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Long Term Food Crisis – Jeremy Grantham

August 13, 2012

You may not know Jeremy Grantham.  He is co-CEO of GMO, Inc., an investment management firm with around $100 billion under management.  His quarterly newsletters have a near cult following due to his unique perspective on markets.  He thinks in terms of big themes and global trends which will have implications for the economy and investments for many years.  He is not a stock picker so you will not come away with new ideas for trades but you will come away with your mind expanded in ways that can help to shape your own thinking and perhaps your investments.

His most recent letter, “Welcome to Dystopia” addresses what he sees as a sustained increase in price and decrease in supply of the world’s most important natural resources.  Now this is not necessarily a new notion, but he puts it into perspective and identifies the key factors that have led us to this point and will likely determine the trajectory of these trends in the years ahead.  Specifically, he identifies that we are 10 years into an era of rising resource prices and now are 5 years into a period of sustained food crisis in poorer countries, a situation likely to continue for the indefinite future.

Grantham cites a number of factors supporting the trends in the food crisis:  water shortages, erosion, slowing productivity per acre for grain, diminishing returns from fertilizer use, waste and climate change.  Projections for population growth and food production anticipate a substantial shortfall in food by 2050.  But, long before then the people of the poorer countries would not be able to afford the increased costs for food that go along with a reduced supply.  The result would be the breakdown of the social structures of these countries, waves of large scale immigration and wars.  The cruel irony of this situation is that the richer countries are the least likely to recognize and react to this crisis as it grows.  We have more food available and spend less of our total budgets on our food.

A perfect symbol of our carefree and careless attitude is in our policy toward corn-based ethanol.    Despite corn being almost ludicrously inefficient as an ethanol input compared to sugar cane and scores of other plants, 40% of our corn crop – the most important one for global exports – is diverted away from food uses.  If one single tankful of pure ethanol were put into an SUV (yes, I know it’s a mix in the U.S., but humor me) it displaces enough food calories to feed one Indian farmer for one year! To persist in such folly if malnutrition increases, as I think it will, would be, to be polite, ungenerous: it pushes the price of corn away from affordability in poorer countries and, through substitution, it raises all grain prices.  Our ethanol policy is becoming the moral equivalent of shooting some poor Indian farmers.  Death just comes more slowly and painfully.

In the US, we like to congratulate ourselves on how admirably we respond to emergencies such as helping out victims of flooding or other natural catastrophes.  However, when the threat is longer term in nature and we perceive that it is unlikely to affect our way of life for the foreseeable future, we cannot muster the will to act.  Do I even need to point out that our politicians cannot be counted upon to provide this leadership?  Grantham says, “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.”

Even if we did recognize the impending crisis and cared enough to do something about it, we generally don’t know what we can do.  Here are a few things anyone can do:  conserve water; reduce beef consumption (one pound of beef replaces 30 pounds of grain and requires a substantial amount of water to produce); support measures to reduce global birth rates; encourage more organic farming (over time organic farming holds the promise of reducing damage to the soil and reducing our reliance upon the dwindling supply of fertilizer sources).

If you can make the time to read the letter you will certainly find that it will challenge your thinking and might even lead you to read more on this topic and consider how it may affect the lives of your children and grandchildren.

From → Government, Stocks

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