My back door is open. I’m getting ready to head out to the bomb shelter so I can cover my head and not look at my investments for a couple of years. That 2008 feeling is coming round again.
Looking back on it, I have no doubt going through the panic in the fall of 2008 has improved me as an investor. Talking about focusing on the value of a business and not a stock price is one thing. Living through a period where some of your investments decrease in paper value by 80% is another.
I did it in 2008/2009. I put my head down and focused on the businesses. I even added to positions when things looked very bleak.
I did it. But it wasn’t easy. I’ve been investing for quite a while. But I remember very clearly thinking in October 2008 that “I didn’t sign up for this” when I decided to focus on equity investing. I certainly had an inclination or two to sell to make sure I didn’t lose all my money. But I fought my emotions and managed to do the right thing.
And I’m better for it. My emotions are much less of an enemy now. When you are mentally prepared for what went through in 2008 the volatility of this summer is nothing to get worked up over.
The hardest part now for me when stocks are crashing is knowing where exactly to focus. There is so much to look at that it is overwhelming. So today I’m going to remind myself of what Jeremy Grantham has been preparing for.
What reminded me of Grantham was this article from Marketwatch.
And specifically this part:
Grantham runs a personal, non-profit foundation dedicated to the protection of the environment. For the foundation he has invested heavily in agriculture, commodities and natural resources. Timber is a favorite, as are fertilizer companies. He’s not a big fan of gold. “I own some myself as a pure speculation,” Grantham said — “just enough to mute the irritation of watching gold [prices] rise.”
In his first-quarter 2011 letter Grantham raised the idea that a paradigm shift had happened in the commodity sector:
How does an investor today handle the creative tension between brilliant long-term prospects and very high short term risks? The frustrating but very accurate answer is: with great difficulty. For me personally it will be a great time to practice my new specialty of regret minimization. My foundation, for example, is taking a small position (say, one-quarter of my eventual target) in “stuff in the ground” and resource efficiency. Given my growing confidence in the idea of resource limitation over the last four years, if commodities were to keep going up, never to fall back, and I owned none of them, then I would have to throw myself under a bus. If prices continue to run away, then my small position will be a solace and I would then try to focus on the more reasonably priced – “left behind” – commodities. If on the other hand, more likely, they come down a lot, perhaps a lot, then I will grit my teeth and triple or quadruple my stake and look to own them forever. So, that’s the story.
And here we are. Those short-term risks have reared their ugly heads very quickly. And while prices of commodities likely haven’t taken the awful drubbing Grantham is looking for, some of the equities that produce those commodities have.
And if you like Grantham, that is likely a place to be looking today: energy, metals and agriculture.
Here is why Grantham thinks each area is where we should be invested as detailed in his second-quarter 2011 report:
A Possible Hierarchy of Problems
1. Energy
The transition from oil will give us serious and sustained problems. We passed peak oil per capita long ago and we are within 30 years, possibly within 10, of peak oil itself. The price will be volatile beyond our wildest dreams (or nightmares), and the price trend will rise, although at times this will be difficult to discern through the volatility.
Transportation will be difficult in general and air transportation in particular. But behind oil, there is a relative plenty of natural gas and coal, which can, although with cost and difficulty, be substituted for oil.
Even with coal and gas, however, we are dealing with only many decades of supply, not centuries. But beyond hydrocarbons there really is good news. Within 50 years or so, I believe we will have made spectacular progress in the science and engineering of solar, wind, tidal, and other energy sources, together with storage. One simple storage management idea for the nearer term, for example, is that every electric car would have two easily-exchangeable battery packs, with one in the garage, storing solar from your roof while you drive to work.
Whenever possible, all such batteries would be attached to an intelligent grid that would be able to raid batteries or deposit into them, giving massive flexibility by today’s standards. It is also possible (although, unfortunately, I believe improbable) that we will have a new, large-scale burst of activity in nuclear fission, perhaps stimulated by some technological improvements.
Further out, completely new forms of commercial energy are likely, perhaps from nuclear fusion of some kind, or perhaps from something completely off of our current radar screen. This is where my optimism comes in, for I believe that in 50 or so years
– after many and severe economic and, possibly, social problems – we will emerge with sufficient, reasonably-priced energy for everyone to live a decent life (if we assume other non-energy problems away for a moment) even if we don’t radically improve our behavior and make true sustainability our number one goal. In other words, current capitalist responses to higher prices should get the job done. We should realize, though, that reasonably-priced does not mean the nearly give-away prices of oil in the post war period, which serves as a real testimonial to the failure of standard free-market practices to recognize that a vital resource being finite changes everything in the long run.
“Reasonably-priced” fuel would be where prices rise steadily faster than the CPI rather than ruinously so.
2. Metals
Metals are, of course, a bigger long-term problem than energy. They are entropy at work ... from wonderful metal ores to scattered waste. Even the best recycling will have slippage. Entropy is impressive; everything really does run downhill, iron really does rust. So our future will undoubtedly be increasingly constrained, particularly if our population and its wealth both grow steadily. Eventually, the growth of both population and wealth will be limited and possibly even stopped by a lack of metals, but that should, with luck, be a long time away.
If we respond to increasing price pressures, as I’m sure we will, with a greater emphasis on quality and small scale along with an increasingly sensible and non-wasteful lifestyle, then we can push these serious constraints out for well over a hundred years. This is assuming, once again, no radical shift in attitudes and behavior other than those elicited by higher prices.
3. Agriculture
The trouble really begins with agriculture. This is the factor that I believe almost guarantees that we end up with a world population between 1.5 and 5 billion. The only question for me is whether we get there in a genteel, planned manner with mild, phased-in restraints, or whether we run head down and at considerable speed into a brick wall.
