The prescient Jeremy Grantham, who predicted the tech and credit bubbles, as well as the recent slowdown in China, has this to say in his most recent quarterly letter (link to PDF) to his investors:
We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody.
Er, is there anything we can do about it, Mr. Grantham?
We are badly designed to deal with this problem: Regrettably we are not the efficient species of investment theory, but ill-informed, manipulated, full of inertia, and corruptible.
If that's the case, what else does this future hold? And how can investors shield or grow their assets during such a turbulent time?
The Road we're heading down
As in Cormac McCarthy's novel, food is scarce in Grantham's future. It won't be a nuclear holocaust that puts us in this situation, however, but simple economics -- we won't be able to produce enough food for the billions more people the world will be adding.
According to the Food and Agricultural Association, the world will need to produce 70% more food by 2050 to feed the expected 9.1 billion people. Grantham thinks this goal will be a stretch to reach because of:
- Falling grain productivity.
- Water scarcity.
- Land degradation.
- Diminishing returns from fertilizer.
- Increasing weather instability.
- Increasing fuel prices.
With too little supply of food, and too much demand, prices will rise. And while developed countries will only see higher food bills (phew!), developing countries will struggle to afford any food. These populations that struggle to meet basic needs will demand change; Grantham cites that Egyptians were spending 40% of their income on food before their revolution. Americans, on the other hand, spend about 7%. For comparison, imagine how content you would be if you had to pay $20 for a Subway sandwich, or even $5 for Ramen noodles.
With little hope of changing the situation, where can you put your cash?
In the ground!
Don't bury it, but invest it in companies that will. Grantham recommends transitioning your portfolio to hold at least 30% resource stocks along with investing in high-margin companies that will feel relatively less pressure from higher resource prices. Here are samples of such stocks:
|
Company |
Business |
P/E Ratio |
Comments |
|---|---|---|---|
| Brookfield Infrastructure Partners (NYSE: BIP) | Ports, railroads, pipelines, utilities, and forests | 37 | Brookfield has been on a tear this year, up 25%. While this has made the stock a little expensive, it still offers a dividend yield over 4%. |
| Adecoagro (NYSE: AGRO) | Crops, rice, coffee, cattle, sugar, ethanol, land | 29 | Also up 20% for the year, Adecoagro's farms (all in South America) were hurt by drought and cold weather, lowering net income 90%. The company will offer a new picture when it reports in mid-August. |
| Veolia Environnement (NYSE: VE) | Water, waste, and energy management | Unprofitable | The French company recently sold off its American waste-management segment to pay down debt and is even more water-focused. European weakness has Veoila trading near its 52-week low with a 6.7% yeild. |
| Sociedad Quimica (NYSE: SQM) | Mines chemicals for fertilizers, food, and batteries | 26 | The good? It could benefit from higher commodity prices. Even better? Its chemicals have a diversity of uses beyond fertilizer. |
| Weyerhaeuser (NYSE: WY) | Timber, homes, paper | 39 | After converting to a REIT and reducing its employees by 70% over five years, the stock trades at its 52-week high with a 2.6% yield. |
Even with a large portion of your portfolio dedicated to resource stocks, Grantham thinks that rising resource prices will hurt your other holdings substantially.
Proceed with caution
With more stress on the world's resources, investing in the right business can help offset the higher prices you'll be paying in the future. It will be your decision whether you help the hungrier portions of the world in 2050, but make sure you can have that decision through building long-term wealth now. To help you achieve this, read our free report on "3 Stocks That Will Help You Retire Rich," which outlines the savings habits you need and quality stocks for a smarter portfolio. Best of all, the report is free!
