Chris Mayer

An old bit of advice says, “Never eat at a place called Mom’s or play poker with a man named Doc.” That’s a joke, but this isn’t: Never fall for an argument that says we’ll run out of some natural resource or bet on the “end” of cheap anything. Such views will cost you money in the long run.

Let’s look at potash, a rock mined and processed to make fertilizers. This is a commodity that got exciting in 2008 and 2009 as the price ran from under $200 to $1,000 per tonne. It has since meandered between $300-500.

The spike brought out the doomsayers who said we’d run out of the stuff. One of the most prominent was (and still is) Jeremy Grantham. He is the chief investment officer at GMO, which manages $97 billion. He is generally regarded as one of the most influential thinkers in finance.

In the summer of 2011, he wrote an essay titled “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever.” He laid out a long-term view of increasingly scarce resources. In that piece, he said potash is “part of our extremely finite resources” and that “fertilizer resources — potash and potassium — will become particularly precious.” The realization gave him “goose bumps.”

Yet the US Geological Survey says we have at least 610 years’ worth of potash. New investment in potash has brought new mines and sources closer to production. There is no shortage of potash — and there won’t be. There was a temporary squeeze, and the market responded. (During that squeeze I advised my subscribers to invest in two fertilizer stocks:  PotashCorp and Mosaic. Subscribers who followed my recommendation would have doubled their money on PotashCorp and made more than 50% on Mosaic. But I never believed the constraints could not be solved. Both stocks are well below where I told my subscribers to sell out and take their profits.)

Beyond supply, Grantham (and thinkers like him) discount too heavily the ability of the market to cut back or become more efficient when a commodity gets more expensive. So they too often simply extrapolate current usage into the future. This is a mistake.

For example, the Chinese are the largest consumers of potash in the world. But here’s the thing: Chinese farmers use two-to-three times more potash per acre than their neighbors. They use five times more than US farmers. As our man in China, Ben Simpfendorfer (the Hong Kong-based editor of China Insider), notes: “For many Chinese farmers, simply throwing more fertilizer onto a field is often the easiest and often the only way they know to raise yields.”

It’s easy to overlook how much science and know-how goes into farming. Chinese farmers lack that knowledge or have not had reason to put it to use. As a result, they are not as efficient as farmers in other markets. The doomsayers assume Chinese farmers mindlessly continue to throw potash on their fields, even though the price of potash goes up.

But is it reasonable to assume that Chinese farmers will continue to use two-to-three times more potash per acre than everybody else? Might it not be better to assume that they will apply more technical know-how to improve their yields? In such a case, they would use a more “normal” amount of potash per acre. Overall demand could fall dramatically.

In fact, the Chinese are already doing this at the margin. Simpfendorfer visited hothouses in Guangdong province. They produce three times as many vegetables per acre as a typical farm in China. Simpfendorfer asked a 30-year veteran farm manager from a major US fruit producer what struck him most about farm. “They seem to produce so much with so little,” he said.

This gets at the heart of why the doomsayers will be wrong about all natural resources — not just potash. They continually ignore the human element and how people respond to prices.

For example, Grantham writes, “We now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common.” I don’t buy this for a minute. His reasoning is the same old nonsense we’ve heard again and again since the age of Malthus.

Thomas Malthus wrote an influential essay in 1798 that predicted rising population growth would lead to famine. He is remembered today chiefly because he was so spectacularly wrong. (By the way, I’m not talking about market calls that go wrong. Everybody gets those wrong from time to time. But Grantham and his gang are committing strategic errors that run deeper than mere market calls.)

To illustrate, I’ll touch on one more commodity: oil.

I often hear the refrain, “The easy oil is gone.” Thus, we are supposed to believe, the price of oil can only go higher as extraction costs rise. Well, the easy oil is always gone. Back in the 19th century, Col. Drake drilled his first Pennsylvania well at the agonizingly slow pace of 1 meter per day. (Today, drill bits advance more than 10 meters per hour.) In the early 20th century, William D’Arcy and his men worked in incredibly difficult conditions in Iran — 110 degrees in the shade at 7 a.m. in the morning! — to find oil. They almost went bankrupt before they hit oil at Masjid-e Suleiman, the first big oil find in the Middle East. In the 1970s, oil workers pushed the envelope of existing technology again by working in the dangerous and icy waters of the North Sea. Several disasters ensued — leading to the deaths of hundreds of oil workers.

So the story repeats on and on to our own day. As industry veteran Robin Mills writes: “The industry has always operated at the margins of technology.” In this, it is not unlike other industries. “Are we at the end of ‘the age of easy microchips’? Was it easy to invent the integrated circuit in 1959?” Mills continues. “Microchips, being cutting edge, will always be difficult to make. Similarly, the next oil field will always be difficult.”

Yet whether it is oil or copper or iron ore or whatever resource, people insist on relying on the same faulty reasoning that “the easy stuff is gone.” They continue to make the same tired case for chronic natural resource shortages and a decline in our standard of living.

The great economist Joseph Schumpeter’s (1883-1950) criticism of the Malthusian position still holds. On Malthus and his ilk, he wrote: “The most interesting thing to observe is the complete lack of imagination which that vision reveals. Those writers lived at the threshold of the most spectacular economic developments ever witnessed.” Yet they missed it.