There are three particular aspects of agriculture where the shoe pinches the most: water, fertilizer, and soil. All three must be seen in the context of a rapidly growing population. To set the scene, Exhibit 1 shows arable land per person.
Unlike us, suitable land for agriculture has not increased since farming started some 10,000 years ago. In fact, with our help it has declined considerably, perhaps by as much as half or more!
A. Water
There is no doubt that water shortages will be a source of economic and social trouble forever. Countries will rattle sabers or, worse, go to war over access to river waters. That is certain. But viewed as a problem for the U.S. or for the planet as a whole, it does not seem to be a game stopper. The surface of our planet is, after all, mostly water. For our direct use and for our crops, we need a derisorily small fraction of Earth’s supply of water.
The entire planet’s current wasteful use of fresh water is equal to only 80% of the flow of the Amazon.
We also use our existing supplies of renewable fresh water with desperate inefficiency and wastefulness. As prices rise, we can save not just a few percent but a great majority of our water by growing the right things in the right places and by sensibly sharing and recycling the resource. Further out, with likely sources of reasonably cheap energy, we could supplement our supply with desalinated ocean water for coastal populations. Other than shifting crops, the main effect on agriculture will be a steady increase in the cost of water as we move slowly to recognizing the real costs of supplying water to farming.
However, come back in 50 or 100 years and we will, I believe, have been persistently irritated by water problems but never seriously threatened as a species.
For farming productivity, one of the greatest irritants for the next 50 years will be the depletion of fossil water: the great underground lakes of fresh water that receive little or no replenishment by rainfall. By bad luck, such vast deposits underlie and make possible some of the planet’s great bread baskets, including parts of the U.S. plains, parts of the Northwest of the Indian subcontinent, and parts of Northeastern China. If these very large areas are to stay in production, and they will certainly be needed, then major water transfer systems – canals of 500 to 2,000 miles in length – will have to be developed and the water taken from elsewhere. But even this, although it spells investment and environmental troubles in a big way, sounds ultimately doable, at a price. (The nastiest near-term problem of this kind will be in Yemen, where there is almost total dependence on underground fossil water, which is beginning to run out as I write!)
B. Fertilizers
Fertilizers are, I believe, less tractable. The three major macro nutrient fertilizers are the well-known N-P-K of lawn fertilizer: nitrogen, phosphorus, and potassium. Nitrogen, the most urgently needed of the three every year, is found in the greatest quantity so is happily the least problematical. Many crops, such as soya and alfalfa, supply or “fix” nitrogen for our main cereal production. Bioengineering is likely to increase this ability as well as broaden the range of plants that are able to do this. Electrical storms provide large quantities of nitrogen fertilizer out of the very air itself. (This provides about 5% of all nitrogen fixation, while modern agriculture accounts for about 50%).
More dependable man-made, or rather man-processed, nitrogen fertilizer is very efficiently made with natural gas, which is being found, fortunately, in increased quantities in many different regions of the world. Several of these regions – notably the U.S. and China – are major grain producers. Therefore, if we don’t go out of our way to waste our natural gas on less important products, we should be fine at least through this century. Nitrogen is the largest component of air and just needs energy to be converted into fertilizer. So, longer-term availability of nitrogen-based fertilizer is, as with water, about cost, not availability. But, starting with today’s almost ridiculously low prices for natural gas (20% BTU equivalency of oil – just about the lowest in history), farmers should count on seeing increasing multiples of the price for nitrogen fertilizer in the next 10 to 15 years.
Potassium (potash)
Potassium is in a less favorable situation. Today’s known resources are shown in Exhibit 2. Although it is found widely, very large and high grade (i.e., cheap) deposits are concentrated to quite a remarkable degree in two areas: one in Russia and Belarus and the other, happily for North America if we all stay friendly, in Canada. Unless there is considerable cartel-like behavior, which is certainly not unheard of these days with some commodities, then we have plenty of time to study the very long-term shortage problem. Luckily for us, potassium is a generously supplied element in the Earth’s crust.
Nevertheless, it is worth pointing out that both potassium and phosphorus (phosphates) have some characteristics that we are not accustomed to dealing with in our neat and short-term-oriented investment world. They are characteristics that make energy problems seem trivial because energy can be extracted in so many different ways.
Potassium and phosphorus cannot be made. They are basic elements.
No substitutes will do. Both potassium and phosphorus are required for all living matter, animal and vegetable. Most notably, us. We humans are, for example, approximately 1% phosphorus by body weight.
Modern high-production, single-crop agriculture today is very dependent on fi nite mined resources, which, if used wastefully, could easily cause a severe problem within 50 years and, if used sensibility and sparsely, could last for perhaps 200 years. And then what? You must recycle and farm super intelligently, as if your life depended on it. And it will.
Phosphorus (phosphates)
The reserve situation for phosphorus is shown in Exhibit 3. Admittedly, there are big arguments over reserves of both potash and phosphates because neither has been explored as comprehensively as have oil reserves. Here, too, we are quite lucky because the reserve life gives us time to plan sensibly for the rest of our lives (as a species, that is). But here again, the reserves are not evenly distributed and this time the skew is more, shall we say, interesting. It is thought that between 50% and 75% of the reserves are in Morocco and “associated” Western Sahara. Morocco’s share of phosphates makes Saudi Arabia’s share of oil look like small potatoes and, in the end, who values heating more than eating?
