Perspective: Mid-Day Commentary for February 27

By: Arlan Suderman, Chief Commodities Economist

Mon, 27 Feb 2023, 15:34

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

February 27 - Stocks pushed higher in the wake of this morning's durable goods orders data, with equity traders seeing the negative headline number as indication that the Fed's higher interest rates are having their desired impact without the necessity of getting more aggressive. However, commodity traders focused more on the details of the report, showing strong demand for core durable goods, suggesting that the Fed might need to become more aggressive, throwing our economy into a deeper pullback that could reduce demand for commodities. The VIX traded below 21 at this hour as stocks rallied. The dollar pulled back with Treasury yields to trade below 104.7, while yields on 10-year Treasuries traded near 3.92%, which was near session lows. Crude oil prices are modestly lower, while the grain and oilseed sector also turned lower, led by wheat which did significant chart damage last week. The protein sector gave way to these headwinds as well early in the session, but it has since firmed on rising stocks and on Friday's supportive USDA cattle-on-feed report.

Future policy in China will largely be shaped by its changing demographics, among other factors. The graphics below tell the story of China's population, which is currently in decline. In fact, India tops China as the world's most populous nation this year, due to China's numbers coming down. But it's not just above fewer people, but also about an aging population. The graphic to the left below shows China's age demographics in 1950. This is a typical demographic of a developing country - many young people, but short life span resulting in few older people. This is a supportive demographic for food demand and for developing an economy, with many workers and few older people to support.

But China worried about the speed at which its population was growing, so it implemented a one-child policy to bring things under control. That effectively put the breaks on its rapid population growth, easing concerns about how it would feed all of its population, but also triggering the law of unintended consequences. The culture of China shifted. If parents could only have one child, they wanted that child to exceed in every way possible and they built their culture and their finances on making that happen - getting the best education and tutoring possible for that child. Raising a child became extremely expensive due to that overriding priority on making sure that that child succeeded in a world where every other parent was doing the same. Keep in mind that the median income in China is only about $16,000, and 55% of that is collected in taxes on average, not including the sales taxes. As such, having just one child became so engrained into the population that it didn't change when China dropped its one-child policy. China cracked down on the tutoring industry to reduce the cost of raising a child, and many local governments are offering a cash reward for having a second or third child. Yet, those efforts are having little effect. Keep in mind that all of this took place as healthcare improved, resulting in an aging population with fewer workers to support them.

As such, China's goal of being the #1 economy and #1 military in the world require that it expand its resources. Thus, its investment in the Belt and Road initiative, which invests in critical infrastructure in much of Asia, Africa and South America, and even into Europe, which returns revenue to China. It's also one of the factors in China exerting control over Hong Kong, and it even has an influence on its Taiwan policy. Pork consumption in China has likely peaked as we look at the data, which has implications for soybean demand longer-term. There are obviously other factors involved as well, but these age demographics are a critical component of China's policy development.

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