Demography, the Global Emergency

It is not an exaggeration to say that world demographics are entering uncharted territory. For the first time in a very long time, perhaps the first time ever, the dependency ratios (loosely, the ratio of dependents to workers) of all rich nations and of several emerging markets have started rising and will continue to rise for several decades.

This alone would be enough of a challenge for the world economy. But making things more complicated, it is taking place at the same time as the other big demographic transition of our age, the great population boom in some of the poorest nations of the world. Read more

The Case for Agricultural ETFs: A Conversation with Sal Gilbertie

“It is really important to have ags in your portfolio. Most people have gold and most people have oil. The fact that they don’t have ags is actually quite a mystery.”    Sal Gilbertie, President of Teucrium Funds.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW:

As Sal Gilbertie would have it, CORN is not only the king of agricultural commodities. It is also the ticker symbol for one of Teucrium Funds agricultural ETFs. In addition to CORN, Teucrium offers three other single-commodity ETFs: WEAT, SOYB, CANE, for wheat, soybean and sugar. Each of these ETFs invests in futures and is configured to “mitigate contango and backwardation” and to track the price of its underlying commodity. A fifth ETF, with ticker TAGS, tracks an equally-weighted basket of corn, wheat, soybean and sugar.

I recently had a conversation with Gilbertie who is President of Teucrium. Gilbertie cut his teeth in the 1980s as a commodities trader at Cargill and later at other large institutions. His case for investing in agricultural commodities is three-fold:

  • the long-term: growth in demographic demand in emerging markets.
  • the timeless: diversification away from the S&P 500 and from gold.
  • the short-term: agricultural commodities are now significantly undervalued relative to gold.

1- Long-term Demand and Supply

Demand for agricultural commodities is expected to rise steadily in the decades ahead due to 1) the growth of the global population currently from 7 billion people to over 9 billion by 2050 and 2) the rise in living standards and concomitant improvement in diets in emerging markets.

The table below shows future population estimates per the United Nations’ medium variant estimates. It should be noted that this medium variant assumes a big decline in total fertility rates (TFRs, number of children per woman) in India and Sub-Saharan Africa. In the event that TFRs do not decline as fast as expected, the population growth in these countries would be even greater.

Asia and Sub-Saharan Africa will show the biggest jump in population and in demand for basic food stuffs. Note in the table that Sub-Saharan Africa is forecast to contribute half the population growth between today and 2050, and as much as 81% of the growth between today and 2100.

Screen Shot 2015-02-20 at 5.53.58 AM

It is not difficult to conclude from these figures therefore that Sub-Saharan Africa will require more than a doubling of food supplies in the next 35 years, a significant challenge at a time when it is still trying to eliminate hunger in many countries.

Of course, supply is also growing but it is generally more volatile than demand due to periodic crop failures (from floods, droughts etc.) in one or another region of the world. Supply is also constrained by two factors: lower yields from farms in emerging markets and poor infrastructure in the regions of the world which have the largest unused acreages of arable land.

In 2012, the African Union Commission (AUC), the United Nations’ Food and Agriculture Organization (FAO) and the Brazil-based Lula Institute joined forces to “eradicate hunger” in Africa. At the time, the Chairperson of the AUC stated the following [my emphasis]:

“Food security is one of the key priorities of the African Union. Africa has the potential to increase its agricultural production given that almost 60 percent of the arable land in the continent is still not utilized. This enormous potential can make a real difference to improve our agricultural production and food security. It is time to move beyond subsistence agricultural production and consider ways of eventually embarking on agro-industrial production.”

More generally, looking at the global picture, Sub-Saharan Africa is believed to have the largest reserves of untapped arable land. As promising as this may be, massive investments in technology, infrastructure and logistics will be needed before new farm land can yield significant amounts of grain that can be delivered to consumers.

With regards to agricultural yields, an FAO report released in 2002 stated:

“Global cereal yields grew rapidly between 1961 and 1999, averaging 2.1 percent a year. Thanks to the green revolution, they grew even faster in developing countries, at an average rate of 2.5 percent a year. The fastest growth rates were achieved for wheat, rice and maize which, as the world’s most important food staples, have been the major focus of international breeding efforts. Yields of the major cash crops, soybean and cotton, also grew rapidly.”

For example, wheat yields in developing countries have nearly tripled from 1,000 kilograms per hectare in 1968 to over 2,600 now.

To sum up, supply will keep up with demand but only if yields improve at existing farms and if new infrastructure is put in place to service new arable land.

