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Grantham, Part 3

Morningstar.com

This video is part three of five from GMO's Jeremy Grantham's address at the 2018 Morningstar Investment Conference. You can also watch parts one, two, four, and five.

Jeremy Grantham: OK. But now the terrible news. Sorry about this. I tell you, it's hard to live with me, too. Feeding the 11.2 billion, the impact on food sufficiency of population growth and increasing wells, climate change, soil erosion, and many other factors. This is what world population looks like going nowhere forever. When Malthus writes it, it's still below 2 billion. When I get born, it's about 2.3, it has tripled in my lifetime the global population. Whenever you see a chart like that in investing, you know what to do: Go short. The good news that Malthus never dreamt about, our last best hope really is a declining fertility. In the developed countries, we're all below replacement level. The irony here is probably because we've discovered how incredibly expensive and inconvenient children are. This is my scientific reason. There are other reasons, which we'll get to, but they include waiting longer to have children and a side effect of toxicity. Iran is my hero, they used to have seven children, each woman in 1960. And now, they're down to 1.6. My other hero is Bangladesh, dirt-poor then and now, no oil. They also had seven children, and today, they're down to 2.2. It really is amazing. And all they've done is had a persistent program, semi-educated, little bit of training. The women go out into the village and they go out, and they go out, and they go out. And they try very hard, and they have done it. It can be done. 

This is the problem here, Africa in a word. These are the forecasts, midrange forecasts from the UN. Look at the blue, the rest of the world, 6.2 goes up to 7.2 and then peaks out and starts to drop to 6.7 by 2100. The rest of the world is not the problem. Given a couple of hundred more years, that 6.7 may be back down to 2. You can do that at 1.6, way above Japan will take the whole rest of the world back to 2 billion in a few generations. The problem is Africa. Nigeria is just a classic case. When I was born, there were 28 million Nigerians. Today, there are 195 million. The midrange forecast for 2100 is 780 million. In a recent poll, 40% of them said they would love to leave, most of them to the U.K., 40% of 783, 140 million in 2100 would love to go to the U.K. The U.K. can only feed half of its people today, the rest is imported. The only worse country is Japan, which feeds one-third. Everyone says how ludicrous it is for Japan to have a declining population. Come food troubles, it is the only way they could stay in one piece. Other Africa is huge too, they are increasing their population or trying to by 3 billion people between now and 2100. Of course, I fear they will not get there.

What they will get is rolling, failing continent. Five countries in my opinion have failed already in Africa, five are in the process of failing. They're putting incredible pressure on Europe through immigration. The scale of this problem is far too great for Europe to handle. I wrote four years ago that the first casualty would be the liberal tradition of Europe. It happened a whole lot faster than I feared. It is driving right-wing groups everywhere in Europe. That was for a couple of million refugees. If Europe were to take 100 million, it is not even a down payment on the billion and a half or so that will try and emigrate. Europe has to get its act together, try and be as gentle and as firm and as reasonable as it can possibly be, convey that data clearly. And that's the best it can do. It will not be able to take food or climate, failed state refugees. I am not speaking as someone with fascist tendencies on income equality, I am left of Karl Marx. 

Grain productivity to get down and dirty looks like that. It spent a long time in the Green Revolution at 3.5, it's come down to about 1.2 and the world's population growth has come down to 1.2. We are in a dead heat producing as much grain as we produce people. There is no room for them to eat meat that takes 8 or 10 times the grain. And yet, they intend to. This is going to be a very uncomfortable situation for the poor people who can't afford to buy grain. 

Diminishing returns cuts across this. Let me point out they've been breeding race horses for thousands of years, the chief of the tribe always wanted to have the fastest horse. And who has the record, Seabiscuit has the record. And that giant horse that nearly beat him is second. You can't get blood out of a stone. You can get the horses to break more legs, but you can't get them to run any faster because they have done so well. When you're looking for diminishing returns, you go to the best grain producers on the planet per acre. And they are not the U.S., the U.S. it's the best per person. A 62-year-old farmer and his son and 6,000 acres. You want the best per acre, you go to rice in Japan and wheat in Germany, France, in the U.K., and this is them. And they were doing brilliantly for 70 years until the last 15 where none of them have increased. One of the reasons is that fertilizer, the backbone of the Green Revolution, is peaking out. You can use some more in Africa, but the U.S. and China, the two biggest users already officially use too much. This is a summary of all that. Before the Green Revolution, we were chugging along at a nice 1.5 a year. The Green Revolution, we accelerated to 20 years at 3.5.

Just imagine that, every three years, you have a 10% increase. And then, of course, it dropped back, and then it started to drop to new lows and our estimate talking to scientists is it will still be OK in terms of diminishing returns but will steadily decline. 

Then we get into erosion and this is where we discovered in this last 12 months some really sad truths about the scientific world. And that is erosion and climate change both hurt fertility of grain productivity. And yet, neither side knows what the other side is doing. We called up the erosion guys, and they said they were not aware that climate change would pose any problem, even though as I said the single most dependable feature is an increase in the very heavy downpours that precisely cause this. Up to 5, 10 feet gullies sometimes running through fields in Iowa and Kansas.

