How to play resource scarcity

By 2050, it’s all over, says Jeremy Grantham: we’ll have either used up all cheap fuel or irreparably damaged the climate.

The founder of GMO Asset Management shared this grim scenario at the Ben Graham 2013 Value Investing Conference in Toronto in April.

And other major resources are at risk.

Consider that China currently consumes 59% of the world’s cement, 48% of its coal and iron ore, and 45% of its steel.

And the country has traditionally eaten a plant-based diet. But as it becomes wealthier, people will demand meat. Even now, the Chinese eat 47% of the world’s pigs.

As a result, agricultural stress will grow.

“There’s no room for bad weather,” Grantham says. Crop yields are decreasing: annual growth was 1.25% in 2011, compared to 3.5% in 1971. And the best crop yields – Japanese rice, German wheat – are topping out.

Food shortages will only worsen: we’re running out of phosphorus, an element with no manmade substitute that’s a crucial component of fertilizer.

“We need to mine it now to feed seven billion people,” Grantham says. He adds that 85% of the world’s high-grade, cheap phosphorus is in Morocco and the west Saharan region; the remainder is scattered around the world and in the ocean.

That supply, Grantham estimates, will only last about 50 years. In 25 years, we’ll be in crisis, he says.

Compounding the problem is the political unrest in Tunisia and Egypt, which is causing these countries to halt exports of the commodity.

And “Morocco won’t sell. I’ve met with them twice,” says Grantham. Regardless, he recommends buying phosphorus if you can – he owns some in his Foundation for the Protection of the Environment.

Potash, of which there are large supplies in Saskatchewan, Russia and Belarus, is also a component of fertilizer. So it’s another resource to consider investing in as food scarcity continues.

Aside from these commodities, he’s long on natural gas and short on grain.

His logic on gas? It’s $3.50 in the U.S., but $12 in Europe, so resource companies will find drilling attractive. “In five years, the price will have tripled, and it’s game over.” There will still be a long-term shortage.

Fracking does not address the cheap oil problem, he adds, because natural gas is a local market – it’s hard to move without pipelines.

His reasoning on grain is the major droughts of the last few years have caused farmers to overplant. “We will drown in grain” if the weather is good, he says.

Grantham also recommends investing in alternative energy companies, noting that the solar sector in particular has taken off. He predicts its delivery cost will fall over the next decade.

Read: Buffett firm invests in solar projects and The dirt on clean tech

Copper ore, farmland and forest are also going to be scarce, and make good investments.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.