Transcript: Commodity prices should rise as ‘era of abundance’ ends

The agriculture sector

TR: We think the global economy is seeing a rising middle class, which means the caloric requirements are going to rise. As people get wealthier, they consume more calories. We’re going to have better precision farming, better technologies, more fertilizer use to make sure yield-per-acre rises. Companies that are facilitating the improving yields — so these are machinery companies that are adapting precision farming technologies — we think that they’ll really benefit because they’re going to have better pricing structures and more predictable revenues. I think we are moving to an era of bigger consolidation and bigger farms and that’s going to create some efficiencies. You’re going to see a big investment in technology for farmers. It’s going to be expensive, but those that are well capitalized and large and are able to pay for the best-in-class technologies are really going to be the ones that see their yields go up.

The outlook for energy companies

TR: The big tailwind is, I think, the realization that the energy transition is happening, but it’s not happening in the way people think. And we’ve actually tried to reframe the conversation away from energy transition and into what we call ‘energy addition.’ Three or four years ago, people said ‘energy transition,’ and what they thought was ‘Out with the old, in with the new.’ That’s not happening. The reality is the demand for energy is rising a lot around the world. That means we need to invest in every type of energy supply that we can. In the very long run, traditional forms of energy, like oil, will peak and decline slowly in the late 2030s, into the 2040s. Right now, the U.S. administration is talking about lowering oil prices. So we do see a bit more oil supply coming in the next year than oil demand growth. But the reality is, in the long run, we need every molecule and electron of energy that we can possibly harness, because the global demand needs are really that robust.

Metals and mining

TR: All of the energy transition is highly metals intensive, particularly things like copper and lithium and nickel and cobalt. You look at how metal intensive an electric vehicle is versus a traditional internal combustion engine vehicle. You think about what we’re trying to do with reindustrialization in the U.S. We want to develop new infrastructure in emerging markets and in the developed markets. All of that is going to be very metals intensive over time. And we’re going to need higher prices to make sure the supply is there.

Where he sees opportunities

You know, when you think about the agriculture value chain, the protein companies — pork packers and chicken producers and beef producers — their input costs should come down as grain prices come down and their margins should widen out. So in the ag space that’s something we like. We like gold and precious as well. Obviously gold prices are high if you look at historical correlations but there’s been a lot of spending in the flight-to-safety. And so we like precious, and we like gold. And the last one that I’d say is that we really do like uranium. In the global energy markets, the tension today is you can either have 24/7 365, baseload, predictable energy, but it has a carbon emissions profile. Or you could have really clean energy, but it’s not predictable. Nuclear is the one that can bridge both worlds. Now, it’s going to take a really long time to get the nuclear system up and running, but it is starting to grow again, and it will see a big inflection, probably around 2030 or the early 2030s.

The rightful place of commodities in a well-balanced portfolio

TR: Commodities and real assets cost you very little in your portfolio over time, but provide a lot of value, particularly in inflationary periods. We think the environment right now is very attractive and investors should feel very good about the relative and absolute return of real assets, broadly — things like commodities, natural resource equities, real estate, infrastructure, broad real assets. At a minimum, they’re a great portfolio hedge. Not having things like commodities, natural resource equities in your portfolios in the 2010s was actually a good decision. But I think investors have become very complacent. Folks are saying, ‘Oh, the last 10 years looked like this? This is what the next 10 years must look like.’ The next 10 years, we think, are going to be very different. So, not owning them has been the right choice for 10 years, but won’t necessarily be the right choice for the next 10 years, and that’s why we think investors should be taking a really close look at a lot of this stuff.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Tyler Rosenlicht of Cohen & Steers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

**

Go back to the article.