I started writing about the ‘commodities supercycle’ back in 2002 or so. It was a pretty easy call at the time – prices had been in a bear market for 20 years, but the numbers coming out of China made it clear that it wasn’t going to last.
You didn’t need to know anything about mining or the mechanics of it to invest. All you needed to know was that the demand for most metals was greater than the new supply of them.
This was the age of the Chinese killer stat. Even by 2004, China was the largest consumer of zinc, tin, copper, wool and cotton. More than 20 Chinese cities were installing subway systems. The country was in the process of building 50,000 miles of three-lane highway (about the same length as the entire US interstate network). There were a mere six cars per thousand people in China, versus 400 per thousand in the US. By 2025, 70% of China’s population was to be urban – and they were to be living in 219 cities, each with more than a million inhabitants. And so on.
It isn’t so easy any more. You can still bandy about fantastic-sounding numbers, but with Chinese growth finally slowing, a good few predictions (such as the one that says that in 25 years Chinese demand for copper will be higher than all the copper mined in the world so far) are beginning to look more outlandish than likely.
I’ve been warning of a slowdown in China for some time, but there isn’t much room for argument any more. The official figures now have growth at 7.4% and some, such as Marc Faber of the Gloom, Boom and Doom Report, suspect it may be more like 4%.
More telling are some of the non-official numbers. Komatsu’s sales of excavators to China fell by 43% year-on-year in August (marking the 16th consecutive monthly decline). If sales of excavators are falling, you can assume that activity in areas in which excavators operate is also falling. Goodbye supercycle.
But there might be one part of the sector that should be part of a long-term portfolio – soft commodities. A note from Standard Chartered points out that when Neil Armstrong looked back from the moon in 1969, he looked to three billion people. Now he’d be looking at seven billion. And by 2020, that number is forecast to be eight billion (75 million new mouths a year). It might even rise from there before prosperity and urbanisation stabilise things. How’s that for “one giant leap for mankind”?
Not only are we getting more people, we are getting more middle class people. I’m more pessimistic than most about the idea that China can keep GDP growth at 7-8% plus forever (or even another year), but nonetheless, the fact that factory wages are rising at 15% a year suggests protein consumption is likely to keep rising.
Then there is Africa, which as the report points out has a population that is growing five times faster than that of China. It is also “the youngest in the world”, and boasts a fast-swelling middle class. So demand is likely to keep rising. Yet at the same time, desertification and urbanisation are cutting into current land supplies; biofuels are interrupting the supply chain; and season of nasty drought is reminding us that agriculture consumes 70% of the world’s water.
Finally, it is worth looking at agricultural prices and remembering that they have not participated in the supercycle to the same extent as hard commodity prices: adjusted for inflation, key prices have still not reached their 1981 levels. According to Diapason Commodities Management, corn stands at only 45% of its 1973 highs, while beans and wheat are at less than 30% of theirs. Wool prices remain at a fraction of the one-time highs, and an onion farmer in Tasmania, says Standard Chartered, still only gets half the price per kilo that he got in 1980. How does that make sense?
I wouldn’t invest directly in prices of commodities; they are just too volatile to make sense for most investors and price rises in food markets are often self correcting (wastage falls).
There is also scope to improve global yields. There has been no real green revolution in Africa, for example, and even in China things aren’t much better. Take pig farming. Right now, says Jonathan Fenby of Trusted Sources, 55% of the world’s pigs live in China. However, 90% live in small pens. Add a little agribusiness into the mix and – while the pigs might not fancy it much – you would find yields rising and prices falling fast.
So instead of looking to invest directly, you are probably better off with companies that are involved in improving productive capacity – for example, Agriterra (LSE:AGTA), Bunge (NYSE:BG) or Syngenta (although as this has just hit a new high, now might not be the time). Or with one of the many funds the supercycle has produced. Most hold much the same stocks, but Sarasin Agrisar and First State’s Global Agribusiness fund have good records.
• This article was first publihsed in the Financial Times