Grantham: Paradigm Shift Taking Place In Commodity Prices

We are undergoing a Paradigm Shift in the price trend of virtually all commodities – perhaps the most important economic event since the  Industrial Revolution. [Let me explain why that is the case.] Words: 765

So says Jeremy Grantham in edited excerpts from an article* posted at www.BusinessInsider.com by Henry Blodget entitled GRANTHAM: We’re Headed For A Disaster Of Biblical Proportions.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.

Grantham goes on to say, in part:

The rise in population, the ten-fold increase in  wealth in developed countries, and the current explosive growth in developing  countries have eaten rapidly into our finite resources of hydrocarbons and  metals, fertilizer, available land, and water. Now, despite a massive increase in fertilizer  use, the growth in crop yields per acre has declined from 3.5% in the 1960s to  1.2% today. There is little productive new land to bring on and, as people get  richer, they eat more grain-intensive meat. Because the population continues to  grow at over 1%, and no compound growth is sustainable, there is little safety margin.

Downward Trend in Commodity Prices Has Ended

For the past 100 years, the prices of commodities have  trended downward, as technology has made them cheaper to extract and produce.  Grantham thinks that trend has now permanently ended.

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A New Paradigm Shift in the Price of Oil Underway

Looking at oil, for example… Oil traded at about $16 a  barrel for 100 years. Then, as demand outstripped supply, the paradigm  shifted–to ~$35 a barrel. Now, Grantham thinks, the paradigm has shifted again,  to a central value of about ~$75 a barrel

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Demand for Oil Growing Faster Than Supply 

Why is the paradigm shifting? Because demand is now  growing far faster than supply. The world’s oil production has barely increased  since the 1970s, while oil usage has exploded.

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Don’t buy that crap about how future discoveries  will save us. In the 1980s, we began consuming more oil each year than was  discovered. That disparity is only going to increase.

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Metals Also Undergoing a Paradigm Shift in Prices

Oil is not the only commodity undergoing a price  paradigm shift. Metal prices are also exploding. Here, for example, is a  hundred-year look at the prices of iron ore.

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Yield per Ton of Metal Ores Continues to Drop

The story for metals, by the way, is the same as for  oil: the low-hanging fruit has been picked. Despite the use of new technologies,  the yield per ton of metal ores continues to drop. Here’s the yield on a ton of  copper ore, for example.

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Growth Rate of Crop Yields per Acre Has Dropped Dramatically

The same story is playing out in food. 40 years ago,  the average growth rate of crop yields per acre was an impressive 3.5% per year.  This was comfortably ahead of the growth rate of global population, which was  about 2%. In recent years, however, the growth in crop yields per acre has  dropped to about 1.5%. That’s dangerously close to the growth of population, and  at some point soon, the lines will cross.

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Fertilizer Usuage Continues to Grow Dramatically/Unsustainably

The ever-increasing-yield per acre, by the way, is the  result of heavy fertilizer use and most fertilizers are commodities, too  (potassium, for example) so there’s no infinite supply of fertilizers,  either.

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The Prices of Foods are Skyrocketing

Not surprisingly, the prices of foods are  skyrocketing.

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China’s Share of World Commodity Consumption is High and Growing

Why is all this happening now, when the global  population has been exploding for two centuries? The answer, in part, is the  spectacular growth of China, India, and other massive countries. The  resource-usage of these countries is mind-boggling.

Below, for example, are GMO’s  estimates of the percentage of world consumption of various resources that are  consumed by China alone. (China accounts for 9% of the world’s GDP and it’s  using 53% of the world’s cement!)

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Recent Commodity Price Spike is NOT Speculation or Random Price Fluctuation

GMO has calculated  those odds by examining how far the prices of various commodities are away from  their long-term trends. The odds that some commodity prices are random  fluctuations are reasonable (see the bottom of this chart). The odds that other  prices are “random,” however, are so high as to be basically impossible. This  supports GMO’s belief that we’re seeing a paradigm shift.

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