Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Commodity Prices: To Infinity and Beyond

By Nate Weisshaar - Updated Nov 7, 2016 at 8:59PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China brings inflation to the world.

Have we seen the end of cheap commodities? Are we in for global inflation -- even hyperinflation? The debate is raging from Wall Street to Main Street, from the White House to houses just like yours.

The accepted wisdom states that as incomes rise in emerging markets like China and India, consumers in those countries will want more and more of the stuff Americans take for granted. But the stuff we take for granted is in limited supply. China and India are each home to more than 1 billion people -- more than three times the U.S. population.

Currently, about 49% of Chinese citizens live in cities, up from 36% in 2000. Yet China's urbanization has a long way to go. Research group McKinsey Global Institute estimates that 66% of the country, or nearly 1 billion Chinese, will live in cities by 2025.

This means they'll need more oil to fuel billions of new cars; billions of tons of iron ore and copper to build new apartment buildings, commercial buildings, and subways; and much, much more food, produced on less land and with less water. Where will it all come from? And will it come in time?

When Malthus met Grantham
Thomas Malthus famously wrote back in the late 1700s that population is limited by how much food we can produce. He also lived at a time when the world population was around 1 billion. Since then, the world has seen a net 6 billion new mouths arrive. At the same time, arable land has declined as cities gobble up real estate and water supplies get diverted, depleted, and polluted.

Renowned value investor Jeremy Grantham argues in his first-quarter letter to investors that the only reason Malthus has been wrong to date is because he didn't foresee the dramatic impact that cheap fossil fuels would have on our ability to grow more food per given measure of space.

However, Grantham continues, the age of cheap oil is coming to an end. With it, so will the world of deflationary commodity prices we've become accustomed to over the past century or so.

How to get in on this
If this is the case, a world of $100 oil will seem like paradise, and investors should be loading their portfolio with energy-related stocks. I'm not just talking about Big Oil names like ExxonMobil, Chevron, and BP, but also the service companies that support them. And the smart money will be looking at the so-called unconventional players: oil sands, deep sea drilling, liquid natural gas (LNG), and shale gas.

This means companies like CGG Veritas (NYSE: CGV), one of the leaders in deep-sea seismic mapping; Chicago Bridge & Iron (NYSE: CBI), an engineering/construction firm with experience building LNG plants; and SeaDrill (NYSE: SDRL), owner of a 60-strong fleet of offshore drilling vessels.

You could also play this trend by noting where China will get its resources from: places like Canada, Australia, Brazil, and Africa. The big, obvious names here are Rio Tinto, BHP Billiton, and Vale. A less obvious play is Brookfield Infrastructure Partners (NYSE: BIP), which owns one of the world's largest coal ports in northwest Australia -- a convenient location for supplying Chinese markets -- and high-quality timberland in Canada and the U.S.

You could also play the agriculture angle along with famous trader George Soros. Adecoagro (NYSE: AGRO), of which Soros' investment vehicle owns about 25%, owns sugar plantations and farmland in Brazil, Argentina, and Uruguay.

Hold on, not so fast
While Grantham is bullish on commodities (or pessimistic on inflation) going forward, his value instincts tell him that now, when commodity prices are bubbling, is not the time to jump in. He's waiting for a pullback before he goes all in. And he thinks that pullback will come from a slowdown in China.

He agrees with the logic that demand from the massive emerging economies of China and India is pushing us to the limits of our resource supply. Therefore, he says, if markets feel China's economy, which has grown an average of 10% per year since 1978, is going to slow down, we'll see a serious sell-off in commodities. That will be the time to pounce!

Yet another way to profitIf you aren't comfortable with trying to guess where commodity prices are headed -- and I'm in the same boat there -- you can still set up your portfolio to benefit from the urbanization of China's population. The Motley Fool Global Gains team is heading to China in a few weeks to find the best ways to invest alongside the rising Chinese consumer. If you'd like to get their notes from the road and see what they find, click here to sign up for their dispatches.

Nate Weisshaar doesn't own any of the stocks mentioned above. The Motley Fool owns shares of Brookfield Infrastructure Partners and CGG Veritas. Motley Fool newsletter services have recommended buying shares of Brookfield Infrastructure Partners.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a doomsday bunker and a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SeaDrill Limited Stock Quote
SeaDrill Limited
SDRL
Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
BIP
$58.31 (2.69%) $1.53
Chicago Bridge & Iron Company N.V. Stock Quote
Chicago Bridge & Iron Company N.V.
CBI
Adecoagro S.A. Stock Quote
Adecoagro S.A.
AGRO
$8.19 (3.15%) $0.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
652%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.