So here is my prediction: I believe we are on the cusp of even greater levels of innovation and development — another industrial revolution is in progress right now. So ignore the gloom and doom on natural resources. Contra Grantham, the days of abundant resources and falling prices are far from over.


Chris Mayer
for The Daily Reckoning

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Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents. 

  • Will.S.

    Isn’t Chris Mayer though, just: “Kicking the Resource Can Down the road”

    To suggest that with 7 billion Global population now, 8 billion by 2025, 9 billion by 2035, and who knows… 10 billion before 2050 – IF WWIII doesn’t happen, and IF those behind the scenes don’t do all in their power to reduce Global Population -particularly in the Far-East… THAT number of people will impact us.

    Maybe not directly here in the feather-bedded West, but we WILL pay the price in instability in the poorer parts of the world as inflation reaps the whirlwind. As we in the west perhaps suffer slow-downs in population growths, with possible reductions – at least for the next 20+ years, the Global Imbalances will be about money and want…

    We here in the West, have built on a thousand years of Social Change from the Norman Invasion in 1066, the Magna Carta in 1215, to the demise of Charles I in the mid 1600’s, and Oliver Cromwell, to The Wars of Independence, the French Revolution, to the Russian, Chinese, Japanese movements to democratic government. Africa, and Latin America, have always had a different perspective on how they would wish their countries to be.

    Chris is obviously an optimist, and that is a wonderful character trait to have. BUT doing less with more can only extend so far… If we can grow sufficient food without those hundreds of millions of unpaid workers – BEES, and clean sufficient fresh water to provide for the agri-businesses, and the rapidly growing Latin-American and African populations, who have a different historical perspective than the American and European Empires since WWI.

    As well as the changes in Medical Techniques leading to average age on death raising to 100+, the demands on food, water and other slightly more scarce commodities are only readily available in testimony to the intelligence and the wit of man. But to suggest that this will go-on to infinity, is naïve in the extreme.

    Will Stirrup

  • davbeau

    “Never fall for an argument that says we’ll run out of some natural resource or bet on the “end” of cheap anything. Such views will cost you money in the long run.”

    I agree wholeheartedly – and especially never fall for hysterical articles proclaiming the ‘end’ of a country like ‘The End of Britain’ currently being touted round the internet by ‘Money Week’ (one of Agora’s unfortunately). Such stuff is not only monumentally stupid – it’s harmful and driven by greed.

    Chris go tell Bill Bonner to be ashamed, deeply ashamed.

  • Levi Russell

    Where are your population growth numbers coming from? Further, I don’t see the sort of population increases (even if they’re right) as necessarily a problem. Percentage-wise, they are smaller increases than have previously occurred.

  • Bill B. Bonner

    I’m so deeply, deeply ashamed.

    God Save the Queen.

  • Mark Green

    You’re onto something. In fact, certain precious living resources are already in steep decline: majestic wild animals. This is due to habitat destruction.

    Consider the precipitous, world-wide decline in tigers, elephants, leopards, rhinos, jaguars, cheetahs, and even wild gorillas. The habitat of these majestic beasts is being overrun and destroyed by humans. There’s no turning back the clock on this man-made disaster. Soon, most all of these amazing creatures will be found only in zoos.

  • Tim Worstall

    What annoys me intensely about these discussions is the way that people gloss over the difference between reserves and resources.

    For potash, reserves are at about the 300 year level globally. Resources at some 7,500 years (USGS numbers).

    In mining a reserve is a very specific economic and legal construct. Resource is a better measure of how much is available over time.

    Except when we’re talking about long periods of time when elemental presence becomes more important. Potassium (the element we want in potash) is some 2.5% of the lithosphere. We’re just not going to run out of it this side of the heat death of the universe.

  • Libertarian Grump

    My friend, you are making the exact same mistake this article is criticizing: assuming nothing changes, and trends continue exactly as they are now. If you are right, then so was Malthus — the industrial revolution never happened, and all 300 million or so humans on the planet are crawling in the dirt eating worms to get by today.

  • Clay

    “For many Chinese farmers, simply throwing more fertilizer onto a field
    is often the easiest and often the only way they know to raise yields.”

    How is this even sustainable, this argues more for investing corn wheat or other food source, dairy farming something like that, treating their land this will see them importing larger and larger quantities of food, as they chemically raze their own land. Great short term tip though!

    Read more: My Prediction for 2013…and Beyond

  • Larry

    “…and all 300 million or so humans on the planet are crawling in the dirt eating worms to get by today.”
    300 million? LMAO.

  • Bob

    300 million?

  • kace7

    You reveal your own ignorance. The Rev. Malthus was born in the 18th century and 300 million would have been nearer to the world population in his time — a population that could not have grown due the lack of food production and massive starvation that Malthus predicted.

  • Stephen N. Jacobs

    This is my point of view exactly. Sitting behind this computer operating on the Internet this evening and observing how well and efficiently this 15 year old computer can function in a bedroom at home, the ridiculous Malthusian argument about the world running out of resources falls apart completely. Naturally the world would have run out of resources if mankind would have done nothing with the resources it mined from the world except the same old things, and just as inefficiently as it did with them in the past centuries before physics and before electronics, before computers before the Internet.

  • Dave Budge

    Somewhere I’m seeing ghost of Julian Simon laughing his ass off.

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