We are not in the business of forecasting the weather at MoneyWeek. However, given the constant scaremongering about the upcoming cold winter in the papers (it’s going to be the coldest for at least a decade, according to the Met Office), we thought we might take a look at what a big freeze could mean for markets. We’ve looked at a variety of stocks that might do well – everything from funeral homes to insulation fitters – but the most interesting point that comes out of the story is that bad weather around the world might be good news for the price of soft commodities: bad weather tends to mean bad harvests, which should in turn mean higher prices.
Soft commodities are already on our radar, so having one more thing to back up our bullishness is no bad thing. They are still trading at historically low prices (200-year lows relative to oil prices) and many of them (corn, wheat, sugar and soya) can be refined into biodiesels – no bad thing, given the oil price. Buying soft commodities is also a way to get exposure to the potential for water shortages around the world.
This latter point should get rather more attention than it does. As Hugh Hendry, CIO of Eclectica Asset Management, points out, agriculture accounts for 85% of all freshwater consumption in the world: it takes 1,000 tons of water to produce just one ton of wheat. Yet there are droughts underway all over the world (note the water crisis in Spain over the summer) and the massive economic expansion of India and China is coming at a steep price. India is using its underground water reserves twice as fast as they are being replaced and in China the water table is falling rapidly, leaving 300-odd cities running near empty.
Producing all the commodities that India and China demand for their non-stop development uses a great deal of water too. The Saudis are having to inject 15 million to 18 million barrels of oil into their largest oil field, Ghawar, every single day. That is three times the number of barrels of oil produced by the field. Mining for the metals needed to build China’s infrastructure is also a very water-intensive business – a shame, given that much mining takes place in the developed world and that 90% of the world’s severe water shortages are already in developing countries. “The inevitable conclusion,” says Hendry, “is more drought and disappointing crop yields” followed, of course, by rising soft commodity prices.