2- Timeless Diversification

Agricultural commodities are less correlated to the stock market than gold and should therefore be considered for diversification at any time. In recent decades, gold has drawn tens of billions in portfolio investments mainly because it was seen as a hedge against possible dislocation in financial markets.

Screen Shot 2015-02-20 at 3.57.31 PM

Gold delivered on its promise as an effective diversification asset in 2008-2011, outperforming stock markets by a wide margin during the financial crisis and its aftermath. Although it has retreated from its 2011 highs in recent years, gold is still a significant outperformer of all leading stock indices in the decade and a half since it hit bottom in 1999. See chart above.

Of course, gold grossly underperformed stocks in the 1990s, but the subsequent decade proved that there can be prolonged periods of time when it beats the popular indices by a very significant margin, notwithstanding comments by some market participants who deride it as barbaric or uncivilized. The pragmatic reality is that, barbaric as it may be, gold sometimes outperforms stocks for ten or fifteen years.

Screen Shot 2015-02-20 at 2.47.14 PM

Still, if we have shown that diversification into commodities is desirable, the chart above from Teucrium’s web page argues that agricultural commodities are even better diversifiers than gold because they have a lower historical correlation with the S&P 500 than gold does. Through the 20-year period 1995-2014, sugar, corn, wheat and soybean have all had a lower correlation to the S&P 500 than has gold.

3- Short-term Valuation

The ratio of gold to corn was in September 2014 at its highest level since gold started trading freely 38 years ago. It stands today at nearly twice its long-term average. Gilbertie says that, on average since 1976, an ounce of gold has purchased 165 bushels of corn. Last September, an ounce of gold could buy 377 bushels and today it can buy around 300 bushels, still nearly twice the long-term average.

The ratios of gold to the other grain commodities and to sugar tell a similar story.

Screen Shot 2015-02-20 at 5.27.15 AM

Thank you for reading. My conversation with Gilbertie includes more original insights about the mechanics of trading futures and ETFs and about the supply and demand prospects for agricultural commodities.

You can listen to the full podcast here:

Disclosure: The author has no contractual agreement with Teucrium and receives no compensation from Teucrium. As of the date of this posting and for at least the following 72 hours, the author has no investments in the Teucrium Funds.

Disclaimer: This article represents the author’s best faith efforts at presenting true facts. Nonetheless, despite the author’s best diligence, the article may include unintentional errors. Do your own work, read more research and draw your own conclusions before you decide to trade.

Demography Charts – 2

9 December 2014

See also Demography Charts – 1

Below are lists of largest country populations in 1950, 2015 and 2050, assuming the UN’s medium-variant projections. Key takeaways:

  • Lower growth for world population in upcoming decades as total fertility ratios (TFR = children per woman) decline in Africa and Asia.
  • Four European countries were in the top 10 in 1950. Only one (Russia) remains in 2015 and none in 2050.
  • US population drops from 6.3% of world in 1950, to 4.4% in 2015, to 4.2% in 2050.
  • Huge increase in Sub-Saharan Africa from 2015 to 2050, despite an expected decline in TFR.

Top 10 populations in 1950:

Population (millions) 1950
WORLD 2526
Sub-Saharan Africa 179
China 544
India 376
United States 158
Russia 103
Japan 82
Indonesia 73
Germany 70
Brazil 54
United Kingdom 51
Italy 46

 

Top 10 populations in 2015:

Population (millions) 2015
WORLD 7325
Sub-Saharan Africa 949
China 1401
India 1282
United States 325
Indonesia 256
Brazil 204
Pakistan 188
Nigeria 184
Bangladesh 160
Russia 142
Japan 127

 

Top 10 populations in 2050:

Population (millions) 2050
WORLD 9551
Sub-Saharan Africa 2074
India 1620
China 1385
Nigeria 440
United States 401
Indonesia 321
Pakistan 271
Brazil 231
Bangladesh 202
Ethiopia 186
Philippines 157

Finally, here is a chart of Europe and Sub-Saharan Africa as percent of total world population.

EuropeSubSaharan

 

 

Demography Charts – 1

13 November 2014

Below are charts of country and regional dependency ratios.

First some definitions:

The total dependency ratio is the ratio of the population aged 0-14 and 65+ to the population aged 15-64. They are presented as number of dependents per 100 persons of working age (15-64).

The child dependency ratio is the ratio of the population aged 0-14 to the population aged 15-64. They are presented as number of dependents per 100 persons of working age (15-64).

The old-age dependency ratio is the ratio of the population aged 65 years or over to the population aged 15-64. They are presented as number of dependents per 100 persons of working age (15-64).

