Wheat Producers are Helping to Bring Down Food Prices
It has been four months since Russia invaded Ukraine, which caused trade flows to be disrupted and caused futures’ prices to rise. The fear of a grain crisis is slowly giving way to the hope that important producers will harvest large enough harvests to help repair war-torn reserves. This is essential for the production of wheat, which is needed to feed the world’s population, corn, which is needed to feed hogs, chickens, and cattle, and oilseeds, which are needed to make food.
“Supply may not be as impaired as we think because other areas will compensate for any losses from Ukraine, and it is happening across the board,” said Marc Ostwald, global strategist at ADM Investor Services in London.
It is anticipated that Australia, which is one of the top exporters of wheat, will produce another massive crop this year. On the other hand, corn is piling up outside bins in the principal growing region of Brazil. The worry that spring weather problems would drastically cut down on the amount of land used for growing grain and soybeans in North America has dissipated.
The Bloomberg Agriculture Spot Subindex is on course to have its worst monthly loss since 2011. Concerns about decreasing grain and oilseed supplies, as well as fears that an economic downturn could reduce demand, have pushed crop futures lower from recent highs. While such improvements often take time to reach grocery shelves, Darden Restaurants Inc., owner of the Olive Garden and LongHorn Steakhouse restaurants, reports that chicken and beef prices are cooling slightly.
Fuel pump costs will also have a significant impact on the direction of food inflation for the rest of the year. According to Joe Glauber, former head economist of the US Department of Agriculture, supermarket prices are projected to “moderate over the next six months, particularly if oil prices decline.”
As of June 24, the average daily price of a gallon of gasoline in the United States had fallen for ten consecutive days after reaching some of its highest levels on record. Crude oil futures are down more than 10% from a near all-time high in the days after Russia’s late-February invasion on Ukraine, one of the world’s largest grain and vegetable-oil shippers. Fertilizer, a major expense for farmers, has fallen after reaching new highs.
The United Nations’ food price index fell from a record high in March after the war stifled Ukrainian exports and provoked a slew of sanctions against Russia. Even if the rate of increase slows, high food prices will continue to put pressure on the poor. A government prediction released last week predicts that food prices will rise by much to 8.5 percent this year, however the analysis did not account for the recent decline in agricultural futures.
Furthermore, Goldman Sachs Group Inc., one of the more positive commodity watchers, claimed prices haven’t peaked yet, despite Bloomberg’s broad index of spot commodities falling around 13% from a record high.
“We agree that when the economy is in a recession for long enough, commodity demand falls and hence prices, fall,” experts such as Jeffrey Currie stated in a note. “We are not yet at that state, with economic growth and end-user demand simply slowing, not falling outright.”
Darden Restaurants is enthusiastic about the future. The Orlando, Fla.-based company says it is not passing on higher meat, dairy, and wheat prices to customers because it does not expect the higher expenses to last. Meat prices are starting to “come down a little bit,” and impending crop harvests could help lower wheat prices, according to Chief Financial Officer Rajesh Vennam last week.
Wheat and soybean futures have lost roughly 15% this month, while maize has fallen 13%. Coffee, sugar, and cocoa have all taken a step back.
Food is more of a national security issue in China than an inflation concern. As grain and cooking-oil prices fall, June consumer-price growth in China is projected to be less than 2.5 percent, according to Zhaopeng Xing, senior China analyst at ANZ Bank China Co. in Shanghai.
However, given the uncertain future for grain supplies from Ukraine, India, and other key exporters, he believes it is still too early to declare an end to food inflation.
Palm oil, the world’s most widely used vegetable oil, has fallen almost 30% from its peak as leading shipper Indonesia increases exports to reduce bloated stocks. The decline, combined with a drop in soybean oil and other commodities, might mean cheaper household products like chocolate, margarine, and shampoo. However, as with other agricultural markets, any sign of supply disruption or adverse weather might spark another wild ride.
For the time being, the reduction in essential commodities may provide a much-needed halt in inflation.
“Markets would really love to be able to breathe less stressfully again,” said Arnaldo Correa, a partner at Archer Consulting in Sao Paulo. “Light a candle for your guardian angel, and let’s see how things will play out.”
Globalization is a Critical Issue in Davos
Days long forgot.
