Our Chat With Jeremy Grantham about commodity prices

Our Chat With Jeremy Grantham
Photograph by Erik Madigan Heck

Jeremy Grantham

JEREMY GRANTHAM’S GOT A TRACK RECORD that’s impossible to ignore—he called the Internet bubble, then the housing bubble. While moves like those have earned the famed forecaster the nickname “perma-bear,” in early 2009 he also told clients at GMO, his $100 billion, Boston-based money-management firm, to jump back into the market. It was the same week that stocks hit their post-Lehman low.

Now, however, the outspoken Yorkshireman, who is chief investment strategist at GMO, is making headlines with a new prediction: Dire, Malthusian warnings about environmental catastrophe. To hear him tell it, the world is running out of food. Resources will only keep getting more expensive. And climate change looms over it all. Indeed, at times he sounds like someone Greenpeace would send door-to-door with a clipboard. (He’s not above likening the coal-industry spin to the handiwork of Goebbels.) If it were anyone else, Wall Street would probably laugh him off. But because it’s Jeremy Grantham, they just might listen.

Q: You’ve been ringing alarm bells about commodity prices. Why all the worry?

A: They came down for a hundred years by an average of 70 percent, and then starting around 2002, they shot up and basically everything tripled—and I mean, everything. I think tobacco was the only one that went down. They’ve given back a hundred years of price decline and they gave it back between ’02 and ’08, in six years. The game has changed. I suspect the game changed because of the ridiculous growth rates in China—such a large country, with 1.3 billion people using 45 percent of the coal used in the world, 50 percent of all the cement and 40 percent of all the copper. I mean these are numbers that you can’t keep on rolling along without expecting something to go tilt.

Q: This led to some surprising conclusions, like your concerns about natural resources most of us have barely heard of.

A: We went through one by one, and we decided the most important, the most valuable and the most critical was phosphate or phosphorous. Phosphorous cannot be made, only placed. It is necessary for all living things. And we are mining it, and it’s depleting. And I like to say, if that doesn’t give you goosebumps, then you’re tougher than me. That is a terrible equation. So I went to the professors, and I said, what’s going to happen, and they said, ‘Oh, there’s plenty of phosphorous.’ But what’s going to happen when it runs out? ‘Oh, there is plenty.’ It’s a really weak argument. We do have a lot, but 85 percent of the low-cost, high-quality phosphorous is in Morocco…and belongs to the King of Morocco. I mean, this is an odd situation. Much, much more constrained than oil in the Middle East ever was—and much more important in the end. And the rest of the world has maybe 50 years of reserve if we don’t grow too fast.

Q: What are investors supposed to do?

A: The investment implications are, of course, own stock in the ground, own great resources, reserves of phosphorous, potash, oil, copper, tin, zinc—you name it. I’d be less enthusiastic about aluminum and iron ore just because there is so much. And I wouldn’t own coal, and I wouldn’t own tar sands. It’s hugely expensive to build coal utilities, and the plants they have to build for tar sands are massive, and before they get their money back I suspect that the price of solar and wind will have come down so much.

So I wouldn’t use that, but I think oil, the metals and particularly the fertilizers, I would own—and the most important of all is food. The pressures on food are worse than anything else, and therefore, what is the solution? Very good farming, which can be done. The emphasis from an investor’s point of view is on very good farmland. It’s had a big run. You can never afford to ignore price and value, but from time to time you can get good investments in farmland, and if you’re prepared to go abroad, you can do it today. I wouldn’t be too risky. I would stay with distinctly stable countries—Australia, New Zealand, Uruguay, Brazil, Canada, of course, and the U.S. But I would look around, in what I call the nooks and crannies. And forestry is the same. Forestry is not a bad bargain, a little overpriced maybe, but it’s in a world where everything is overpriced today, once again, courtesy of incredibly low interest rates that push people into investing. A wicked plot of the Federal Reserve.

Rising Commodities

Total return over 10 years (2003-2013)

[image]Source: S&P Dow Jones Indices

Q: Why is this problem so hard for us to deal with? You’ve railed against short-termism.

