China’s Demographics at a Turning Point

For decades, the decline in China’s birth rate was a big boost for the economy. What now?

This week, schadenfreude could have been a word invented for China experts if you judge by some of the commentary surrounding the country’s lifting of its one-child policy. Most got it right that the legacy of the one-child policy is now a problem for the Chinese economy because of a rapidly rising old-age dependency ratio (green line in the first chart below). This was tacitly acknowledged by the lifting of the policy. Read more

Providing Electricity to Africa by 2050

How many Africans will have access to electricity by 2050?

According to the World Bank’s latest figures, 64.6% of the population of sub-Saharan Africa lacked access to electricity in 2012, or a total of 572 million people. Across the world, 1.09 billion have no access to electricity. So, sub-Saharan Africa accounts for more than half the total.

Given the expected boom in the African population and the likely increase in access, the demand for electricity infrastructure is going to explode between now and 2050. On UN estimates (medium variant), the sub-Saharan population will jump from 886 million in 2012 to 2.1 billion in 2050. Assuming that each country’s current access rate remains the same, 381 million additional people will have access to electricity and 855 million additional people will not. Read more

The Candidates’ Other Demographic Challenge

It is massively larger than 11 million illegals.

Hans Rosling, co-founder of Gapminder, calls it “the biggest change of our time”. It is Africa’s population growth from 1 billion people today to 2.5 billion by 2050 and 4 billion by 2100.

You could say that a close “second biggest change of our time” is the aging and stagnation of the population in rich countries. The combined population of North America, Europe, Japan and Australia/New Zealand is now at 1.3 billion and it will remain at 1.3 billion by 2050 and 2100 with small gains in North America and Oceania offset by declines in Europe and Japan. Read more

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.

The BRIC and I

The growth prospects of Brazil, Russia and China are dimming, while those of India are flaring.

If one is a lonely number, then ‘I’ could be a lonely letter, at least when it comes to the ‘I’ of the BRIC countries. Brazil, Russia and China all face mounting challenges in 2015 but the road ahead seems wide open for India. The main concern with this opening statement is that it seems to be the view of a large majority of observers.

Still, a majority is not the same as a consensus and certainly not the same as an extreme consensus. In investing, the consensus view is often right but the extreme consensus is absolutely and always wrong. For example, the consensus to buy tech stocks in 1997 was right but the extreme consensus to sell all non-tech and buy only tech in early 2000 was very wrong. When it comes to India, we are with the majority view, edging into consensus territory, but still far from extreme consensus. There remain enough doubters to ensure that this story still has plenty of time to play out.

Our approach to the topic is resolutely from the point of view of demographics. Demographics are not the be all and end all of an economy, but they are a very important vector, one of three very important vectors, the other two being innovation and institutional strength. Looking at the BRIC countries, the demographics of Russia and China are poor and those of Brazil are neutral. By contrast, the demographics of India, though challenging due to the large population size, could hold much promise if this huge newly created human energy can be harnessed and channelled in the right directions.

In general, the best demographic profile for an economy would be a rising population coupled with a declining dependency ratio (the ratio of dependents to workers). The increase in population means that demand for goods and services continues to grow. And the declining dependency ratio means that there is plenty of discretionary capital for consuming and for investing.

The US, Europe and China were in this sweet spot until six or seven years ago. Indeed, much of the world was in this sweet spot, a fact which largely explains the enormous creation of wealth and improvement in living conditions for billions of people in the past few decades. Things got more challenging in the middle of the last decade when dependency ratios in several countries bottomed out and started to rise.

BRIC Countries Total Dependency Ratios
BRIC Countries Total Dependency Ratios

We can’t blame the 2008 crisis on demographics alone. There were many abuses and excesses in the system which brought about the crisis. But it is worth noting that the crisis struck about the same time that a big reversal in demographics was taking place. A crisis would have come any way but instead of 2008, perhaps it would have come in say 2012 if the dependency ratio had bottomed four years later than it did.

Nor should anyone be surprised that Japan peaked in the late 1980s and has been struggling since then. Its dependency ratio bottomed in the early 1990s.  Or that China saw a huge boom since 1980 after it introduced its one-child policy, thus engineering a very steep decline in its dependency ratio. Or that the US recovery has been slow, given that its population growth has slowed down and its dependency ratio has been rising.

USA, Europe, Japan Total Dependency Ratios
USA, Europe, Japan Total Dependency Ratios

As shown in the first chart above, India is the only BRIC country with a declining dependency ratio between now and 2030. Russia and China’s are already rising and Brazil’s will bottom and rise by the end of this decade. Russia seems to be in the worst shape since it has both a declining population and a rising dependency ratio.

Finally two quick words on the other big vectors of economic growth: innovation and institutional strength. Innovation in Brazil, China (ex-Taiwan) and Russia has been slow and cannot be considered a factor in future growth. There was plenty of excess capital to invest in new businesses when the dependency ratio was declining in all those countries but it went instead into real estate and other unproductive investments. Innovation has been slightly better in India and could take a big leap forward with more capital investments in the decades ahead. India also has an immeasurably greater competitive advantage compared to the other BRIC members: its population speaks English.

Institutional Strength can be the subject of endless debate, especially if we try to draw comparisons across countries. All emerging countries have to make significant progress on this account.

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