Global Commodity Prices: Soaring Worldwide Population Growth and a Can't-Miss Profit Play

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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.

Much 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.

So what's the implication for investors? After all, doom-laden Malthusian predictions of world overpopulation have been with us ever since the days of economist Thomas R. Malthus (1766-1834).

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.

[Action to Take: There's an old saying that there's nothing certain but death and taxes. But we can add two more items to that list of certainties. First, the global population is going to grow. And, second, that growing population means that, over the long haul, global commodity prices have nowhere to go but up.

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.]

[Editor's Note: As a global merchant banker Martin Hutchinson guided clients, companies and even entire countries by capitalizing on near-term opportunities, and by riding long-term trends.

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.]

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Join the conversation. Click here to jump to comments…

  1. Phil Steinschneider | May 17, 2011

    Mr. Hutchinson,

    Whenever I see a Money Morning article by you—to paraphrase the old EF Hutton marketing message—I listen.

    For the first few paragraphs, I agreed with you, but as I neared the middle of your article, my cynicism about so many apocalyptic scenarios (in spite of the fact that I've become a perma-bear) made me pause. I thought back to an earlier doomsaying British economist.

    But low and behold, by the end of the first section, you referenced Thomas R. Malthus. I was more than impressed—I became downright giddy. You once again proved your understanding of the complex world economy and the fact that doomsdayers before us have been proven wrong often.

    On the other hand, there remains the remote possibility that technology provides us with what's needed to make us all Malthusians. This would include the advent of commercial fusion (cheap and abundant energy), genetic agricultural breakthroughs (increased crop outputs), and nanotechnology (totally synthetic metals and fuels, among other things).

    In this case, however, your sanguine appraisal rings very logical, pragmatic, and likely. The odds of your being right seem to significantly outweigh the odds of your being wrong. A clear awareness of history makes your forecasts that much more valid.

    Your explanation of how productive activity has been superseded by the printing of money, which has in turn made commodities all that much more valuable, further supports your assertions.

    Unlike a Bloomberg article, which is usually like getting a reading from the oracle at Delphi; with a strong opinion buttressing an idea at the beginning of the piece, and a counterargument destroying the initial assertion by the end of the missive; you stand behind your theories from start to finish with strong evidence and facts.

    As a passive investor, I've been following your advice to great personal benefit. It helps that we appear to think similarly. Yet if that wasn't the case, I wouldn't be taking the economic and financial positions that I do with as much certainty.

    Thank you for making me and those like me feel at home intellectually and economically.

  2. Ray Wang | May 17, 2011

    Abuja replaced Lagos as Nigeria's capital 20 years ago, but you are still saying Lagos is the capital.

  3. Jason Simpkins | May 17, 2011

    Ray, you're right. We've fixed the error. Our apologies.

  4. janos lengyel | May 18, 2011

    The projected figures for world population and therefore the rise in hard and soft commodities is based on the assumption that the climate will allow such an unsustainable increase in numbers. Is it possible that commodities head lower due to severe negative climate change?

  5. William Patalon III | May 18, 2011

    Dear Phil:

    Thanks for your insightful — and kind — comments. You clearly put a lot of thought into your remarks, and then took the time to relay them to us. Insightful responses such as this one are not only appreciated, they are useful, too.

    I passed your note along to Martin late yesterday; when I returned to the Money Morning newsroom early today, I found that he's already penned a note to you that he asked me to post. You'll find Martin's comments below.

    Thanks again for taking the time to write — and, even more key, thanks for taking the time to read Money Morning with such care. This global investing news service was created to inform, educate and help our many reader/investors. And a smart group it is.

    Hope to hear from you again.

    Respectfully yours;

    William Patalon III
    Executive Editor
    Money Morning

    Note from Martin Hutchinson:

    Dear Mr. Steinschneider:

    Thank you very much for your kind and most encouraging letter. I agree with you in being optimistic that technological advances will solve many of our problems. But they will not not necessarily solve the ones we most want solving or think most likely to be solved.