The existing high quality reserves shown in Exhibit 3 look, superficially, very satisfactory. There are reserves equal to 369 years of current production. Even allowing for 2% growth to help maintain productivity, these reserves would not run out for about 200 years. But, without Morocco and at 2% growth, reserves would be totally depleted in under 50 years. So with or without new reserves being located, some substantial gamesmanship should be expected within a few decades. Or, put it this way: if the phosphates were in my kingdom, I would try to make some hay.
The long-term phosphorus supply is probably the trickiest and most threatening issue to date. There may be a lot of lower-grade reserves that have not been listed or even looked for. (Why pay money to do that when there are decades’ worth of low-cost, very high-quality reserves?) But there may not be.
We are currently ferreting out as much of the limited data there is available. (Data on this and the many other conundrums raised in several of the topics discussed in this letter will be relayed from time to time as we can dig them out.) Serious scientific experts at this point are mostly “supposing” that, as is the case with many other resources, there are more, often much more, lower-quality reserves that are currently unrecorded than there are known high-quality reserves. But this is not always the case.
The U.K., for example, had a lot of high-quality anthracite and bituminous coal reserves, which propelled them into the Industrial Revolution, but today all of its anthracite is gone, most of its bituminous is gone, and there are no very large reserves of brown coal or lignite as there are, for example, in Germany.
Most, if not all, of the potash and phosphate deposits are associated with former oceans or salty seas, or that is believed by many to be the case. Well, if you wanted to be pessimistic, you could argue that you either have a dried up former ocean due to the ground rising over aeons, or you don’t. Perhaps you don’t have masses of smaller dried up bodies of water, which normally would be salt-free. In any case, we are all speculating at this point. Despite its potential importance, reliable data is just not available.
Let us imagine for a minute what might happen in 50 or 150 years when the last affordable phosphorus is delivered and Morocco is, quite sensibly, charging thousands of dollars a ton for the last one-third of its resources. We might be developing offshore recovery from the continental shelf at a little less than Morocco’s price, but still a gaspingly high price that would not be even remotely affordable by poorer countries. But mostly we would be recycling, a word with which our grandchildren will get awfully bored. It’s how crops were grown in the pre-commercial fertilizer age, at least wherever farmers could not engage in slash and burn and move on. Chinese farmers in particular successfully maintained the productivity of their fields for thousands of years by almost religiously recycling: off to the town market with two buckets of beans and back with two buckets of “night soil.” Human and animal waste, as well as
vegetable waste, was scrupulously reused. Countries that pushed their production or were not so careful in recycling depleted their soils. Eastern Europe in particular had recurrent crop failures and starvation as late as the 1880s. And, we could do it better now than the Chinese did in the old days, for science has marched on. We have learned to reduce nutrient loss considerably in the last 50 years. There is also much more that we could do, and we had better get moving: the last time the world depended mainly on recycling, the global population was a mere one billion. The next time it may be 10 billion – cross your fingers it’s not more.
Could a world based on recycling nutrients, even one supplemented by very high-priced remnants of our mined fertilizer resources, really feed 10 billion? Or even 5 billion? I think the answer is certainly no if we do not get our act together in the next very few decades. Even then, it is more likely that true sustainability will be a much lower number than 10 billion.
C. Soil Erosion
Finally, there is the real bugbear: soil erosion.
The Earth is a wonderful place that obligingly creates new soil from bedrock, using the wear and tear of weather plus bacterial and microbial action. Perhaps even more remarkably, this new soil arrives with a good complement of phosphorus and potassium. This is pretty good treatment from a very generous planet. Before humans appeared, the rains would dissolve and wash away the soil and its associated nutrients just as fast as it was produced, but no faster. That’s a pretty neat balancing trick too. We can record the steady, modest rate of erosion in ancient lake beds. Humans, alas, with their tree lust, initially for heat and shelter and later for arable space and fertilizer (burning the forest sheds its store of fertilizer and other nutrients), began to cut forests down so fast that the erosion rate increased. Nothing increases erosion and net nutrient loss faster than deforestation. (And, ironically, nothing encourages deforestation like erosion, because erosion decreases productivity and, hence, increases the pressure to bring on new land to fill the gap in a rather vicious feedback loop.) As our population grew, the forests were thus diminished in size, and the arable land increased. Even plowing savannahs, where trees had seldom or never grown, increased erosion by a large multiple.
Sometimes these factors would accumulate with predictable results. In Panama, for example, it is common to see very hilly land that was once totally forested being used for cattle grazing. The cattle create paths that form gullies that funnel the tropical rains, which in turn denude whole hillsides in a few decades.
What the precise situation is today is hard to tell: First, erosion varies widely from region to region by type of soil and agricultural practice. Second, its measurement must also be difficult, for scientists have widely different views as to the best methodology. At one extreme, the reports are almost terrifying. A group of scientists from Cornell University writing in Science magazine5 summarized their findings as follows: “Soil erosion is a major environmental threat to the sustainability and productive capacity of agriculture.
During the last 40 years, nearly one-third of the world's arable land has been lost by erosion and continues to be lost at a rate of more than 10 million hectares per year ... In the U.S. an estimated 40 billion tons of soil ... are lost each year.” Unfortunately, Cornell’s Agricultural School has high standing in its field – reading their summary, one’s instinct is to say, “Well that’s it then. In a hundred years, everyone starves.” Fortunately, there are also those at the other extreme who think we’ll muddle through just fine, at least in the U.S. And, as we will see, the rise of no-till farming has the potential to help a lot.