A decade ago, political power brokers and corporate titans convened in the Swiss Alps under an optimistic banner, globalization. It was a time for “resilient dynamism,” declared the World Economic Forum‘s 2013 summit organizers. They argued that the globe has entered a “post-crisis” period following the travails of the global financial crisis. It was incumbent on the Davos elites to bring in additional reforms in the service of economic “sustainability” and “competitiveness,” recurrent WEF watchwords that tap into the liberal ethos that has long underpinned its proceedings, where doing good need not conflict with profit margins.
After ten years, there appears to be less optimism. Instead of a “post-crisis” time, it’s more usual to speak of a “permacrisis,” of a world teeming with calamity — war, climate catastrophe, energy price mayhem, inflation, epidemics of hunger and illness, political instability, and growing economic injustice. This year’s WEF theme, an impassioned plea for “cooperation in a fractured globe,” seemed to be more obsessed with the ruptures that have already occurred. Last week, WEF President Borge Brende told reporters that the meeting “will take place against the most complicated geopolitical and geoeconomic backdrop in decades.”
Issues that are still hounding the WEF.
Concerns about a probable global recession are high on the agenda. There’s also the perplexing issue of climate change, as well as the ongoing conflict in Ukraine and its ramifications, such as the snarling of the global grain trade, which contributed to the development of famine conditions in large parts of Sub-Saharan Africa. Underneath it all is a deeper Davos anxiety: few institutions are more inextricably linked to neoliberalism and the globalization movement than the conference. Where does globalization go in an age of rising nationalism and great power competition, when the United States itself is launching trade wars?
The Economist’s recent cover story, which attempts to describe the Davos zeitgeist each year, criticized the “new logic that threatens globalization.” It criticized the Biden administration’s “abandonment of free-market standards in favor of an aggressive industrial policy,” citing subsidy-laden programs to support the country’s green transition as well as new efforts to make the country a semiconductor manufacturing hotspot.
All of this, according to the historically liberal Economist, has “kicked off a perilous spiral into protectionism worldwide,” fraying the global order that the US spent decades constructing and securing in the aftermath of World War II. It may potentially jeopardize “liberal democracy and market capitalism’s causes.”
The Davos hosts want to maintain the status quo.
Tuesday’s launch panel, comprising economic historians Adam Tooze and Niall Ferguson, will debate “de-globalization or re-globalization.” The latter approach mirrors current developments, with governments and multinational corporations redirecting supply chains away from conflict zones and unfriendly states. It is visible with the exit of a large number of Western corporations from Russia and China.
“I would say we are in a re-globalizing moment,” Malaysian Trade and Industry Minister Tengku Zafrul Aziz told me at his country’s pavilion along Davos’ snow-lined central promenade. He believes that while companies and enterprises may benefit in the near term from shifting away from China and into Southeast Asian markets, the larger picture is more concerning.
“People are getting more compartmentalized,” he remarked. “In the long run, we are concerned about rising trade expenses.”
According to the forum, this year’s attendance includes more than 50 heads of state or government, 56 finance ministers, 19 governors of central banks, 30 trade ministries, and 35 foreign ministers, making it the largest gathering of political and business leaders ever.
The majority of the world’s leading economic leaders, though, are conspicuously absent. German Chancellor Olaf Scholz will be the only Group of Seven leaders to attend, with his European peers presumably keen to avoid the optics of rubbing shoulders with the global elite while their own populations deal with cost-of-living difficulties. The key officials from the Biden administration are US climate envoy John F. Kerry and US Trade Representative Katherine Tai, who, given the current state of affairs, may find herself in some heated discussions over the week.
Following a pause caused by the pandemic, China has dispatched its own high-level delegation, led by Vice Premier Liu He, who is scheduled to deliver one of the event’s major keynote addresses on Tuesday. It is a revival of Beijing’s engagement with the forum, albeit not at the level seen in 2017 when Chinese President Xi Jinping keynoted events with a speech championing globalization that portrayed China as an upholder of the liberal system. It was interpreted at the time as a declaration of intent by a leader eager to take the mantle of global leadership, as well as a thinly veiled jibe at the recently appointed ultranationalist Trump government bent on populist disruption.
