A portfolio for hungry times

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Missed out on this summer's spike in corn prices? Not to worry. According to legendary investor Jeremy Grantham, those gains were nothing more than a warm-up act for what resources are likely to do in the coming decades.

Mr. Grantham, the chairman of global asset manager GMO LLC, sees a dismal-looking future for humanity amid a problematic convergence of population growth, climate change and diminishing returns from such key ingredients as fertilizer.

But at least his views provide a big upside to investors: Resource stocks look set to benefit from a long-term trend where supply cannot meet surging demand.

"I am very bearish on the problems we humans face and, sadly, very bullish on resources," he said in his latest note to clients.

Mr. Grantham has become a much-admired investor, and not only because his firm commands assets worth more than $100-billion (U.S.). Some of his recent calls have been prescient: He stayed clear of the 1990s technology bubble but recommended diving into stocks in March, 2009, just days before major indexes began to recover from multi-year lows.

In his latest call, he says that agricultural demand from a global population – expected to hit at least nine billion by 2050 – is a key area of concern, and one that is being underestimated by the general public, governments and financial markets.

Mr. Grantham argues that food production might have to double by mid-century to feed everyone even at a modest level, yet productivity increases have slowed to a crawl while extreme weather patterns have had a punishing impact on food prices.

"The last three years of global weather were so bad that to draw three such years randomly would have been a remote possibility," he said. "The climate is changing."

He expects that the cost of fertilizer will rise rapidly, despite what he sees as diminishing returns from its increased use in global farming. If he is right, this could have a profound impact on two key Canadian companies, Potash Corp. of Saskatchewan Inc. and Agrium Inc.

He also expects energy costs to soar so high that they will exert a significant drag on global economic growth. Yes, countries can increase their levels of efficiency, in theory, but there is probably little political will to do so.

But a note to anyone with exposure to the Canadian oil sands: Mr. Grantham is not a fan. He believes that as climate damage grows more apparent, these operations will be curtailed.

As for metals production, he expects supply shortages to be a minor problem over the next few decades but these will eventually rise as a threat. And unlike energy and food demand, which can be met with new technology and efficiencies (at least in theory), there seems to be no such solution to metals shortages: The world will slowly run out and prices will rise.

"The longer we delay in facing up to resource shortage, especially the need to go to renewables, the more severe the problem becomes," he said.

Feeling a touch pessimistic that the world will meet this challenge? Mr. Grantham sure is: "We are badly informed, passionately prefer good news, and easily evade unpleasant facts; our views are easily manipulated by vested interests; we are sometimes desperately inefficient; and we are apparently corruptible as heck."

He believes investors with a timeline horizon of at least 10 years should devote a substantial portion of their portfolios to resources – at least 30 per cent – but should move toward that goal by taking advantage of occasional price dips.

Some of his investment ideas seem relatively straightforward for most investors: Grab oil producers, fertilizer companies and base metals miners.

Others, like investing in farmland and timberland, might be harder to accomplish – but the payoffs could be greater.

"Mining and oil companies benefit a lot from rising prices, but they suffer from the need, as capitalist enterprises, to keep replacing their stock in trade every year and this slowly becomes impossible to do completely," he said.

"Farms, however, also benefit from rising commodity prices but for them their 'stuff in the ground' is soil, which, if well managed, has fully renewed growing capacity each year."

An ugly menu

Why Jeremy Grantham sees a food crisis ahead:

Food production must increase 60 per cent to 100 percent by 2050 to feed a projected global population of nine billion.

Improvements in grain productivity per acre have fallen decade by decade since 1970, from 3.5 per cent to 1.5 per cent.

Water problems are increasing to a point where gains from increased irrigation are likely to be offset by the loss of underground water and the salination of soil.

Easy gains from increased use of fertilizers are now behind us: Fertilizer use has increased fivefold in the past 50 years.

Source: GMO