A noted strategist sees a global food crisis that will be with us for decades. Here are the investment areas he recommends.
The road to dystopia is paved with dust and hardship.
Such is the gloomy worldview of Jeremy Grantham, the chief investment strategist of institutional money manager GMO, based in Boston. Grantham envisions a future of scarce resources, where food — and the means to produce it — is the coin of an unstable realm.
“We are five years into a severe global food crisis that is very unlikely to go away,” Grantham wrote in a letter (.pdf file) to GMO clients, published late Tuesday.
“It will threaten poor countries with increased malnutrition and starvation and even collapse,” Grantham predicted. “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.”
Food (and the lack of it) will be the world’s foremost social, economic and political priority for several decades, Grantham maintains. The crisis is unlikely to abate “at least until the global population has considerably declined from its likely peak of over nine billion in 2050.”
The good news is that science and technology are engineering better ways to increase food production, Grantham said. The trouble is that these efforts might not be successful, and in any event, demand will most certainly overwhelm supply.
“The general assumption is that we need to increase food production by 60% to 100% by 2050 to feed at least a modest sufficiency of calories to all 9 billion people plus to deliver much more meat to the rapidly increasing middle classes of the developing world,” Grantham said.
“I believe that this is substantially optimistic,” he wrote. “Much more likely, we will not come close because there are too many factors that will make growth in food output increasingly difficult.”
Among the factors Grantham cites are declines in grain harvests, obstacles to efficient irrigation, bad farming practices that undermine productivity, and increasing weather instability, including floods, droughts and heat. “The climate is changing,” he argued.
Moreover, he said, rising production costs will price many people literally out of the market. “Even if we could produce enough food globally to feed everyone satisfactorily, the continued steady rise in the cost of inputs will mean increasing numbers will not be able to afford the food we produce.”
Grantham has been concerned with resource scarcity for several years and frequently raises the issue. The Grantham Foundation for the Protection of the Environment works to promote environmental awareness and action.
The foundation has an investment portfolio, separate from Grantham’s work at GMO, that allocates with an eye to the next 10 years and beyond. Farming and timber assets are top areas to consider on a global basis, as are shares of companies involved in fertilizer, chemicals, farm equipment, irrigation and other areas of agricultural production.
“I am very bearish on the problems we humans face and, sadly, very bullish on resources,” Grantham said. “You can confidently expect that if resource prices steadily rise in real terms, then resource stocks should outperform the market.”
Grantham said he’s targeting a 30% allocation to resources in the foundation’s portfolio, and is about two-thirds of the way there. The breakdown of assets, he estimated, would be about 15% in forestry and farms, 10% in “stuff in the ground” and 5% in resource-efficiency investments.
Yet the opportunities for investors in food-related businesses are double-edged. While higher food prices will benefit resource stocks, the “resource squeeze” and other economic developments that curtail corporate growth are likely to trim investors’ total return, Grantham said.
“Rising resource prices will worsen the prospects for the balance of the portfolio,’ Grantham said, “by both squeezing profit margins and reducing overall growth.”
Accordingly, Grantham said, he continues to favor shares of “quality” companies. “They have much lower resource costs as a percentage of total revenues than typical companies,” he wrote, “and they have a higher margin base from which to resist margin pressure.”
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