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the latest analysis of green and ethical investment

'Paradigm Shift' in Commodity Prices

Jeremy Grantham, chief investment strategist at GMO, highlights the green investment opportunities of increased scarcity. In his second quarterly letter of 2011 he discusses pressures on energy, metal and agriculture as a result of limited supply and increasing population and consumption.
Grantham’s previous position was that prices, in the long term, will revert back to their trend. He has revised that position in the case of commodities, where he now believes a new trend is forming. His argument resembles that of Thomas Malthus, an early 19th century scholar who believed that human population and consumption would only grow to the level constrained by available resources. Critics of Malthus put faith in technological genius, as seen in the industrial revolution, to ensure endless economic growth.

Grantham in his April letter says: “no compound growth is sustainable” and argues that we are reaching the point where limited resources will put a strain on consumption. His previous letter showed that commodities with constantly falling trend prices over the previous century are now rising in price so distantly from trend that he pronounces it a “paradigm shift”. He begins this quarter’s letter with the assurance that the human race is capable of solving these scarcity issues, but that action needs to be taken and: “It really is a crisis that begs for longer-term planning– longer than the typical horizons of corporate earnings or politicians.” As a result of this he criticises capitalism for its short-sightedness and inability to efficiently handle scarcity.

As mentioned in his previous letter, the pressure on hydrocarbons will be strong as we come to the end of our oil, natural gas and coal reserves. The letter suggests that in the 50 years that this may take, there is room for innovation in renewable and clean energy. The capitalist system of price signals should encourage this technology, and could be effective in solving the energy problem. In a similar way he foresees metal prices rising to respond to finite supply. His predictions concerning energy give long term prospects for clean energy funds, and for investment into energy efficiency.

With agriculture, however, without a careful plan he predicts we may “run head down and at a considerable speed into a brick wall” as our population and consumption is rapidly rising while crop yields are slowing in growth. Upward pressure on crop prices may occur as a result of rising population and increasing consumption, particularly of meat. Grantham’s letter repeats Jim Rogers’ advice: “become a farmer”, to take advantage of these higher prices. Agriculture funds are likely to benefit from increasing crop prices and many invest in fertiliser companies so will further benefit from rises in the price of fertiliser. As a solution to the agriculture problem, Grantham supports the method of no-till farming, where farmland is left unploughed. This method helps water retention, can lower fertiliser use, and can make the land a store of CO2.

Although the letter illustrates the problems the world is facing, it remains optimistic in our ability to solve them if action is taken now. The predictions from this letter would suggest strong performance for agriculture and clean energy funds in the long term.

Fund context:

Most of the Worldwise Investor Agriculture funds, such as Sarasin AgriSar, have holdings in fertilizer companies such as PotashCorp, Yara International and Agrium Inc. Companies that focus on agricultural efficiency such as Syngenta and Monsanto are also held by funds in these themes, such as CF Eclectica Agriculture and Baring Global Agriculture. Some Environmental funds and Multi-Themed funds have agriculture as one of their investment themes, such as Schroders Global Climate Change and Pictet Environmental Megatrend.

There are funds that try to reduce exposure to carbon risks, such as IFSL Carbon Footprint, and also funds that invest in alternative methods of power generation, such as iShares S&P Global Clean Energy, and others in the Clean Energy theme.

Related funds:

Baring Global Agriculture
CF Eclectica Agriculture
IFSL Carbon Footprint UK350 Equity Index Tracker
iShares Global Clean Energy UCITS ETF
Pictet Environmental Megatrend Selection
Sarasin Food and Agriculture Opportunities
Schroder Global Climate Change

Useful links:

Worldwise Investor: Agriculture Theme

Worldwise Investor: Clean Energy

Worldwise Investor: Water Scarcity Creating Investment Opportunities

NY Times: Can Jeremy Grantham Profit from Ecological Mayhem?

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Louise Fallonall articles

Louise Fallon starting working for Worldwise Investor as an intern over the summer and has written a number of articles during that time.

Louise is studying for a degree in Mathematics and Economics BSc at London School of Economics and Political Science, and graduates next summer.

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