That occasion at Davos was perhaps a watershed moment for Xi on the global scene.
His dictatorial hand has tightened at home in the years afterward, while many nations worldwide regard China under his leadership as a threat, if not necessarily a foe. Whatever the World Economic Forum’s pleas for discussion and collaboration, there is a growing consensus in the West that Xi’s ambitions for Taiwan must be checked. There is now an emerging consensus that China’s admittance to the World Trade Organization two decades ago — possibly the single most momentous event in the history of globalization — was a mistake.
In 2013, WEF organizers praised Russian Prime Minister Dmitry Medvedev’s participation as a national leader who grasped “global obligations.” Of course, Medvedev and Russian President Vladimir Putin, as well as the entourage of Russian billionaires and business leaders who used to throw some of the most expensive parties on the fringes of the forum, are now all persona non grata in Davos. The conflict in Ukraine will cast a shadow over the talks, with a large delegation from Kyiv, including Ukrainian First Lady Olena Zelenska, in attendance.
Looking into the future.
A large portion of the discussion has little to do with politicians’ or pundits’ doom-mongering. There will be hundreds of lectures and events highlighting various examples of private-sector innovation and collaboration on topics ranging from food security to youth education to forestry (WEF has pledged to restore and plant a trillion trees around the world). WEF organizers describe the forum’s attendees as enabling “systems positive change” and guiding the globe toward a better, more sustainable future in rosy technocratic language.
“There’s skepticism around Davos; they can say it’s a talk shop,” Penjani Mkambula, who works at the Global Alliance for Improved Nutrition on fortifying grains with minerals and vitamins in the developing world, told me. “However, there are numerous advantages that emerge. A lot of alliances are formed, a lot of work is done, and the effects are sometimes visible years later.”
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Population in China Declines for the First Time in Decades, Alarms Starting to Ring
China’s population decreased for the first time in six decades last year, a historic reversal that is believed to signal the start of a long era of fall in its citizen numbers with far-reaching ramifications for the country’s economy and the rest of the world.
The dip, the worst since 1961, the final year of China’s Great Famine, adds credence to forecasts that India would overtake China as the world’s most populous country this year.
According to the National Bureau of Statistics, China’s population would have decreased by approximately 850,000 to 1.41175 billion by the end of 2022.
Long-term, UN scientists predict that China’s population would fall by 109 million by 2050, more than double the decline predicted in 2019.
Domestic demographers are worried that China may become old before it becomes rich, stalling the economy as revenues fall and government debt rises due to rising health and welfare bills.
“China’s demographic and economic prospects are far worse than anticipated. China’s social, economic, defense, and diplomatic policies will all need to be adjusted” Yi Fuxian, a demographer, stated.
He went on to say that the country’s declining labor force and manufacturing slump would worsen high pricing and rising inflation in the United States and Europe.
Birthrate keeps on falling
Last year, China’s birth rate was 6.77 births per 1,000 people, down from 7.52 births in 2021 and the lowest rate on record.
The death rate was 7.37 fatalities per 1,000 people, the highest since 1974 during the Cultural Revolution, compared to 7.18 deaths in 2021.
Much of the demographic collapse is the result of China’s one-child policy, which was implemented between 1980 and 2015, as well as sky-high education expenditures, which have discouraged many Chinese from having more than one child if any at all, and had long-term effects on the population.
Following the release of the results on Tuesday, the data became the top trending subject on Chinese social media. One hashtag, “#Is it really necessary to have children?” received hundreds of millions of views.
“The primary reason why women do not want to have children is due to society’s and men’s unwillingness to take on the task of parenting children. Women who give birth have a significant drop in their quality of life and spiritual life ” Joyful Ned, a netizen, shared his thoughts.
Impact of regulations
According to population experts, China’s strict zero-COVID regulations, which have been in effect for three years, have harmed the country’s demographic outlook.
Since 2021, local governments have implemented policies to encourage families to have more children, such as tax breaks, extended maternity leave, and housing subsidies. President Xi Jinping also stated in October that the government would implement additional helpful policies.
However, thus far, measures have done little to halt the long-term trend.
Searches for baby strollers on China’s Baidu search engine fell 17% in 2022 and are down 41% since 2018, while searches for baby bottles have declined by more than a third since 2018. Searches for aged care facilities, on the other hand, increased eightfold last year.