The brief nitty-gritty on erosion and replacement is that somewhere between 50 and 1,000 years is needed to naturally replace one inch (25mm) of subsoil, depending on local conditions and who is doing the research. Different soil has different weights, but averages about 5 tons per acre per millimeter or 125 tons per acre per inch. Therefore, the natural replacement rate is equal to 2.5 to 0.125 tons per acre per year, rather than the 5 tons per acre per year that the U.S.D.A. has been using as an acceptable erosion rate. To state this very conservatively, current U.S. soil losses are very probably higher than natural replacement and possibly considerably higher. In Australia too, where records go back into the nineteenth century, it is also clear that more than 70% of arable land has been degraded to some considerable degree. For the planet as a whole, soil losses are certainly higher than replacement, and for some areas, notably in Africa, they are disastrously higher.
Further offsetting any of the more favorable data in the U.S. is a recent report from Iowa State University.6 The report, which claims new accuracy levels, holds that typical erosion is not the issue, but that the rare extreme storm can cause one to several years’ erosion in a single night as new gullies form in a way totally unlike those that form during regular rain storms. These outlier storms have unfortunately become much more common globally in recent years, with formerly rare weather events having become more frequent as a consequence of a warming climate.
History of Erosion
We now know that population density in the Fertile Crescent and some of the other centers of early civilization often dropped precipitously as their soils, due mainly to plowing, eroded. By the time they were finally disposed of by invaders, they were often shells of their former might with tiny fractions of their original populations left. North Africa was home to empires such as Carthage, which were powerful enough to challenge Rome and, in other cases, fertile enough to help feed Rome, which was the case of ancient Libya and Tunisia. Most of this territory has lost the great majority of its former agricultural capacity. Ancient Greece, Central Italy under the Romans, Syria, Iraq, and many others all suffered from the effects of subsoil erosion over a period of one thousand or more years, thus limiting their populations and reducing their economic and military power. In its later years, Rome, once at the center of fertile plains, abandoned farms everywhere and was totally dependent on imports from Egypt and Syria.
Syria’s history is one in which whole cities, with their dozens of surrounding villages, were later completely abandoned to the desert as their soil disappeared due to unsustainable agricultural practices. Fifteen hundred years ago in the Americas, civilizations such as the Mayans overtaxed their soils and provably lost enough soil to make it impossible to reliably feed their peak populations. (Two readable books for the summer that cover this topic in detail are: Dirt: The Erosion of Civilizations, by David R. Montgomery and Collapse: How Societies Choose to Fail or Succeed by Jared Diamond.)
The academic study previously cited,7 claims the loss of one-third of our soil globally in just a few
decades. It is easy to believe that since the beginning of human history it might be fully one-half, or even more.
The history of soil erosion bringing ancient empires down might have served as a powerful warning, but it does not seem to have done so. Since Colonial times, the U.S. is thought to have lost one-third to one-half of its topsoil, and today is still losing at a rate faster than replacement, although at a recently much-reduced rate. Yet, as recently as the 1920s, the 1930s of Dust Bowl fame, and the 1940s, U.S. farms were eroding at disastrous rates – well over 10 times replacement, despite the historical warnings.
Globally, the situation has been, and remains, much worse than in the U.S. It is not clear what it will take to drive home the message that erosion is perhaps the single largest threat to our long-term well-being. It is certainly one of them. But erosion is insidious in that it has always crept up very slowly on both ancient and modern civilizations alike. Syrian farmers in 100 A.D. were concerned with supplying Rome in a year when prices were high. We can be sure that slow (even if steady) losses of productivity seemed to them to be academic abstractions in contrast. Today, what we might call the tyranny of the discount rate guarantees the same behavior. Damage far out has little value, and there is no adjustment factor for damage to all of us collectively. Only the gain of the individual or the corporation appears in the spreadsheet. This is a severe, perhaps even fatal, fl aw in traditional free-market capitalism, and there
are others that relate to this general topic: capitalism has not easily handled the finiteness of our resources.
This topic – deficiencies in capitalism – is a big one and I will try to do it justice next quarter. For now, to link the current topic of erosion with that of next quarter’s on capitalism, I offer a brief story of the Devil and the Farmer.
The Devil and the Farmer
The Devil, disguised as an innocent agent of a large agricultural company, arrives at a typical Midwestern farm. He has come to suggest to the farmer that he engage in more aggressive farming, and he comes, as usual, with a contract.
The contract, if signed, pledges the farmer to farm aggressively and pledges the Devil to guarantee that the farmer’s profits will be multiplied five-fold. But, as always, there is a catch: Footnote 23 is a clause that informs the farmer that squeezing out maximum short-term output will result in the loss of just 1% per year of his soil. The Devil’s deal is dangerously reasonable, and therefore I would guess that 90% of farmers would feel that their families’ well-being requires that they accept it.
The Devil has included a spreadsheet that accurately lays out the profits and also lays out the steady decline in the soil’s productivity and, fiendishly, does it honestly. By the end of the 40-year contract, the
farm’s productivity is down by barely 5%, and the farmer’s net financial gains are enormous.
So successful has this period been that the farmer re-ups for another 40 years. Once again, the Devil does not cheat. By the 80-year mark, the soil depth after some natural replacement is almost precisely half of its year 1 level (and, remember, it also lost one-third to one-half of its soil on average in the fi rst 150 years of farming), but the farm has prospered enormously. And, even after the soil loss, it is still by no means particularly sub-average because it turns out that all of the local farmers have made the same deal. All of their productivities have dropped by 20% to 25% but, because of global pressures on grain prices, the deal still looks attractive.
The spreadsheets, which have not lied in the past, still accurately and honestly show how profitable it will be for great-grandson and all of his neighbors to re-up yet again. In this way, by always adopting the plan with the optimal present value and by following strict capitalist principles, the Midwest and the planet marches off the edge of the cliff, as farmers, prosperous almost to the very end, are finally overwhelmed by armies of starving city dwellers!