The charts below are derived from the United Nations’ World Population Prospects – The 2012 Revision

In theory, the economy does better when the dependency ratio is falling and less well when it is rising. But, as discussed in this previous post, two important mitigating factors are a country’s rate of innovation and its institutional strength.

United States, Europe, Japan

Figure 1 shows the total dependency ratios of Europe, Japan and the US from 1950 to 2050.

Total Dependency Ratio
Fig. 1. Total Dependency Ratio, Europe, Japan, USA

Key takeaways are:

  • The ratio bottomed in Japan two decades before it bottomed in Europe and the US, which may explain Japan’s stagnation relative to the US and Europe in the 1990-2008 period.
  • In the 1980s, 1990s and early 2000s, Europe and the US benefited from a declining ratio.
  • All three ratios will rise from now into the foreseeable future. But Japan’s ratio will rise faster due to its older population.

BRIC countries

Figure 2 shows the total dependency ratios of the BRIC countries: Brazil, Russia, India and China.

Fig. 2. Total Dependency Ratio
Fig. 2. Total Dependency Ratio, BRIC countries

Key takeaways are:

  • The ratios of Russia and China are both bottoming in the middle of the present decade and will rise for the foreseeable future.
  • Brazil’s ratio will bottom later this decade and will subsequently rise.
  • India’s ratio will continue to fall until about 2030 and will level off until 2050, which may help its economy grow faster.

Country Charts

Following are charts for a few individual countries and for Europe and Africa, showing all three dependency ratios as defined above. The blue line is the total ratio, the red is the child ratio and the green is the old-age ratio.

DR United States
Fig. 3. Dependency Ratios, USA

In the case of the US, Europe, Japan and China, it is clear that the rise in the total dependency ratio is mainly driven by a rising old-age ratio. Japan has the fastest rising old-age ratio. None of these countries is expected to see a big rise in its child ratio.

DR Europe
Fig. 4. Dependency Ratios, Europe

 

DR Japan
Fig. 5. Dependency Ratios, Japan

Note the steep 40+ point decline in China’s total dependency and child dependency ratios between 1970-2010. It is due to the country’s one-child policy and it provided a big boost to the Chinese economy in recent decades.

DR China
Fig. 6. Dependency Ratios, China

The following chart compares the total dependency ratios of the US and China. China’s ratio fell faster and will also climb faster.

Fig. 7. Total Dependency Ratio, USA, China
Fig. 7. Total Dependency Ratio, USA, China

India and Sub-Saharan Africa have a more promising demographic profile. A declining total ratio could markedly improve their economies, if other obstacles can be overcome. In addition, unlike other regions, Sub-Saharan Africa will not have a rising old-age ratio for the foreseeable future.

DR India
Fig. 8. Dependency Ratios, India

 

DR SubSaharan
Fig. 9. Dependency Ratios, Sub-Saharan Africa

 

DR Russia
Fig. 10. Dependency Ratios, Russia

 

DR Brazil
Fig. 11. Dependency Ratios, Brazil

 

 

On ‘America’s Baby Bust’

Jonathan Last’s recent article in The Wall Street Journal sounds a powerful alarm alongside the release of his book What to Expect When No One’s Expecting, with the tagline America’s Coming Demographic Disaster.  ‘No One’ is an exaggeration since there were about 4 million births in the US last year, but the title is a playful reminder of Heidi Murkoff’s blockbuster book on pregnancy.  As to the phrase ‘Coming Demographic Disaster’, it could put Last, years from now, in the category of overly pessimistic forecasters alongside Paul Ehrlich, author in 1968 of The Population Bomb. Forecasting is a difficult task and extrapolating the known past and present into the future has often proven to be an inadequate approach.  There are usually new hitherto unknown factors which intervene down the road and which derail any linear or semilinear prediction.

However, none of this should diminish the fact that Last’s article is an excellent must-read for anyone who still believes that US demographics are strong and supportive of future economic growth.  As I wrote a few months ago, there are many, including many in leadership positions, who still live with this illusion. Last’s main point is absolutely correct.  The birth rate (and fertility rate) has declined since the 1970s and the growth rate of the US population has been on a downward trend.  This phenomenon yielded a large demographic dividend from about 1982 to 2005, but it is now leading to large negative consequences for the economy. I covered several of these points in previous articles on this site. Most critical in my view is the rise in the dependency ratio which is likely to last now for several decades.  US demographics provided steady tail winds to the US economy for decades and added a large demographic dividend when the birth rate fell and more women joined the work force, but we are now over that hill and are facing intensifying demographic head winds.