In India, Google Trends reveals a 15% year-on-year growth in searches for baby bottles in 2022, while searches for cribs increased nearly fivefold.
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China’s Quick Reopening Pace Brings a Mixed Bag of Emotions Globally
The quick reopening of China’s economy from COVID lockdowns brightens the outlook for global investors eager to leave behind one of the worst years on record, but it may also exacerbate the inflationary pressures policymakers think are subsiding.
The impact of the world’s second-largest economy reopening on financial markets, which suffered double-digit losses last year as inflation and interest rates rose, is critical.
Emerging markets, commodity currencies, oil, travel, and European luxury companies are among the top buying bets on recovery optimism.
It will undoubtedly be a rocky voyage. COVID instances, deaths, and the economic impact on China from epidemic infections have yet to be seen, but commodities prices are already rising, raising the likelihood of inflation.
For the time being, investors are focused on the positives, anticipating additional stimulus measures from Beijing with the health crisis and economic impact on China peaking in the first quarter.
“The reopening story is looking fairly positive, and… China is pouring a lot of credit and fiscal stimulus into the economy,” said Edward Al Hussainy, senior interest rate and currency strategist at Columbia Threadneedle, which oversees $546 billion in assets.
“That boost is permeating global asset values.”
The reopening of China also alleviates the sting of recessionary threats. Goldman Sachs forecasts the eurozone economy to grow by 0.6% this year, up from a previous projection of a decline.
According to Chris Iggo, chief investment officer for core investments at AXA Investment Managers, “Chinese demand will offset the story in the West…” as consumer demand and company spending have decreased, while interest rates have risen.
Emerging markets, which are expected to profit from tourism and trade with China, were at the top of the buy list.
The Thai baht was a favorite of Hussainy and other investors. It has risen to its highest level since March and is up about 5% since the beginning of December.
Prior to the pandemic, Chinese tourists accounted for a quarter of all annual visitors to Thailand.
Amundi, Europe’s largest investor, believes the reopening may signal a “turning moment” for emerging market shares, a trade also supported by BlackRock’s investment institute.
According to Goldman Sachs, company earnings in Malaysia, Singapore, and Thailand should increase.
Chile, the world’s largest copper producer, is another investment favorite. Its peso has risen 7% since early December, as copper prices have risen near $9,000 for the first time since June.
According to BlueBay Asset Management fund manager Zhenbo Hou, the commodity-driven Australian dollar could appreciate further.
Prior to the pandemic, China was the world’s largest outbound travel market.
Chinese customers “will rush to Beijing International Capital Airport and flee the country as quickly as they can because they want to travel,” according to Alison Shimada, head of overall developing markets at Allspring Global Investments.
Travel may also boost European luxury stocks, as Chinese demand has dropped since the outbreak began, according to UBS, accounting for approximately 17% of industry sales vs 33% in 2019. This should increase valuations.
LVMH shares (LVMH) reached a new high this week.
The reopening of China was expected to weaken the safe-haven currency while benefiting the euro. China is the European Union’s most important trading partner, accounting for around 16% of total goods trade.
According to Barclays analysts, China’s slowing was responsible for more than half of the euro’s loss against the dollar last year.
According to them, the reopening boosts the outperformance of European stocks and calls into question the consensus underweight strategy. UBS is also bullish on European materials, industrials, and consumer discretionary stocks.
CAUTION ON INFLATION
However, the boost from China’s reopening raises fears about inflation.
China is the world’s largest importer of oil and other commodities; oil prices have jumped 10% since mid-December to almost $84 per barrel.
“One thing we need to keep an eye on is if China’s resurgence adds to global inflationary pressures,” AXA’s Iggo added.
The aim is that the global economic slowdown will offset China’s increased commodity consumption, reducing the inflationary impact.
According to Goldman Sachs, a return to regular travel and transportation behavior in China might increase oil demand by 1.5-2 million barrels per day. Still, slower global growth implies oil prices won’t reach $140 highs until 2022.
“At this point in time, the rate hike is really starting to have the anticipated impact on inflation, which I think should play out over the course of the year, even with China reopening,” said Jason Pride, Glenmede’s chief investment officer of private wealth.
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