A: A career politician has a very short horizon. They’re not really interested in problems that go out five or 10 years. Secondly, you have what they call the discount-rate effect, which is a dollar in 10 years has a much lower value to a corporation than a dollar today. So they’re only interested, at the corporate level, in the short term. And politicians, in the very short term. And you have a vested-interest effect. In other words, it’s very hard to get change when the people who are benefitting very nicely, thank you, from the current situation don’t want it. If the oil industry is making a bundle, which they are, they don’t want to change to a system that recognizes climate change and the need to have a tax on carbon. And they can fund right-wing think tanks, and they do.

So you have vested interests fighting like mad to keep the situation the way it is. And that’s always the case. So change is difficult, and with our politicians with the short-term election problems, it’s nearly impossible. And when they depend so much on campaign contributions, and they find the campaign contributions come so much from the vested interests, the financial world, but more particularly the energy world, it’s a bloody miracle anything gets done.

Q: And that long-term perspective is important, not only to changing society, but also to investing. As an investor, you’re known for that.

A: I like to get what I consider the central idea, which in the stock market is patience and value and mean reversion. And in society, it is resources and climate damage. That’s plenty to go on, and that’s a pretty strong focus. We have a shockingly short horizon in the stock market, as witnessed in the Internet bubble. And we have a shockingly short horizon about social problems, where all we want to hear is how rapid the growth will be and how good everything is.

Q: How about a stock forecast. You called the market’s initial 2009 rally, but by 2010 you were predicting “seven lean years.” So far, however, the market’s soared.

A: And it can go a lot higher than this with the Fed pushing it. And we can have another real bubble. Based on the Fed’s history, that seems to be what they like. You know we had one in 2000 with Greenspan, and then we had a housing bubble and a financial bubble with Bernanke and Greenspan. And it looks like Bernanke is perfectly happy to keep the rates down and watch as stock prices rise. They do that because as the rising stock prices give you a little consumer kick, you feel richer—and then, when you least need it, the whole thing bites you, and the prices go back to fair price or lower, like they did in ’09, and the consumer reacts, and you have a recession and a bad stock market. But they’ve had two of these, and they seem bound and determined to do it a third time. As I’ve said, it’s a workable definition of madness to keep doing the same thing and expect a different result.

Q: Like many Englishmen, you seem to regard Americans as wildly, fool-heartedly optimistic.

A: America is a very, very optimistic-biased society, as I believe, incidentally, Australia is, for whatever that means. We’re the two great optimistic societies. You can have a conversation about a housing bubble in England, and they’ll say, ‘oh, is that right? Let me see the data.’ If you have one in Australia, you have World War III! They hate you. They hate you for years! [laughs] The idea that you could suggest that they were having a housing bubble. [laughs]

Q: So the stereotypes about us are true?

A: Absolutely. Now, it’s been very useful in enterprise, in venture capital…in start-ups. We have more failures here than probably every developed country added together, but in consequence, when the smoke clears, we tend to end up with the Amazons and the Googles. It’s not an accident. We just throw more darts at the dartboard. The Germans are very conservative about throwing darts. We have an admirable risk-taking attitude, and we’re very tolerant of failure.

Q: We benefit from it?

A: Absolutely, but the downside is you’re willing to throw darts because you think you’re going to win. American entrepreneurs all know they’re going to win. Only 10 percent survive, but they all think they’re going to win.

Today grain future

Corn futures finished a few pennies lower across the board. After the close, USDA released the most recent crop progress report which showed corn conditions in the gd/ex rating declined 1 point from last week to 53%. This figure remains much higher than the same period last year which was at 24%. Corn in the mature stage was up to 22%, compared to 73% at this time last year. USDA showed 4% harvested in the 18 major states. The 5 year average is 10%, but includes last year and the record 24% by September 15, 2012. The Brugler 500 Index declined 3 points from last week to 342. Weekly corn export inspections came in at 20.111 (mbu) vs. 9.986 mbu the previous week. Market year to date figures are at 28.277 (mbu) vs. 37.635 mbu last year. The most recent CFTC data released last Friday showed spec funds still holding a sizeable short position.

