I enjoy bantering with good friends about the scarcity “meme” that is often used to frighten us into acquiescing to some sort of government program or regulation designed to thwart the perceived negative effects of such shortages. One such is “peak oil” about which I’ve commented from time to time. But until this morning I’d never heard of “peak potash.” Chris Mayer helps his investors make money by pointing out absurdities and then riding them for all they’re worth. In his “predictions for 2013” newsletter to clients, he wrote:
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 ton. 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.
But Grantham made a mistake and got caught in indulging in the idea of impending scarcity. Noted Mayer:
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.”
Those goose bumps can be costly. As Mayer noted, where there is a perception that differs from reality, there’s money to be made. There’s also a point to be made: the scarcity “meme” is usually wrong:
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.
It’s all he can do to keep from saying to Grantham “I told you so,” but was much more restrained: “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.”
Same old nonsense, indeed.