GMO's Grantham: Farmland Will Outperform Long-Term

(August 10, 2010) — Farmland and forestry will outperform the average of all global assets long-term, says Jeremy Grantham, the co-founder of Boston-based investment firm GMO Capital Management, which in 2006 predicted the housing crash.

“For those with a long horizon, I am sure well managed forestry and farmland will outperform the average of all global assets,” Grantham said in GMO’s latest quarterly report, noting that energy, metals and fertilizers will gain in 10 years. Meanwhile, copper has already doubled since the end of 2005, with oil up 35% and sugar up 90%.

In March, Grantham wrote in GMO’s newsletter that since growth of natural resources is severely limited as population and demand soar, the age of cheap commodities prices is over. “The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value,” Grantham wrote. “We all need to adjust our behavior to this new environment. It would help if we did it quickly.”

Grantham indicated that the prices of all important commodities, excluding oil, declined by an average of 70% in the past 100 years until 2002. However, since then, colossal price increases wiped out the declines, driven by heightened demand from developing countries, such as China. Inflation-adjusted commodity prices are nearly exactly where they were in 1900, he said.

According to Grantham, who is credited with warning of the economic downturn in February 2006 when he told Barron’s magazine that “housing is a classic bubble,” long-term investors must alter their frame of reference to adapt to this rapidly changing world in which shortages will be common. He wrote: “If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources. The quicker we do this, the lower the cost will be. Any improvement at all in lifestyle for our grandchildren will take much more thoughtful behavior from political leaders and more restraint from everyone. Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period…Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels.”