Dec 13 Corn closed at $4.56 1/2, down 2 1/2 cents,
Mar 14 Corn closed at $4.69, down 2 1/2 cents,
May 14 Corn closed at $4.77 1/4, down 2 1/4 cents
Jul 14 Corn closed at $4.83 3/4, down 2 1/2 cents

Soybeans futures closed 20 to 33 cents lower on the day. After the close, USDA released the most recent crop progress report which showed soybean conditions in the gd/ex rating declined 2 points from last week to 50%. This figure remains much higher than the same period last year which was at 33%. The USDA report also showed 26% dropping leaves, which is below the 5 yr average of 35%. The Brugler 500 Index declined 6 points from last week to 336. August NOPA crush was pegged 110.5 mbu which was within the range of estimates, while soy oil stocks came in at 1.668 bln lbs which was below estimates. Rains over the weekend in parts of Iowa and Minnesota have provided the trade with a bearish influence to start the week. Weekly soybean export inspections came in at 2.972 mbu vs. 2.519 mbu the previous week. Current market year to date figures are now at 4.818 mbu vs. 22.644 mbu from the previous year.

Nov 13 Soybeans closed at $13.48 1/4, down 33 1/4 cents,
Jan 14 Soybeans closed at $13.48 1/4, down 31 1/2 cents,
Mar 14 Soybeans closed at $13.22, down 25 1/4 cents,
May 14 Soybeans closed at $12.94 1/2, down 20 1/2 cents,
Oct 13 Soybean Meal closed at $431.20, down $13.40,
Oct 13 Soybean Oil closed at $42.13, down $0.21

Wheat futures closed the day steady to 4 cents lower. After the close, USDA showed 90% of the spring wheat crop is harvested, just above the 87% average. The report showed winter wheat is currently 12% planted, which is equal to the 5 yr average for this time of year. Weekly export inspections came in at 46.024 mbu vs. 31.689 mbu the previous week. Market year to date figures are now at 419.171mbu vs. 308.640 mbu from the previous year. Almost 55% of the USDA forecast for the year is already on the books or shipped out, well ahead of the 48% average for this date.

Dec 13 CBOT Wheat closed at $6.41 1/4, down 1/4 cent,
Dec 13 KCBT Wheat closed at $6.89 3/4, down 2 1/4 cents,
Dec 13 MGEX Wheat closed at $7.01 3/4, down 4 cents

Storm damages crops in Central Washington

Severe thunderstorms damaged alfalfa, corn, dry beans and possibly other crops throughout Central Washington the night of Sept. 15.

Growers and fieldmen were assessing damage the next day. A lot of fourth-cutting and some heavy third-cutting alfalfa was on the ground from Pasco northward and was damaged by rain, said Ben Schaapman, a Quincy grower.

“There were a lot of double-raked windrows, ready for baling, everywhere and it was blown around and got wet,” Schaapman said. “We have to let it dry today (Sept. 16) and there’s a 30 percent chance of more rain tomorrow.”

More rain would lessen the quality that already might be sliding into feeder hay and costing growers $40 to $50 per ton, he said.

“I shut my swathers down Friday in anticipation of the storm, trying to minimize the loss,” he said. “A neighbor said his field corn was OK, but another said his dry bean windrows blew all over the place.”

Brian O’Shea, field department manager at Quincy Foods, said sweet corn was damaged in the Quincy area and moreso near Moses Lake and Othello.

“The east end of the Royal Slope, some was knocked down pretty hard,” O’Shea said. Dry bean and alfalfa windrows were blown around, he said.

National Weather Service alerts warned of hail and winds up to 70 mph, but Schaapman, O’Shea and Ryan Flanagan, George and Quincy area vineyard manager for Wahluke Wine Co. and Milbrandt Vineyards, said they heard no reports of hail.

Milbrandt Vineyards began wine grape harvest Sept. 9 in the Quincy area and will finish the first week of November with the last half of October being the heaviest, Flanagan said.

Picking machines usually run through the night but shut down for the rain the night of Sept. 15, he said. Wind dried the vines and grapes enough that harvest resumed the next morning, he said.

Wind blew down some apple trellises and damaged some apples in McDougall & Sons orchards in Mattawa and Quincy, but not significantly, said Scott McDougall, company co-president in Wenatchee.

Storm damage six weeks earlier north of Orondo and May 21 near Quincy was more significant, he said. Half the company’s fruit on 700 acres in the Quincy area was damaged by hail May 21, he said.

Soybeans Drop Most in Week as Rain Aids U.S. Crop; Corn Declines – Bloomberg

Soybeans fell the most in more than a week on speculation that Midwest rains will halt declining crop conditions in the U.S., the world’s largest grower. Corn dropped for a third day, and wheat slid.

