In recent months, headlines have touted 2010 as the “warmest year on record.” While we agree with this claim (the temperatures were scientifically measured), we belong to the school of thought that temperatures are cyclical and that despite headlines, the Earth is actually in a cooling phase.
The temperature dataset used to show that the Earth was the warmest on record in 2010 comes from University of Alabama Huntsville (UAH), home to some very bright climatologists and guardians of some of the most important temperature data sets in the world. UAH’s satellite-based dataset depicts surface temperatures in the lower atmosphere.
Being satellite based, the “warmest temperatures on record” effectively mean ‘the warmest temperatures dating back to November 1978 when the first NOAA satellite was put into service.’ Unfortunately, that sounds a little less sexy. In addition to a very short dataset, one must also take into account that 1978 was near the end of a brief cooling period when both Time and Newsweek featured cover stories about a pending ice age.
Lastly, we stress the point that the dataset is an approximation of global surface temperatures: 71% of the Earth’s surface is covered with water. Knowing this, one might suspect that the 2009-2010 El Nino, “characterised by unusually warm ocean temperatures in the Equatorial Pacific” by the NOAA, may have had an impact on the satellite-based temperature trends over the past two years. (sarcasm)
The graph below, generated from the NOAA’s Satellite and Information Service, shows the twelve month average land based surface temperature readings in the contiguous United States:
The graph clearly displays the unusual run-up in temperatures that began in the late 90’s (commonly referred to as the “hockey stick graph”) followed by a sharp decline since 2005. The up-tick in average surface temperatures in 2010 resulted from the warm El Nino summer. When the three month average temperature is displayed (November-January), temperatures this winter were below average. (Data for this graph can be found here: http://www.ncdc.noaa.gov/temp-and-precip/time-series/).
If one accepts the notion that the Sun, which provides over 95% of the heat energy to the surface of the Earth, has the potential to impact surface temperatures, it would be logical to incorporate observations and predictions of solar activity in climate models and forecasts.
Luckily, solar activity follows surprisingly stable, and thus predictable, cycles. In 1993, Robert Jastrow of the Mount Wilson Observatory in California, and Sallie Baliunas of the Harvard-Smithsonian centre for Astrophysics, reported that most of the known twelve sun-like stars showed regular cycles of activity similar to the eleven-year cycles of our sun.
Solar activity is most commonly measured by sunspot counts. Sunspots are created when the plasma circulation within the sun becomes so strong that flows of plasma escape the surface. This plasma cools and creates a visible dark spot as it is later brought back towards the core by the Sun’s gravitational pull.
The intensity of this circulation, commonly referred to as the Sun’s “conveyor belt,” creates the electromagnetic output of the Sun and sunspots: a more active conveyer belt circulation creates high sunspot counts and high electromagnetic output, leading to warmer temperatures here on Earth. In contrast, a less active conveyor belt circulation produces a low sunspot count and weak electromagnetic output, leading to lower temperatures here on Earth. The graph below shows the correlation between the sunspot count and global surface temperatures:
On May 10, 2006, NASA scientists proclaimed that the great conveyor belt of the sun had slowed significantly. At the time, NASA solar physicist David Hathaway spoke of the slow conveyor belt circulation stating “It’s off the bottom of the charts…We’ve never seen speeds so low.”
This is just about the strongest statement that a government-funded physicist can make against global warming and still feed his children. Since then, the sunspot count has continued to remain depressed, far below normal levels, foreshadowing a period of colder weather that we expect to last beyond 2020.
While we find weather patterns fun and interesting to study, we have an ulterior motive: how can we profit from a decline in temperatures? The key takeaways from our “Global Cooling” thesis are the impacts on grain yields and increased precipitation (snowfall). Based on our research, we expect grain prices to remain elevated as shortened growing seasons and negative yield events usually coincide with periods of low solar activity.
Our favourite Global Cooling play, Compass Minerals (CMP), provides investors two ways to win: Compass produces highway deicing salt (rock salt) in North America and the United Kingdom and is the largest producer of specialty fertiliser in North America. In 2010, Compass generated 81.41% of their revenues from salt sales and 17.55% of their revenues from specialty fertiliser production.
We believe Compass will also benefit from its planned expansion of their evaporation ponds, doubling their low cost production of Sulfate Of Potash (SOP) fertiliser, which is used by farmers to help improve the yields of high-value crops like fruit and vegetables.
As New Englanders, we aren’t looking forward to a decade of declining temperatures but identifying this trend early has introduced several exciting investment opportunities that the market is currently overlooking.
Unit Economics is a Boston-based independent research firm. We provide institutional investors with insightful macro and thematic research and actionable equity ideas, both long and short. Our work stems from out of consensus views accompanied by extensive research and a fundamentally-oriented ‘Unit Economics’ approach to financial modelling and forecasting.
Disclosure: Clients of Unit Economics own a significant amount of shares of Compass Minerals.
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