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Grantham: Investors Should Gird for Global Food Crisis

By    |   Friday, 03 August 2012 07:58 AM

While the relentless drought affecting much of the United States has increased agricultural commodity prices, a larger force is at work and this is only the beginning of the price increases, according to Jeremy Grantham, co-founder of the global investment management firm GMO.

We are “about five years into a chronic global food crisis that is unlikely to fade for many decades, at least until the global population has considerably declined from its likely peak of over 9 billion in 2050,” Grantham wrote in his quarterly letter to investors, CNBC reports.

The food crisis “will threaten poor countries with increased malnutrition and starvation and even collapse,” he added. “Resource squabbles and waves of food-induced migration will threaten global stability and global growth.”

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Grantham believes the main drivers of the crisis will be a spike in demand for food from an increasing global middle class, decreasing grain productivity, a tainted water supply, increasing fertilizer and fuel costs and climate change, according to CNBC.

Food production will need to increase 60 to 100 percent by 2050 in order to adequately feed the more than 9 billion people who will populate the Earth, he noted.

“The portfolio investment implications are that investors should expect resource stocks—those with resources in the ground—to outperform over the next several decades as real prices of the resources rise,” Grantham wrote. “Farming and forestry, though, are at the top of the list. Serious long-term investors should have a very substantial overweighting in a resource package.”

The drought that is afflicting more than half the country will drive up food prices, and losses could eventually rival the 1988 drought that cost $78 billion in today’s dollars.

About 64 percent of the contiguous United States is in a drought, at the same time that the National Oceanic and Atmospheric Administration is reporting that 2012 is the hottest year ever recorded. The heat and lack of rain has sapped the production of corn and other crops.

“There does seem to be near-unanimous agreement from industry experts that this year's drought losses will surpass the $12 billion recorded in 2011," meteorologist Steve Bowen of Aon Benfield, a global reinsurance firm, told USA Today.

Richard Volpe, a U.S. Department of Agriculture economist, told USA Today, “In 2013, as a result of this drought, we are looking at above-normal food-price inflation. Consumers are certainly going to feel it.”

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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