Jeremy Grantham Long Soil, Short Capitalism


These are turbulent times in the financial markets and a lot of investment managers are yearning for the simpler life of corn and cows rather than corn futures and deals structured by cows. Jim Rogers has been happy to advise anyone on Wall Street who'll listen to get into farming.

In general, you probably want to take Jim Rogers’s advice. But here you have a dilemma, since you grew up in the suburbs, you've worked in finance all your life, and the closest you’ve ever come to a farm was when that guy on your floor at Penn showed you the hydroponic setup in his closet. So who will teach you what you need to know about farming?

Talk to Jeremy Grantham of GMO, who is looking to get you set up in the growing field of no-till farming.

You may remember Grantham’s last quarterly letter, cheerfully titled “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever.” Today Grantham is out with his 2Q letter, “Resource Limitations 2: Separating the Dangerous from the Merely Serious,” which offers a little bit of hope if we all give up on capitalism and get back to low-impact farming.

Like many investment newsletters, this one starts from the premise that capitalism is fundamentally broken:

Capitalism does not address these very long-term issues easily or well. It seems to me that capitalism’s effectiveness moves along the spectrum of time horizons, brilliant at the short end but lost, irrelevant, and even plain dangerous at the very long end.

What is capitalism not doing so well at? Energy? A problem, but “current capitalist responses to higher prices should get the job done.” Metals? A bigger problem, but “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.” But the real kicker is dirt. Grantham loves dirt:

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.

But earth is through playing nice:

A group of scientists from Cornell University writing in Science magazine 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.”

Grantham thinks that "erosion is perhaps the single largest threat to our long-term well-being." But there’s hope:

No-till farming, developed in recent decades has, after a slow start, been spreading very rapidly in South America. … In the U.S., the adoption of no-till has very recently accelerated and it now accounts for more than 35% of farmland according to the U.S.D.A. In general, it is growing elsewhere, albeit slowly, and hardly at all in Africa. … Just as it sounds, no-till leaves the crop residue on the field and the following year, instead of plowing up the ground, a rotating wheel pierces the ground every few inches and plants a seed, sometimes together with a precisely measured dose of fertilizer. After a few years, the mat of ground cover massively reduces the erosion caused by heavy rains: the average academic study reports more than an 80% reduction, with the highest being 98% and the lowest 50%. In one fell swoop, the erosion problem can be effectively resolved.

All in all, no-till is like a gift from Ceres and single-handedly would remove or long postpone most of our longterm productivity problems.

Working in finance is no way to solve any productivity problems so we're thinking that a lot of you will be interested in giving this a go. We assume that part 2 of Grantham's letter (due out in 2 weeks) will include instructions for how to get started in this exciting field.

Resource Limitations 2: Separating the Dangerous from the Merely Serious