Fields from North Dakota to Ohio got as much as 1 inch (2.5 centimeters) of rain over the past three days, National Weather Service data show. Showers will reach the southwestern Midwest through midweek, aiding a third of the soy crop, Commodity Weather Group said in a report. Crop conditions declined for four straight weeks, with 52 percent rated good or excellent on Sept. 8, down from 64 percent on Aug. 11, government data show.

“Forecasts for beneficial rain in the U.S. this week weighed on sentiment,” Luke Mathews, a commodity strategist at Commonwealth Bank of Australia (CBA), wrote in a note.

Soybean futures for delivery in November lost 2.4 percent to close at $13.4825 a bushel at 1:15 p.m. on the Chicago Board of Trade, capping the biggest drop since Sept. 4. Through last week, the oilseed advanced for six straight weeks as unusually dry, hot weather across the Midwest raised concern that yields will be less than forecast.

Global production of oilseeds including soybeans, canola and sunflower seeds will rise 4.8 percent this year to 495.1 million metric tons, boosting global inventories by 17 percent before next year’s harvest, the U.S. Department of Agriculture said on Sept. 12.

U.S. farmers will harvest 3.149 billion bushels this year, down from 3.255 billion estimated in August, the USDA said. Corn output will jump 28 percent to 13.843 billion from last year’s drought-reduced harvest, helping send global inventories to a 12-year high, the government said. The USDA will update its crop-condition report today.

‘Adequate Supply’

“Global supplies are more than adequate,” Robert Utterback, the chief executive officer of Utterback Marketing Services in Lafayette, Indiana, said in a telephone interview. “The U.S. crop is looking better, and early yields are coming in above farmer expectations.”

Corn futures for delivery in December slid 0.5 percent to $4.565 a bushel in Chicago, after falling 2 percent last week.

Wheat futures for delivery in December fell less than 0.1 percent to $6.4125 a bushel on the CBOT. Prices lost 1 percent last week after rain boosted soil moisture for sowing of winter grains across the Grain Plains.

Grain futures – Weekly review: September 9 – 13 By Investing.com

U.S. grain futures ended Friday’s session broadly lower, with corn prices sinking to a four-week low after the U.S. Department of Agriculture projected a bigger harvest this autumn than analysts had expected.

On the Chicago Mercantile Exchange, corn futures for December delivery fell 1.4% on Friday to settle the week at USD4.5888 a bushel. The December contract settled 1.3% lower on Thursday at USD4.6620 a bushel.

For the week, the December corn contract lost 2%, the second consecutive weekly decline.

The USDA said Thursday the U.S. corn crop will total 13.84 billion bushels in the 2013 marketing season, up 0.6% from its August forecast and the largest crop on record.

Meanwhile, soybeans for November delivery declined 0.95% on Friday to settle the week at USD13.8188 a bushel by close of trade. The November contract jumped 2.8% on Thursday to settle at USD13.9600 a bushel, the strongest level since September 3.

Prices of the oilseed declined Friday as investors cashed out of the market to lock in gains from Thursday’s 2.8% rally.

Despite Friday’s losses, the November soy contract rose 0.9% on the week, the sixth consecutive weekly advance, as lingering warm and dry weather fuelled concerns over crop conditions.

The USDA lowered its forecast for the U.S. soybean crop on Thursday to 3.149 billion bushels, down 3% from its estimate in August.

Soybean stockpiles will total 150 million bushels the end of the current crop year on August 31, 2014, below analysts’ expectations for 161 million bushels.

Elsewhere on the Chicago Board of Trade, wheat for December delivery tumbled 1.8% on Friday to settle the week at USD6.4050 a bushel. CBOT December wheat prices rose 0.8% on Thursday to settle at USD6.5300 a bushel.

The December wheat contract ended the week with a 1.1% decline, the second consecutive weekly loss.

The USDA raised its estimate for global wheat production to a record 708.89 million metric tons, up 0.5 percent from last month.

In the week ahead, corn and soybean traders will continue to pay close attention to weather forecasts for grain-growing regions in the U.S. Midwest, while wheat traders will monitor temperatures in the Great Plains-region.

Corn is the biggest U.S. crop, followed by soybeans, government figures show. Wheat was fourth, behind hay.