Looking back on it, I have no doubt going through the panic in the fall of 2008 has improved me as an investor. Talking about focusing on the value of a business and not a stock price is one thing. Living through a period where some of your investments decrease in paper value by 80% is another.
I did it in 2008/2009. I put my head down and focused on the businesses. I even added to positions when things looked very bleak.
I did it. But it wasn’t easy. I’ve been investing for quite a while. But I remember very clearly thinking in October 2008 that “I didn’t sign up for this” when I decided to focus on equity investing. I certainly had an inclination or two to sell to make sure I didn’t lose all my money. But I fought my emotions and managed to do the right thing.
And I’m better for it. My emotions are much less of an enemy now. When you are mentally prepared for what went through in 2008 the volatility of this summer is nothing to get worked up over.
The hardest part now for me when stocks are crashing is knowing where exactly to focus. There is so much to look at that it is overwhelming. So today I’m going to remind myself of what Jeremy Grantham has been preparing for.
What reminded me of Grantham was this article from Marketwatch.
And specifically this part:
Grantham runs a personal, non-profit foundation dedicated to the protection of the environment. For the foundation he has invested heavily in agriculture, commodities and natural resources. Timber is a favorite, as are fertilizer companies. He’s not a big fan of gold. “I own some myself as a pure speculation,” Grantham said — “just enough to mute the irritation of watching gold [prices] rise.”
In his first-quarter 2011 letter Grantham raised the idea that a paradigm shift had happened in the commodity sector:
- The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
- Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution
How does an investor today handle the creative tension between brilliant long-term prospects and very high short term risks? The frustrating but very accurate answer is: with great difficulty. For me personally it will be a great time to practice my new specialty of regret minimization. My foundation, for example, is taking a small position (say, one-quarter of my eventual target) in “stuff in the ground” and resource efficiency. Given my growing confidence in the idea of resource limitation over the last four years, if commodities were to keep going up, never to fall back, and I owned none of them, then I would have to throw myself under a bus. If prices continue to run away, then my small position will be a solace and I would then try to focus on the more reasonably priced – “left behind” – commodities. If on the other hand, more likely, they come down a lot, perhaps a lot, then I will grit my teeth and triple or quadruple my stake and look to own them forever. So, that’s the story.
And here we are. Those short-term risks have reared their ugly heads very quickly. And while prices of commodities likely haven’t taken the awful drubbing Grantham is looking for, some of the equities that produce those commodities have.
And if you like Grantham, that is likely a place to be looking today: energy, metals and agriculture.
Here is why Grantham thinks each area is where we should be invested as detailed in his second-quarter 2011 report:
A Possible Hierarchy of Problems
1. Energy
The transition from oil will give us serious and sustained problems. We passed peak oil per capita long ago and we are within 30 years, possibly within 10, of peak oil itself. The price will be volatile beyond our wildest dreams (or nightmares), and the price trend will rise, although at times this will be difficult to discern through the volatility.
Transportation will be difficult in general and air transportation in particular. But behind oil, there is a relative plenty of natural gas and coal, which can, although with cost and difficulty, be substituted for oil.
Even with coal and gas, however, we are dealing with only many decades of supply, not centuries. But beyond hydrocarbons there really is good news. Within 50 years or so, I believe we will have made spectacular progress in the science and engineering of solar, wind, tidal, and other energy sources, together with storage. One simple storage management idea for the nearer term, for example, is that every electric car would have two easily-exchangeable battery packs, with one in the garage, storing solar from your roof while you drive to work.
Whenever possible, all such batteries would be attached to an intelligent grid that would be able to raid batteries or deposit into them, giving massive flexibility by today’s standards. It is also possible (although, unfortunately, I believe improbable) that we will have a new, large-scale burst of activity in nuclear fission, perhaps stimulated by some technological improvements.
Further out, completely new forms of commercial energy are likely, perhaps from nuclear fusion of some kind, or perhaps from something completely off of our current radar screen. This is where my optimism comes in, for I believe that in 50 or so years
– after many and severe economic and, possibly, social problems – we will emerge with sufficient, reasonably-priced energy for everyone to live a decent life (if we assume other non-energy problems away for a moment) even if we don’t radically improve our behavior and make true sustainability our number one goal. In other words, current capitalist responses to higher prices should get the job done. We should realize, though, that reasonably-priced does not mean the nearly give-away prices of oil in the post war period, which serves as a real testimonial to the failure of standard free-market practices to recognize that a vital resource being finite changes everything in the long run.
“Reasonably-priced” fuel would be where prices rise steadily faster than the CPI rather than ruinously so.
2. Metals
Metals are, of course, a bigger long-term problem than energy. They are entropy at work ... from wonderful metal ores to scattered waste. Even the best recycling will have slippage. Entropy is impressive; everything really does run downhill, iron really does rust. So our future will undoubtedly be increasingly constrained, particularly if our population and its wealth both grow steadily. Eventually, the growth of both population and wealth will be limited and possibly even stopped by a lack of metals, but that should, with luck, be a long time away.
If we respond to increasing price pressures, as I’m sure we will, with a greater emphasis on quality and small scale along with an increasingly sensible and non-wasteful lifestyle, then we can push these serious constraints out for well over a hundred years. This is assuming, once again, no radical shift in attitudes and behavior other than those elicited by higher prices.
3. Agriculture
The trouble really begins with agriculture. This is the factor that I believe almost guarantees that we end up with a world population between 1.5 and 5 billion. The only question for me is whether we get there in a genteel, planned manner with mild, phased-in restraints, or whether we run head down and at considerable speed into a brick wall.
