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The United Nations issued a press release this week stating that the world population, which is close to 7 billion right now, will surpass 10 billion by 2100. Many analysts had believed that population growth would stabilize at around 9 billion globally.
The news reminded me of an extremely interesting newsletter authored by Jeremy Grantham of GMO, titled “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever.”
The main thesis of Mr. Grantham’s newsletter is that “the world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.” The prices, in real-terms, of all important commodities other than oil have fallen by an average of 70% over the last 100 years until 2002. From 2002 until now, the entire decline has been erased. “Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.”
Here are a couple of key facts noted in the newsletter:
The world population was 800 million in 1800 and we’re on our way to 10 billion 300 years later. On top of the population growth we are seeing “explosive growth in developing countries that have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.”
“Despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.”
The chart below demonstrates that most commodities are not on the same downward price trend that has existed for the last 100 years. For example, there is a 1 in 2,200,000 chance that Iron Ore is still on the same trend line.
We’ve heard this before haven’t we – that the world will use up all its natural resources – the loudest of all being the “peak oil” theorists. Here’s what Mr. Grantham has to say about previous forecasts:
“Aware of the finite nature of our resources, a handful of economists had propounded several times in the past (but back in the 1970s in particular) the theory that our resources would soon run out and prices would rise steadily. Their work, however, was never supported by any early warning indicators (read: steadily rising prices) that, in fact, this running out was imminent. Quite the reverse. Prices continued to fall. The bears’ estimates of supply and demand were also quite wrong in that they continuously underestimated cheap supplies. But now, after more than another doubling in annual demand for the average commodity and with a 50% increase in population, it is the price signals that are noisy and the economists who are strangely quiet. Perhaps they have, like premature bears in a major bull market, lost their nerve.”
Even with the paradigm shift and long-term trend of rising commodity prices, Mr. Grantham forecasts, with an 80% probability, that commodity prices will come down next year. The two key drivers are a better weather year (this last year was the worst in decades), and a slowing of China’s economy. If one of these events happens, “commodity prices will decline a lot.” “If both events occur together, it will probably break the commodity market en masse” and “produce the second ‘once in a lifetime’ (investment) event in three years.” But this doesn’t change the long-term trend – “in the next decade, the prices of all raw materials will be priced as just what they are, irreplaceable.”
Have we really reached a paradigm shift? I won’t pretend to be the expert, but what seems very clear is that we have a growing global population with more “western-like” appetites in food and consumer goods. And commodities are getting harder and more costly to get out of the ground whether it is oil from tar sands in Canada or iron-ore from less developed regions like Zambia. I absolutely believe we will have higher commodity prices at the end of this decade than we do now. In addition to higher prices, we will see more and more volatility caused by a tighter demand/supply equation.
Where Mr. Grantham sees this as an investment opportunity, I see it as an opportunity for corporations to put best practices and systems in place to better manage commodity procurement. The organizations that figure this out first will have a big competitive advantage.