    For example, in 1961 you'd have got good odds that, by 2011, we'd be colonizing all the useful planets and making our first ventures into interstellar space, and that our power problems would have been solved by fusion reactors. Equally, anybody who had suggested the PC and the Internet would have been thought seriously eccentric.

    It's thus clear that our 1960-2000 assumptions about cheap commodities get changed once the big population groups in China and India get rich, and that further increases in population raise the risk that we'll run into an environmental or resource problem we can't solve. Another worry, brought out by the Japanese quake, is that ice ages, meteors and other cosmic harassments are more common than we think, and so we'd better have a good margin of safety in our population/resource balance to avoid being wiped out when the planet suddenly can't give us what we thought it could.

    High commodity prices and restrained population growth (or preferably the beginnings of shrinkage) are thus good for us in the long term.

    Best

    M

  6. William Patalon III | May 18, 2011

    Dear Mr. Steinschneider:

    Thanks so much for your kind and thoughtful remarks. I forwarded them to Martin late last night – when I returned to the Money Morning newsroom early this morning and checked my e-mail, Martin had already sent a response and asked that I post it. You’ll find it below.

    One of the things that makes Money Morning work so well as a global investing news service is its smart and well-informed readership. You, sir, perfectly illustrate just what I mean.

    Check out Martin’s comments below. Feel free to write again – with additional remarks, criticisms or even suggestions of stories or reports that you’d like to see. We welcome the input.

    Respectfully yours;

    William Patalon III
    Executive Editor
    Money Morning

    P.S. Here is Martin’s response to your very kind note …

    Dear Mr. Steinschneider:

    Thank you very much for your kind and most encouraging letter. I agree with you in being optimistic that technological advances will solve many of our problems. But they will not not necessarily solve the ones we most want solving or think most likely to be solved.

    For example, in 1961 you'd have got good odds that, by 2011, we'd be colonizing all the useful planets and making our first ventures into interstellar space, and that our power problems would have been solved by fusion reactors. Equally, anybody who had suggested the PC and the Internet would have been thought seriously eccentric.

    It's thus clear that our 1960-2000 assumptions about cheap commodities get changed once the big population groups in China and India get rich, and that further increases in population raise the risk that we'll run into an environmental or resource problem we can't solve. Another worry, brought out by the Japanese quake, is that ice ages, meteors and other cosmic harassments are more common than we think, and so we'd better have a good margin of safety in our population/resource balance to avoid being wiped out when the planet suddenly can't give us what we thought it could.

    High commodity prices and restrained population growth (or preferably the beginnings of shrinkage) are thus good for us in the long term.

    Best;

    M

  7. Phil Steinschneider | May 18, 2011

    William and Martin,

    Thank you both for the extremely kind responses. This is why I look forward to my Money Morning email every…well…morning.

    I also have to thank Peter Schiff for sending me to Money Morning a couple of years ago.

    Martin, Keith, and Shah always get my attention, but I thoroughly enjoy the contributions of all your experts.

    Sincerely,
    Phil

  8. Ian Fletcher | May 21, 2011

    The fact that UN predictions are notoriously short-sighted, doesn't comfort me much.
    I can't help thinking thak if they predict a figure of 10billion by 2100, in reality 20billion would be more probable.
    I'd love to know what the limit could be for food production on this earth. Are we doomed to anorexia?
    Even if we manage to produce food enough for say, 50billion people, the wild-life cost would be a real desastre. No forests left, no wild-life.
    From an investors' viewpoint, buying land on the last continent to be colonised, the Antarctic, must be the new El Dorado. As the world population rises, so do temperatures. The Antarctic is moutainous so that it's a safe bet as its ice melts…
    cheers!

  9. Tom T | May 28, 2011

    Considering how we tend to improve technologically but not sociologically, I suspect by one means or another some group will decide to unleash a population corrective action.

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