Jeremy Grantham, the ‘G’ behind Boston-based fund manager GMO, says long-term investors should gradually raise their allocation to resources up to 30%, on the back of food shortages he expects to worsen.
Although these days it seems even ‘long term’ investors can’t focus beyond the latest Fed or ECB declaration, Grantham says “sensible long-term investors’ 7- to 10-year horizons should overweight resources,” adding that 30% is about two times current market weight.
In his quarterly letter to investors, Grantham says investors’ models of declining prices for food and related resources is broken. A new era has begun, one that is not understood by governments.
He says China "gets it" but even it may be underestimating the potential emergencies in food, water and climate change; and although the election-obsessed politicians of the West are hopelessly behind, military planners in the US and UK are perhaps most attuned to the emerging food crisis.
“You can confidently expect that if resource prices steadily rise in real terms, then resource stocks should outperform the market,” he says.
The North American shale-gas revolution has sent energy prices into a nosedive, but Grantham’s focus is not on fossil fuels. Oil and tar sands are two resources that he expects will be abandoned as the costs of climate change mount.
“I see farms and forestry as the senior or preferred component, if you will, for the longer term,” Grantham says, because if properly managed, these can produce continuously; mining and oil companies are under pressure to constantly reproduce their stock and face eventual depletion.
The world has entered a chronic food crisis that will continue for decades, until the global population peaks at over 9 billion around 2050. Grantham believes predictions that food needs can be met are fantasy.
The most efficient grain producers, in Europe, Japan and the US, have seen productivity fall since the 1970s, as the use of fertilizers has reached its marginal limits. Genetic engineering does hold the potential to create massive productivity gains in wheat and rice, however. And more efficient organic farming, in theory, can boost productivity throughout emerging markets.
But assuming things on those fronts go right, the world still faces growing problems with water and unstable weather. Grantham is convinced that fertilizer and fuel prices are going to rise dramatically.
Even if the world can produce enough food, these price rises mean poor countries won’t be able to feed enough of their people.
For example, Egypt and other countries suffered a food shock in 2008 that saw consumers’ budget for food double to 40%; such pressures played a role in stoking the Arab Spring. Although the immediate food crisis has subsided, Grantham says Egyptians’ food budgets are still stuck at 40%, suggesting fuel and fertilizer price rises are becoming structural; another shortage could lead to social collapse.
The good news of cheap natural gas has the downside of making the rich world more complacent regarding the long-term viability of fossil-fuel dependence. And Grantham cites early studies of fracking that show a considerable amount of methane-laden gas is accidentally released into the atmosphere, undermining the supposedly cleaner nature of natural gas.
Were the US to undergo a massive, decade-long programme of building ‘smart grids’ (electricity networks that plug directly into people’s homes and implement power-saving technologies) and investing in renewables, many of these problems would be mitigated. But Grantham is sceptical that the US can find the political will to do so.
Therefore, for investors, he thinks the best response is to invest in those companies most likely to benefit as political inertia leads to rising prices in resources.