There are three particular aspects of agriculture where the shoe pinches the most: water, fertilizer, and soil. All three must be seen in the context of a rapidly growing population. To set the scene, Exhibit 1 shows arable land per person.
Unlike us, suitable land for agriculture has not increased since farming started some 10,000 years ago. In fact, with our help it has declined considerably, perhaps by as much as half or more!
A. Water
There is no doubt that water shortages will be a source of economic and social trouble forever. Countries will rattle sabers or, worse, go to war over access to river waters. That is certain. But viewed as a problem for the U.S. or for the planet as a whole, it does not seem to be a game stopper. The surface of our planet is, after all, mostly water. For our direct use and for our crops, we need a derisorily small fraction of Earth’s supply of water.
The entire planet’s current wasteful use of fresh water is equal to only 80% of the flow of the Amazon.
We also use our existing supplies of renewable fresh water with desperate inefficiency and wastefulness. As prices rise, we can save not just a few percent but a great majority of our water by growing the right things in the right places and by sensibly sharing and recycling the resource. Further out, with likely sources of reasonably cheap energy, we could supplement our supply with desalinated ocean water for coastal populations. Other than shifting crops, the main effect on agriculture will be a steady increase in the cost of water as we move slowly to recognizing the real costs of supplying water to farming.
However, come back in 50 or 100 years and we will, I believe, have been persistently irritated by water problems but never seriously threatened as a species.
For farming productivity, one of the greatest irritants for the next 50 years will be the depletion of fossil water: the great underground lakes of fresh water that receive little or no replenishment by rainfall. By bad luck, such vast deposits underlie and make possible some of the planet’s great bread baskets, including parts of the U.S. plains, parts of the Northwest of the Indian subcontinent, and parts of Northeastern China. If these very large areas are to stay in production, and they will certainly be needed, then major water transfer systems – canals of 500 to 2,000 miles in length – will have to be developed and the water taken from elsewhere. But even this, although it spells investment and environmental troubles in a big way, sounds ultimately doable, at a price. (The nastiest near-term problem of this kind will be in Yemen, where there is almost total dependence on underground fossil water, which is beginning to run out as I write!)
B. Fertilizers
Fertilizers are, I believe, less tractable. The three major macro nutrient fertilizers are the well-known N-P-K of lawn fertilizer: nitrogen, phosphorus, and potassium. Nitrogen, the most urgently needed of the three every year, is found in the greatest quantity so is happily the least problematical. Many crops, such as soya and alfalfa, supply or “fix” nitrogen for our main cereal production. Bioengineering is likely to increase this ability as well as broaden the range of plants that are able to do this. Electrical storms provide large quantities of nitrogen fertilizer out of the very air itself. (This provides about 5% of all nitrogen fixation, while modern agriculture accounts for about 50%).
More dependable man-made, or rather man-processed, nitrogen fertilizer is very efficiently made with natural gas, which is being found, fortunately, in increased quantities in many different regions of the world. Several of these regions – notably the U.S. and China – are major grain producers. Therefore, if we don’t go out of our way to waste our natural gas on less important products, we should be fine at least through this century. Nitrogen is the largest component of air and just needs energy to be converted into fertilizer. So, longer-term availability of nitrogen-based fertilizer is, as with water, about cost, not availability. But, starting with today’s almost ridiculously low prices for natural gas (20% BTU equivalency of oil – just about the lowest in history), farmers should count on seeing increasing multiples of the price for nitrogen fertilizer in the next 10 to 15 years.
Potassium (potash)
Potassium is in a less favorable situation. Today’s known resources are shown in Exhibit 2. Although it is found widely, very large and high grade (i.e., cheap) deposits are concentrated to quite a remarkable degree in two areas: one in Russia and Belarus and the other, happily for North America if we all stay friendly, in Canada. Unless there is considerable cartel-like behavior, which is certainly not unheard of these days with some commodities, then we have plenty of time to study the very long-term shortage problem. Luckily for us, potassium is a generously supplied element in the Earth’s crust.
Nevertheless, it is worth pointing out that both potassium and phosphorus (phosphates) have some characteristics that we are not accustomed to dealing with in our neat and short-term-oriented investment world. They are characteristics that make energy problems seem trivial because energy can be extracted in so many different ways.
Potassium and phosphorus cannot be made. They are basic elements.
No substitutes will do. Both potassium and phosphorus are required for all living matter, animal and vegetable. Most notably, us. We humans are, for example, approximately 1% phosphorus by body weight.
Modern high-production, single-crop agriculture today is very dependent on fi nite mined resources, which, if used wastefully, could easily cause a severe problem within 50 years and, if used sensibility and sparsely, could last for perhaps 200 years. And then what? You must recycle and farm super intelligently, as if your life depended on it. And it will.
Phosphorus (phosphates)
The reserve situation for phosphorus is shown in Exhibit 3. Admittedly, there are big arguments over reserves of both potash and phosphates because neither has been explored as comprehensively as have oil reserves. Here, too, we are quite lucky because the reserve life gives us time to plan sensibly for the rest of our lives (as a species, that is). But here again, the reserves are not evenly distributed and this time the skew is more, shall we say, interesting. It is thought that between 50% and 75% of the reserves are in Morocco and “associated” Western Sahara. Morocco’s share of phosphates makes Saudi Arabia’s share of oil look like small potatoes and, in the end, who values heating more than eating?
The existing high quality reserves shown in Exhibit 3 look, superficially, very satisfactory. There are reserves equal to 369 years of current production. Even allowing for 2% growth to help maintain productivity, these reserves would not run out for about 200 years. But, without Morocco and at 2% growth, reserves would be totally depleted in under 50 years. So with or without new reserves being located, some substantial gamesmanship should be expected within a few decades. Or, put it this way: if the phosphates were in my kingdom, I would try to make some hay.