And what we did is we made a very, very modest assumption that the 10% damage from erosion that the erosion experts calculated would become 13 because of the increase in heavy downpours. This is one of my horror show graphics actually, this is outside a library in Iowa. It describes the soil, the topsoil of that county in Iowa, which was not the best or the worst. But in 1850, it had 14 inches of wonderful Midwestern topsoil. You need ideally 4 inches, 3 will get you by. 14 is a luxury beyond belief for the rest of the world. By 1900, 11.5; by 1950, 9.5; by 1975, 7; by 2000, 5.5. At considerable difficulty, we found the guys who did this. We call them up, we said, "What is it in 2017?" And they said, "Yes, it's recognized now as a major problem. People are trying much harder, the rate of erosion has come down not quite by half but a lot. And no, it's 4.8 inches." And just look at that, 14 inches to 4.8, you need 4.

If that doesn't scare you, it scares me anyway. Now, we get to another terrible report of the last 12 months. This is a report unfortunately from the proceedings of the National Academy of Science. When you get bad news, you want it to come from the 27th not the third-most prestigious scientific journal. This was done by the usual 10 scientists led by Mr. Liang. And we called him up and we asked him about this and that and the other. And we asked him about erosion, he was not aware that erosion had any impact on the future of agriculture. This is the problem, climate scientists like him are fairly high up the pecking order. Soil scientists with mud on their boots, who needs to talk to them? There is absolutely no communication. Liang and his guys, this is what they did. They went back and they looked in America, grain by grain, state by state, what effect over the last 50 years actual downpours, floods, and droughts and increasing temperature had had.

And they built that into their model and they noticed the increasing incidence of floods and droughts, and they built that in. The net result was still positive of course last year. Then they extrapolated the midrange of the future out to 2040 where now temperature begins to hurt finally, particularly in corn and the increasing floods and droughts. And they concluded that by 2040, the productivity if nothing else changed would be back to the productivity of 1980. There was a follow-up report in France about French wheat which echoed this finding if it were true, it is incredibly bad news. This is the kind of thing you really want to be not true. 

What we did is we put together the first combined effect of erosion and climate change that has as far as we know ever been done. This is homemade, this is the extrapolation you read about everywhere taking the productivity gains and just extrapolating them.

This is what happens when you build in the diminishing marginal returns that we see in Japan and the U.K. And one by one, as countries get their act together, this is the effect of erosion and the effect of erosion plus increased downpours. This is the original final coup de grace from climate change. We decided we'd give them a one third credit for adaptation, that they will be clever, they will change the crops they grow, they will work on getting more drought-resistant and flood-resistant. By the way, you have to pick, you can't do both. And that's where we go to. Maybe it will be a two thirds credit for adaptation. But the key is, it will still be way down from the forecast and actually almost certainly down from where we are today.

We have a growing population who want to eat meat, diminishing returns, worldwide erosion, 1% a year of the global soil, half a percent of our arable land, and water availability problems from hell that I could spend half an hour on, urban expansion, always in the river deltas and the river plains, the best arable land, bug and pathogen immunities--we have designed a kind of super weed which grow like weeds. Do you know we lose as much of our crop to weeds, bugs, and pathogens today as we did in 1945 before we declared chemical war on these creatures. Now, if we pull back from the chemicals, the bugs, which are now super bugs will eat our lunch, breakfast, and dinner. But if we just never done it, we would be losing approximately the same amount as we are.

Now, we come to the third of four very bad papers, the 75% loss of flying insects. This was a report done by German insect fanatics, amateurs who love insects. They went out from 1989 every few years in each of 63 forest preserves, protected forests. They put out the same net in the same place at the same time of year. They took all the bugs that they caught, and they laid them out and they drew the decline curve. And to everyone shock and horror, there is a more than 75% loss. These are all the pollinators, have just gone missing. Why isn't this a dramatic item? 75% of all the food plants that we eat need pollination, every flower needs a pollinator. And 75%, look at your own garden by the way. I was complaining, cross my heart and hope to die, that down in Westport, Mass., where we have a summer house that the insects had gone missing before this report came out. I would come back and tell my wife that we had three or four insects in the little flower garden, we used to have three or four per flower 20 years ago. 

What we've done is just created a toxic world, which it's apparently not conducive to life as we know it. But just a word before we finish on farming, the global distribution of phosphate reserves. You cannot grow any living thing without potassium and phosphorus. We mined these things, they're finite. We go in there, we dig them out, and we scatter them around the Midwest and the rains carry them off and pollute the streams and rivers and the Gulf. This is the problem, 75% of all the high-grade phosphorus reserves in the world are in Morocco and Western Sahara, which it manages. This makes OPEC and Saudi Arabia look like absolute pikers, and this is more important even than oil. And if ISIS takes over Morocco, I give you my second personal guarantee, that within a week, the military of China or the U.S. or both and the EU will have intervened. We simply cannot manage under currently configured agriculture without Morocco.