GMO’s Jeremy Grantham says the world is well into a food crisis that isn’t likely to abate, and that it will have huge sociological, governmental, economic, and investment repercussions.
“We are five years into a severe global food crisis that is very unlikely to go away,” Grantham writes in his latest quarterly letter on GMO’s site. “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.”
Grantham says the crisis is likely to be around for decades, until the global population has “considerably declined” from the 9 billion peak it is expected to reach in 2050. If it continues, the crisis “will cause the social structure of several countries to break down, resulting in waves of immigration on a scale unknown in modern times, outside of major wars,” and create risks to global security. Part of the problem, he says, is food availability, while another part is cost — even if the world can produce enough food to feed everyone, the input costs could be so high that many are priced out.
The crisis is already having a big impact in some areas, Grantham says. Food accounts for about 10% to 12% of total budgets in developed countries, but 40% in poorer countries like Egypt. He also discusses water shortages, and risks to farming productivity like erosion and dwindling supplies of phosphate and potash fertilizer.
Grantham cites one big positive in the food situation: optimism about scientists’ abilities to engineer genes that would make some key crops more efficient. But, he says, while “strong countermeasures” could be taken to help stem the crisis, they likely won’t be taken. “This is because the price signals for the rich countries are too weak — they can afford the higher price — and there is inertia in all parts of the system,” he says. “Also, the problems of malnutrition in distant countries are not generally felt as high-order priorities in the richer countries.” He says a related energy crisis can be addressed by large investments in renewables and smart grids, and the countries that make those investments will come out ahead of those that don’t. He doesn’t think the U.S. has the will to do so, however.
Grantham says his comments are based on a horizon of 10 years and further out. As for how they impact investing, he explains: “The portfolio investment implications are that investors should expect resource stocks — those with resources in the ground — to outperform over the next several decades as real prices of the resources rise. Farming and forestry, though, are at the top of the list. Serious long-term investors should have a very substantial overweighting in a resource package. I suggest for long-term investors a resource position of at least 30%. Another relative beneficiary of resource pressure is the quality group of equities. Resources are a smaller fraction of final sales than average and higher profit margins make them more resilient to margin pressures.”