The long-term phosphorus supply is probably the trickiest and most threatening issue to date. There may be a lot of lower-grade reserves that have not been listed or even looked for. (Why pay money to do that when there are decades’ worth of low-cost, very high-quality reserves?) But there may not be.
We are currently ferreting out as much of the limited data there is available. (Data on this and the many other conundrums raised in several of the topics discussed in this letter will be relayed from time to time as we can dig them out.) Serious scientific experts at this point are mostly “supposing” that, as is the case with many other resources, there are more, often much more, lower-quality reserves that are currently unrecorded than there are known high-quality reserves. But this is not always the case.
The U.K., for example, had a lot of high-quality anthracite and bituminous coal reserves, which propelled them into the Industrial Revolution, but today all of its anthracite is gone, most of its bituminous is gone, and there are no very large reserves of brown coal or lignite as there are, for example, in Germany.
Most, if not all, of the potash and phosphate deposits are associated with former oceans or salty seas, or that is believed by many to be the case. Well, if you wanted to be pessimistic, you could argue that you either have a dried up former ocean due to the ground rising over aeons, or you don’t. Perhaps you don’t have masses of smaller dried up bodies of water, which normally would be salt-free. In any case, we are all speculating at this point. Despite its potential importance, reliable data is just not available.
Let us imagine for a minute what might happen in 50 or 150 years when the last affordable phosphorus is delivered and Morocco is, quite sensibly, charging thousands of dollars a ton for the last one-third of its resources. We might be developing offshore recovery from the continental shelf at a little less than Morocco’s price, but still a gaspingly high price that would not be even remotely affordable by poorer countries. But mostly we would be recycling, a word with which our grandchildren will get awfully bored. It’s how crops were grown in the pre-commercial fertilizer age, at least wherever farmers could not engage in slash and burn and move on. Chinese farmers in particular successfully maintained the productivity of their fields for thousands of years by almost religiously recycling: off to the town market with two buckets of beans and back with two buckets of “night soil.” Human and animal waste, as well as
vegetable waste, was scrupulously reused. Countries that pushed their production or were not so careful in recycling depleted their soils. Eastern Europe in particular had recurrent crop failures and starvation as late as the 1880s. And, we could do it better now than the Chinese did in the old days, for science has marched on. We have learned to reduce nutrient loss considerably in the last 50 years. There is also much more that we could do, and we had better get moving: the last time the world depended mainly on recycling, the global population was a mere one billion. The next time it may be 10 billion – cross your fingers it’s not more.
Could a world based on recycling nutrients, even one supplemented by very high-priced remnants of our mined fertilizer resources, really feed 10 billion? Or even 5 billion? I think the answer is certainly no if we do not get our act together in the next very few decades. Even then, it is more likely that true sustainability will be a much lower number than 10 billion.
C. Soil Erosion
Finally, there is the real bugbear: soil erosion.
The Earth is a wonderful place that obligingly creates new soil from bedrock, using the wear and tear of weather plus bacterial and microbial action. Perhaps even more remarkably, this new soil arrives with a good complement of phosphorus and potassium. This is pretty good treatment from a very generous planet. Before humans appeared, the rains would dissolve and wash away the soil and its associated nutrients just as fast as it was produced, but no faster. That’s a pretty neat balancing trick too. We can record the steady, modest rate of erosion in ancient lake beds. Humans, alas, with their tree lust, initially for heat and shelter and later for arable space and fertilizer (burning the forest sheds its store of fertilizer and other nutrients), began to cut forests down so fast that the erosion rate increased. Nothing increases erosion and net nutrient loss faster than deforestation. (And, ironically, nothing encourages deforestation like erosion, because erosion decreases productivity and, hence, increases the pressure to bring on new land to fill the gap in a rather vicious feedback loop.) As our population grew, the forests were thus diminished in size, and the arable land increased. Even plowing savannahs, where trees had seldom or never grown, increased erosion by a large multiple.
Sometimes these factors would accumulate with predictable results. In Panama, for example, it is common to see very hilly land that was once totally forested being used for cattle grazing. The cattle create paths that form gullies that funnel the tropical rains, which in turn denude whole hillsides in a few decades.
What the precise situation is today is hard to tell: First, erosion varies widely from region to region by type of soil and agricultural practice. Second, its measurement must also be difficult, for scientists have widely different views as to the best methodology. At one extreme, the reports are almost terrifying. A group of scientists from Cornell University writing in Science magazine5 summarized their findings as follows: “Soil erosion is a major environmental threat to the sustainability and productive capacity of agriculture.
During the last 40 years, nearly one-third of the world's arable land has been lost by erosion and continues to be lost at a rate of more than 10 million hectares per year ... In the U.S. an estimated 40 billion tons of soil ... are lost each year.” Unfortunately, Cornell’s Agricultural School has high standing in its field – reading their summary, one’s instinct is to say, “Well that’s it then. In a hundred years, everyone starves.” Fortunately, there are also those at the other extreme who think we’ll muddle through just fine, at least in the U.S. And, as we will see, the rise of no-till farming has the potential to help a lot.
