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Another commodity plug from Jeremy Grantham [ClearOnMoney]
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Another commodity plug from Jeremy Grantham

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Commentary

Another commodity plug from Jeremy Grantham

1 Aug 2012 by Jim Fickett.

Grantham continues to provide very useful broad-brush overviews of resource scarcity and investment. His main concern for the species is that food will become more expensive, pricing out the poor. His main recommendation for long-term investing is (an eventual) 30% in resources, with half of that in farms or forests (the latter favored because, unlike mines, they are self-renewing).

Yesterday Jeremy Grantham published his quarterly letter (free registration required). He continues to put a great deal of effort into analyzing the future path of resource scarcity, and devotes most of a very long letter (17 pages) to a broad overview of various classes of resources. He has changed some details of his views, and I think one can quibble on some points, but this letter and the previous one are among the best broad-brush overviews on resource investments available.

His biggest concern is that, in his view, food will be in scarce supply. This is not because producing enough food is technically impossible, but because, as energy and fertilizer become scarcer, farming will become more expensive.

Food prospects for 2050

The literature on this topic agrees that a very large increase in global food production is “needed” by 2050. The two most commonly used numbers in the last several years (almost clichés) are that we either need to double food production or to increase it by 70% by 2050 to keep up with expected demand. Recently, U.N. sources have estimated that we are likely to be able to increase food supply by 60%. …

I believe that even the lower U.N. forecast is highly unlikely to be met and that the higher numbers are complete pie in the sky. Yes, a 60% increase is necessary to meet the realistically forecast 30% increase in population to 9 billion+ together with the anticipated increase in meat consumption. But given all of the difficulties already described, it is just not going to happen, at least on any sustained basis. … this is where Mr. Market intrudes: long before an extra 60% in food supply is reached, rising prices will have made food too expensive for hundreds of millions. To balance the books, a series of serious (but still doable) steps must occur. First, the entire world must consume less meat than is assumed in the estimate of a doubling. … Second, food wastage runs – from farm to stomachs – at a shocking one-third globally. … This waste must be much reduced if we mean to have any chance at all of muddling through to 2050. Third, major food-producing countries will have to be more serious about investing more in sustainable production with increased investments in irrigation, farm education, and research. Taking serious steps to lower the longer-term costs of fuel and, of course, protecting against continued deterioration in the climate will also be vital. But the main contributor to reducing the food imbalance between supply and demand is once again likely to be price: more of the poor will eat less and some, regrettably, will eat nothing.

At the end of all the analysis, Grantham spells out his personal investments goals in this area quite clearly. In particular, he finally explains quite concisely why he favors farms and forests over energy, fertilizer, and metals. The overall case is quite convincing, and I would strongly endorse a similar approach.

For any responsible investment group with a 10-year horizon or longer, one should move steadily to adopt a major holding of resource-related investments. For my Foundation (i.e., personally as opposed to institutionally where, reasonably enough, we cannot impose 10-year plus horizons on our clients) I had adopted 30% in resources as my eventual target and was slowly averaging in, nervous of near-term substantial price declines, but even more nervous of completely missing my own point. In my Foundation, I have currently reached about the two-thirds point of 20%.

My personal, somewhat arbitrary breakdown of a targeted 30% is to have 15% in forestry and farms, 10% in “stuff in the ground,” and 5% in resource efficiency plays. I will change the mix as I become more comfortable with some of the subsets or as I see exceptional opportunities. I do, though, see farms and forestry as the senior or preferred component, if you will, for the longer term: mining and oil companies benefit a lot from rising prices, but they suffer from the need, as capitalist enterprises, to keep replacing their stock in trade every year and this slowly becomes impossible to do completely. Farms, however, also benefit from rising commodity prices but for them their “stuff in the ground” is soil, which, if well managed, has fully renewed growing capacity each year, usually even with a modestly rising trend. There is one component of the potential “stuff in the ground” sub portfolio, though, to which I would give a miss: coal and tar sands. This is not primarily because their incredible cost to the environment hurts my conscience; it is because, in my opinion, the odds will steadily grow as climate damage becomes increasingly apparent, that their use will be curtailed.