I differ with Last on his recommendation that we need more children now.  Children born now will not contribute to the economy for another twenty years and their numbers will only further exacerbate an already climbing dependency ratio.  We cannot rewrite the past but what we need now are more adults in their 20s, 30s and 40s, in other words more children born in the 1970s, 80s and 90s.  Yet, had we had these children back then, the economy would not have been as strong in the 1980s and 1990s because less capital would have been available for saving and investing.  In many ways, we front-loaded demand, saving, investment and prosperity in those two decades and now face some inverse complications.

All is not lost however. Instead of boosting the birth rate now, a four-point solution would include 1) raising the age of eligibility for Social Security and Medicare, 2) improving labor force participation, 3) continued innovation and 4) more exports.  The first two would slow, delay or neutralize the rise in the dependency ratio.  Innovation is the most important driver of the economy but innovation without a large demographic audience does not achieve its full wealth creating potential.  An iPhone introduced to a market of 3 billion people clearly will create more wealth than an iPhone introduced to a market of 30 million people. Because US demographics are getting weaker and US demand will be less strong than in the past, an obvious solution is to look for new sources of demand outside our borders.  For this reason, it is essential that the US cultivates new export markets, in particular in countries with attractive demographic profiles.  As I wrote in this article, these markets are chiefly India and the countries of SubSaharan Africa, notably Nigeria, Tanzania and Uganda where the population is large and the fertility ratio is expected to decline, raising the possibility of a demographic dividend in coming decades.  This dividend is not guaranteed to happen. It is only a window of opportunity which opens and closes. And countries are able to capitalize on it only if they strengthen their institutions and improve their governance and transparency.

Tanzania Population 45 Million, Annual Growth 2.7%

The population of Tanzania grew by 10.5 million people in the last decade.  That is a 30.4% increase in ten years, or an annual rate of 2.7%, one of the highest in the world.

ROSE ATHUMANI writes in the TANZANIA DAILY NEWS, via ALLAFRICA.COM:

PRESIDENT Jakaya Kikwete announced the 2012 Population and Housing Census preliminary results showed that the population has reached 44,929,002 in total.

He said that the number of Mainlanders is 43,625,434 while that of Zanzibaris stands at 1,303,560. The last Population and Housing Census conducted in 2002 showed that the population was 34,443,603. President Kikwete noted that in the last ten years the population has increased by 10.5 million people.  READ MORE.

NIC: Global Trends 2030

The US NATIONAL INTELLIGENCE COUNCIL released a study GLOBAL TRENDS 2030: ALTERNATIVE WORLDS.  The talking points about demographics are as follows:

Rapid extensions of life expectancy likely: global deaths from communicable diseases projected to drop by more than 40 percent.

Some countries, particularly in Sub-Saharan Africa and South Asia, will still have youthful populations, but demographic arc of instability will narrow on both east and west flanks.

“Aging” countries face the possibility of decline in economic growth. Increased migration will spread to emerging powers.

Urbanization set to grow to almost 60 percent.

Starting at page 20 of the FULL REPORT is Megatrend 3: Demographic Patterns.

On page 24 is a table on the ‘Demographic Window of Opportunity’ for various countries.

Tanzanians Warned Against High Population Growth

ISSA YUSSUF writes in ALLAFRICA.COM:

Zanzibar — PRESIDENT Ali Mohamed Shein, on Wednesday warned Tanzanians against high population growth, saying the government might fail to distribute the benefits of national economic growth unless the population growth of over three per cent was curtailed.

“We have started to feel the pinch of the rapid population growth… we are complaining of insufficient basic needs including land. READ MORE.

African Union, FAO and Lula Institute join efforts to fight hunger in Africa

“Almost 60 percent of the arable land in the [African] continent is still not utilized.”

From FAO.ORG:

Addis Ababa, November 21, 2012 –The African Union Commission (AUC), the Food and Agriculture Organization of the United Nations (FAO) and Instituto Lula of Brazil announced today they were joining efforts to help eradicate hunger and undernourishment in Africa.

The decision was reached at a meeting between the Chairperson of the African Union Commission (AUC), Nkosazana Dlamini Zuma, FAO Director-General, José Graziano da Silva, and former Brazilian President Luiz Inácio Lula da Silva, Honorary President of the Institute bearing his name.

This effort brings together the AUC’s leadership, FAO’s technical expertise and renewed commitment to fight hunger as well as the political backing of former Brazilian President Lula Da Silva. Knowledge and support from other international, regional and national partners will also go a long way to enhancing this new partnership. READ MORE.