The brief nitty-gritty on erosion and replacement is that somewhere between 50 and 1,000 years is needed to naturally replace one inch (25mm) of subsoil, depending on local conditions and who is doing the research. Different soil has different weights, but averages about 5 tons per acre per millimeter or 125 tons per acre per inch. Therefore, the natural replacement rate is equal to 2.5 to 0.125 tons per acre per year, rather than the 5 tons per acre per year that the U.S.D.A. has been using as an acceptable erosion rate. To state this very conservatively, current U.S. soil losses are very probably higher than natural replacement and possibly considerably higher. In Australia too, where records go back into the nineteenth century, it is also clear that more than 70% of arable land has been degraded to some considerable degree. For the planet as a whole, soil losses are certainly higher than replacement, and for some areas, notably in Africa, they are disastrously higher.
Further offsetting any of the more favorable data in the U.S. is a recent report from Iowa State University.6 The report, which claims new accuracy levels, holds that typical erosion is not the issue, but that the rare extreme storm can cause one to several years’ erosion in a single night as new gullies form in a way totally unlike those that form during regular rain storms. These outlier storms have unfortunately become much more common globally in recent years, with formerly rare weather events having become more frequent as a consequence of a warming climate.
History of Erosion
We now know that population density in the Fertile Crescent and some of the other centers of early civilization often dropped precipitously as their soils, due mainly to plowing, eroded. By the time they were finally disposed of by invaders, they were often shells of their former might with tiny fractions of their original populations left. North Africa was home to empires such as Carthage, which were powerful enough to challenge Rome and, in other cases, fertile enough to help feed Rome, which was the case of ancient Libya and Tunisia. Most of this territory has lost the great majority of its former agricultural capacity. Ancient Greece, Central Italy under the Romans, Syria, Iraq, and many others all suffered from the effects of subsoil erosion over a period of one thousand or more years, thus limiting their populations and reducing their economic and military power. In its later years, Rome, once at the center of fertile plains, abandoned farms everywhere and was totally dependent on imports from Egypt and Syria.
Syria’s history is one in which whole cities, with their dozens of surrounding villages, were later completely abandoned to the desert as their soil disappeared due to unsustainable agricultural practices. Fifteen hundred years ago in the Americas, civilizations such as the Mayans overtaxed their soils and provably lost enough soil to make it impossible to reliably feed their peak populations. (Two readable books for the summer that cover this topic in detail are: Dirt: The Erosion of Civilizations, by David R. Montgomery and Collapse: How Societies Choose to Fail or Succeed by Jared Diamond.)
The academic study previously cited,7 claims the loss of one-third of our soil globally in just a few
decades. It is easy to believe that since the beginning of human history it might be fully one-half, or even more.
The history of soil erosion bringing ancient empires down might have served as a powerful warning, but it does not seem to have done so. Since Colonial times, the U.S. is thought to have lost one-third to one-half of its topsoil, and today is still losing at a rate faster than replacement, although at a recently much-reduced rate. Yet, as recently as the 1920s, the 1930s of Dust Bowl fame, and the 1940s, U.S. farms were eroding at disastrous rates – well over 10 times replacement, despite the historical warnings.
Globally, the situation has been, and remains, much worse than in the U.S. It is not clear what it will take to drive home the message that erosion is perhaps the single largest threat to our long-term well-being. It is certainly one of them. But erosion is insidious in that it has always crept up very slowly on both ancient and modern civilizations alike. Syrian farmers in 100 A.D. were concerned with supplying Rome in a year when prices were high. We can be sure that slow (even if steady) losses of productivity seemed to them to be academic abstractions in contrast. Today, what we might call the tyranny of the discount rate guarantees the same behavior. Damage far out has little value, and there is no adjustment factor for damage to all of us collectively. Only the gain of the individual or the corporation appears in the spreadsheet. This is a severe, perhaps even fatal, fl aw in traditional free-market capitalism, and there
are others that relate to this general topic: capitalism has not easily handled the finiteness of our resources.
This topic – deficiencies in capitalism – is a big one and I will try to do it justice next quarter. For now, to link the current topic of erosion with that of next quarter’s on capitalism, I offer a brief story of the Devil and the Farmer.
The Devil and the Farmer
The Devil, disguised as an innocent agent of a large agricultural company, arrives at a typical Midwestern farm. He has come to suggest to the farmer that he engage in more aggressive farming, and he comes, as usual, with a contract.
The contract, if signed, pledges the farmer to farm aggressively and pledges the Devil to guarantee that the farmer’s profits will be multiplied five-fold. But, as always, there is a catch: Footnote 23 is a clause that informs the farmer that squeezing out maximum short-term output will result in the loss of just 1% per year of his soil. The Devil’s deal is dangerously reasonable, and therefore I would guess that 90% of farmers would feel that their families’ well-being requires that they accept it.
The Devil has included a spreadsheet that accurately lays out the profits and also lays out the steady decline in the soil’s productivity and, fiendishly, does it honestly. By the end of the 40-year contract, the
farm’s productivity is down by barely 5%, and the farmer’s net financial gains are enormous.
So successful has this period been that the farmer re-ups for another 40 years. Once again, the Devil does not cheat. By the 80-year mark, the soil depth after some natural replacement is almost precisely half of its year 1 level (and, remember, it also lost one-third to one-half of its soil on average in the fi rst 150 years of farming), but the farm has prospered enormously. And, even after the soil loss, it is still by no means particularly sub-average because it turns out that all of the local farmers have made the same deal. All of their productivities have dropped by 20% to 25% but, because of global pressures on grain prices, the deal still looks attractive.
The spreadsheets, which have not lied in the past, still accurately and honestly show how profitable it will be for great-grandson and all of his neighbors to re-up yet again. In this way, by always adopting the plan with the optimal present value and by following strict capitalist principles, the Midwest and the planet marches off the edge of the cliff, as farmers, prosperous almost to the very end, are finally overwhelmed by armies of starving city dwellers!
