GMO co-founder and chief investment strategist Jeremy Grantham argued Friday at the Morningstar Investment Conference in the United States that the world is in the midst of a great paradigm shift driven by explosive population growth and its corresponding pressure on natural resources.
A GMO equal-weight index of 33 commodities showed a 100-year decline in after-inflation prices from 1900 to 2000, save for both World Wars and the 1970s inflationary oil shock, which sent prices temporarily spiking upward.
But something happened 10 years ago, Grantham said. 100 years of decline turned around starting in 2000, with real commodity prices rapidly regaining all the ground they lost over the preceding decades.
That's not to say the last 10 years were a smooth ride for commodity prices. "2008 felt like a speculative bust in commodities," Grantham said, "But then everything bounced back. There has never been a major crushing like that, that immediately went back and hit its old high."
The resilience of commodity prices after the financial crisis even further support the argument, Grantham said.
Why a paradigm shift now?
Grantham cites more people as a primary driver in the sea change, with the world population growing from about 2 billion in 1938 (the year of his birth), to about 7 billion today, on its way 9 billion or more, creating a hockey stick population chart over the last 70 years.
China is another factor, Grantham noted, as its share of world commodity usage has ballooned. The country now uses 53% of all the world's cement, 48% of all iron ore, and 47% of all coal. China's demand for animal feed is also soaring, with annual soybean imports growing from 10 million metric tons to 55 million over the last 10 years, according to Grantham's presentation.
A greater population will mean pressure on all sorts of commodities, but the most pressing issue is food and agriculture. "The real problem will be feeding 10 billion people," Grantham said. "At a certain point fertilizer takes you backward and offers diminishing returns."
Agricultural fertilizer usage has grown by about five times since 1960, we've also seen a decline in annual crop yield growth, according to Grantham's presentation. Agriculture resource shortages are particularly acute for potassium and phosphate, which are produced mainly in select areas of the world.
"It's unevenly distributed," Grantham says, adding that resource issues are already contributing to global instability, including the Arab spring.
What does it mean for investors?
"Think about farms, resource funds--fertilizer," Grantham said. "But it's not how to get rich this year. The euro will be much more important [in the short term]."
In an earlier interview with Morningstar.com earlier, Grantham underscored his conviction, "I think the trend is up [in resources], and that makes a big difference for those who own the assets in the ground," he says. "This is the biggest change in the long-term business outlook I've seen in many, many decades."
Jason Stipp is site editor for Morningstar.com, our sister US site.