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Spike in Crop Prices May Signal 'Chronic Food Crisis'

Thursday, 2 Aug 2012 | 12:48 PM ET

The spike in crop prices this year may be an early glimpse into a chronic food crisis that could unfold over the next forty years, says well-known money manager Jeremy Grantham.

TIANLIN, CHINA - MAY 12: A villager looks at the parched paddy on May 12, 2012 in Tianlin county, Guangxi Zhuang autonomous region of China. A lingering drought has dried up most of rivers as high temperature and little rainfall over the past three months this year. Tianlin county had suffered from severe drought over the past three years.
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TIANLIN, CHINA - MAY 12: A villager looks at the parched paddy on May 12, 2012 in Tianlin county, Guangxi Zhuang autonomous region of China. A lingering drought has dried up most of rivers as high temperature and little rainfall over the past three months this year. Tianlin county had suffered from severe drought over the past three years.


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 nine billion in 2050,” wrote GMO’s Grantham in his recent quarterly letter to investors.

“It 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.”

In the last three months alone, wheat prices are up 41 percent, corn is up 29 percent and prices for soybeans are up 17 percent.

The latest surge has been caused by horrific droughtconditions in the Midwest of the United States. But Grantham believes bigger forces than drought are at work here and these price increases are only the beginning.

Along with surging demand for food from a rapidly increasing global middle class, Grantham cites falling grain productivity, tainted water, rising costs of fertilizer and fuel, as well as climate change, as reasons for the seismic move to come.

“The ramifications of a global food crisis have already begun and were a key component of the Arab spring revolutions,” said James Iuorio of TJM Institutional Services in response to the letter.

The assumption out there is that food production needs to jump by 60 to 100 percent by 2050 to adequately feed caloric intake of the 9 billion-plus people that will be around at that time, according to Grantham.

Grantham oversees one of the largest and notable money management firms in the world and has also started philanthropic organizations devoted to the environment. But since his main focus is investing, what does he suggest one do about this crisis from an investment standpoint?

“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,” writes Grantham. “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."

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