If you read the newly released United Nations report on global population trends, you can reach only one conclusion about the long-term outlook for global commodity prices.
They're going higher.
In its report, "2010 Revision of World Population Prospects," published May 3, the UN now estimates that the global population will reach 9.3 billion in 2050, which is an increase of 150 million from the 9.15 billion it projected in its 2008 forecast.
Nor is that the only revision the UN made to its 2008 forecast. Instead of peaking in 2070, as it had previously predicted, the UN now says the world population won't peak until after 2100, when it will reach 10.1 billion – 44% higher than it is today.
The key takeaway: Given this expectation for worldwide population growth, it's clear that the rise in global resources prices we've seen since 2002 is for real, and is likely to continue for the long term.
The effect on global commodity prices will be clear – and dramatic. Oil prices, metals prices and – above all – food prices are likely to be much higher in 2050 (in terms of that era's overall purchasing power) than they are today.
Not the Last Word
If you're of a mind to dispute the UN projections, let me warn you that they will likely prove to be on the conservative side.
Even in the short term, the UN has a horrid tendency to underestimate the ability of our species to reproduce itself – the forecast for the world population for 2010 that it made back in 2000 proved to be no less than 70 million short of the reality.
With that in mind, understand that the current estimates probably won't be the last word on the matter: The next set of projections – set for 2012 – may well "find" another 150 million people for 2050.
Humanist notions (that all these extra people are a blessing to mankind) to the contrary, this explosive population growth figures to be a disaster from a global-resources standpoint – and for two very good reasons.
First, if we want all 10.1 billion people to enjoy a standard of living that's essentially on par with us here in the West (meaning they all have automobiles, washing machines, refrigerator/freezers, and all the rest of the latest electronic gadgets), the consumer demand will put an impossible strain on global resources – and if the global-warming theory proves accurate, will heat our planet up like a meatball in a wok.
Second, the vast majority of these new people will be in very poor countries, many of which are already stretched in terms of water, food and other resources.
Continental Africa's projected 2100 population is 3.6 billion, over a third of the global total, while Nigeria's projected population is 730 million, up from 39 million in 1960. If the Nigerian city of Lagos were to maintain its current ratio of the country's overall population, it would contain no less than 81 million people – a truly frightening thought as that city's infrastructure is already overwhelmed.
Past experiences with many countries have repeatedly demonstrated that rapid rates of population growth are wholly incompatible with economic takeoff. That's because the need for housing, education and infrastructure overwhelms the limited amount of available capital.
Add to that the additional difficulties caused by resource scarcity and it's likely that Nigeria's 2100 population will be even poorer than the one that exists today.
China's draconian "one-child" policy solved this problem, albeit at high social cost; projected 2100 Chinese population is only 941 million, a full 30% below where it is today.
More palatable solutions to the problem include increased expenditure on education (particularly for female students), and perhaps a Western-funded old-age-pension scheme in very poor countries, which would reduce the economic incentive for large families.
I'm not going so far as to predict doom here. But I am going to forecast higher global commodity prices. The formula I'll use here is quite simple – but there's really no arguing with the conclusions we reach.
A Simple Formula for Higher Global Commodity Prices
Back in 1980, during my days as a global merchant banker, I was present at a meeting when the late Harold Fieldsteel, then executive vice president of the liquor giant The Seagram Co. Ltd., was discussing what to do with the $6 billion Seagrams had just made by selling its oil interests.
Consultant Arthur D. Little Inc. had made a very impressive, hour-long presentation of how the world's greatest problem in the next 20 years would be world food and resource shortages (like most consultancy presentations, this was, of course, dead wrong!). At the end of the presentation, Fieldsteel took his cigar out of his mouth, blew a perfect smoke ring, and said: "OK you guys. Now tell me – just how do you think I can make a buck out of starvation?"
Not that we're suggesting that here. And commodities prices will remain volatile in the near-term.
But what we are saying is that the massive increase in world population we're essentially assured of seeing in the years to come will translate into a just-as-certain escalation in demand for oil and other such energy sources, metals – and food.
And that virtually certain increase in demand will then translate into higher global commodity prices. In decades to come, the prices for food, energy, metals and other raw materials will almost certainly be much higher (in terms of overall purchasing power in that future period) than they are today.
The second half of the 20th century saw a 50-year period of declining energy and commodity prices (in terms of the prices of other goods). Generally speaking, the producers of those items were rotten investments. Global commodity prices tended to decline, which meant that the sellers watched their margins get squeezed.
Countries producing commodities became generally poorer; it was the manufacturing specialists that achieved economic liftoff.
But this trend has now reversed itself.
A catalyst for this reversal has been the so-called "cheap money" policies pursued by U.S. Federal Reserve Chairman Ben S. Bernanke and some of his other central-banking brethren.
However, the effect of cheap money will end when the cheap money, itself, ends – probably within the next year or two, as inflation accelerates at a truly frightening rate [Editor's Note: For more on the acceleration of inflation, check out this related story which appears elsewhere in today's issue of Money Morning.].
The total impact of the UN's spiraling population projections will be seen over the long haul. And that means that – even when interest rates are back to normal levels – global commodity prices will not return to levels we would consider "normal." Oil prices will never see $20 a barrel again; their bottom is probably somewhere in the range of $60 a barrel to $80 a barrel – after which they march higher.
Similarly, the prices of agricultural products will remain high by historical standards. And that's good news for farmers, who will likely continue to receive all the subsidies the low-price era has generated.
That brings us to investors. Given what we've learned from the UN's latest report – and what we know is in store for global commodity prices – it's more clear than ever that investors must maintain a broad range of commodity-based investments for the long term.
At the end of the day, Fieldsteel was right: It's tough to make a buck out of starvation. But you can make a buck helping the world avoid it.
Given that insight, what should an investor do?
Well, energy prices will certainly head higher. And that means that production from Canadian oil sands will continue to be economically viable. That makes Suncor Energy Inc. (NYSE: SU) a sound long-term holding.
As global demand zooms, food prices are going to soar. That means that agricultural-product producers such as Archer Daniels Midland Co. (NYSE: ADM) and producers of agricultural equipment such as Deere & Co. (NYSE: DE) will similarly prosper over the long term.
Internationally, well-run countries such as Canada, with diversified commodity-and-agricultural bases, should prosper. So a holding in the iShares MSCI Canada Index Fund (NYSE: EWC) looks attractive.]
Because of its impact on commodity prices, both in the near term and over the long haul, the rising global population requires Hutchinson to search for those more-immediate profit openings, while also scouring the horizon for the long-term trends that can create the hefty profits investors seek.
Indeed, in his "Permanent Wealth Investor" advisory service, Hutchinson has identified one particular global economy that meets all his requirements, and represents such a rich profit play, that we couldn't give it - or the investments he's recommending - away for free.
To find out more about these investments, and Hutchinson's service, check out this link.]
News and Related Story Links:
- The United Nations (A Press Release):
World Population to Reach 10 Billion by 2100 If Fertility in All Countries Converges to Replacement Level.
Thomas R. Malthus.
- The (CIA) World Factbook:
- The New York Times:
The Seagram Co.
No More Free Lunch for Commodities Investors.