left for discovery like America or Australia.
Read the full article from GMO
We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments.
• Grain productivity has fallen decade by decade since 1970 from 3.5% to 1.5%. Quite probably, the most efficient grain producers are approaching a “glass ceiling” where further increases in productivity per acre approach zero at the grain species’ limit (just as race horses do not run materially faster now than in the 1920s). Remarkably, investment in agricultural research has steadily fallen globally, as a percent of GDP.
• Water problems will increase to a point where gains from increased irrigation will be offset by the loss of underground water and the salination of the soil.
• Persistent bad farming practices perpetuate land degradation, which will continue to undermine our long term sustainable productive capacity.
• Incremental returns from increasing fertilizer use will steadily decline on the margin for fertilizer use has increased five-fold in the last 50 years and the easy pickings are behind us.
• There will be increased weather instability, notably floods and droughts, but also steadily increasing heat. The last three years of global weather were so bad that to draw three such years randomly would have been a remote possibility. The climate is changing.
• The costs of fertilizer and fuel will rise rapidly.
Earlier Commodity Bull Post
Grantham has made a famous call that the rise in commodities is not a cyclical phenomenon but a secular long term one. He says that the rise in commodity prices is different from the past. Note Grantham has done an extensive study of bubbles and is one of the leading minds in the investment community. While every time in the past, the statement “this time is different” has led to a crash, Grantham’s call cannot be taken lightly. He says that the rise in population, shortage of resources, the growing consumption power of massive chunks of prosperous citizens in India and China will lead to a continued surge. Note commodity prices have declined secularly in the last century and since 2000 have managed to erase all their losses to form new peaks. Grantham also says there is a possibility of a massive short term decline which will give a historic opportunity to load on commodities. Jim Rogers is the most famous commodity bull and now Grantham has joined him. Note famous hedge fund managers have already made huge bets on gold and are winning currently. Note CIA and German Military are already on the record for calling Peak Oil which would lead to a drastic fall in living conditions worldwide as the global growth fueled by cheap fossil fuels sees an end.