COVID-19 Note –
In most countries, Australia included, the focus of many conversations and actions is how best to manage the spread of COVID-19 infections. However, rather than add to the media maelstrom surrounding COVID-19, AEGIC wants its stakeholders and blog readers to lift their gaze beyond the immediate. We want our blogs to focus on longer term issues that will fashion grain market opportunities and affect the nature and future profitability of Australia’s grains industry.
Peter Elliott – Manager – Strategy & Market Analysis – AEGIC
Aside from intermittent wars and global pandemics* like the Plague and Spanish Flu, global population change over the past few hundred years has mostly been unidirectional, growing reliably year after year. Modern economies have come to depend on population growth to the extent that when a country’s population starts to decline, the repercussions can be serious. Take the case of Japan whose population decline can be tracked in real time (Figure 1).
It should be concerning that Japan, and similarly Korea, two important markets for Australian grain, will be particularly affected by population decline and the accompanying aging of their populations. Not only is their pool of consumers shrinking, so are their dietary habits. For example, once the ‘average’ Japanese person reaches the age of 70, they dramatically reduce alcohol consumption. Less alcohol consumption means less beer consumption, which means less demand for malt and malting barley.
While both Japan and Korea will have smaller populations by 2050, the trajectory and timeline of population change in each country differ. The demographic challenges associated with an aging population, and the implications regarding eventual population decline, have already arrived in Japan, while Korea isn’t expected to follow suit until after 2030. Therefore, to the extent that AEGIC’s current work is focused on a horizon out to 2030, it is important to note that population and demographics are more likely to influence Japanese demand than Korean demand towards 2030. However, beyond 2030, Korea will begin falling from the same precipice as Japan.
Naturally, in addition to population changes, a country’s future demand for imported grain is a function of many interwoven factors – both enduring and ephemeral. For example, while an aging population adversely impacts demand for Japanese Shöchu, every few years Japan experiences a “Shöchu Boom” of varying scale and duration, providing a short-term boost to demand for this traditional distilled liquor, which is typically made using either potato or Australian barley.
However, while intermittent factors like these are difficult to predict in advance, we can say with a great deal more confidence that population growth is unlikely to be the source of any sustained increase in Japanese or Korean demand for imported grain.
If we momentarily set aside certain intangible questions, such as Australia’s responsibilities to particular markets as a stable supplier of grain that keeps their people fed, ultimately for Australian grain growers, the impact of population decline in one market can be offset by growth in other markets.
So, in order to properly contextualise the impacts of population declines in Japan and Korea on the demand for Australian grain, expected population changes in other parts of the world should also be considered – particularly those parts of the world that are, or could become, markets for Australian grain exports. Firstly, the global population is expected to grow by around 750 million people by 2030 and 2 billion people by 2050 (Table 1). This increase occurs despite the expected falls in Japan, Korea and even the whole of Europe. Moreover, the population decline in Japan and Korea will be more than offset by the increase in Indonesia’s population, which is expected to increase by around 25 million by 2030 and 57 million by 2050.
Table 1 – Global regional population forecasts
Source (United nations: https://population.un.org/wpp/ )
In Table 1, the population dynamics out to 2050 have the following major features –
- Populations of developed economies slightly fall, as in Japan, Korea and Europe, or slightly increase, as for Oceania or North America.
- Significant increases in population occur in Sub-Saharan Africa and central and southern Asia.
- Unsurprisingly, if we re-cut the numbers based on income, high income countries are forecast to remain unchanged, while low-and middle-income countries will account for all of the forecast growth.
- Whilst arguably just stating the same thing in a different way, this means that Asia and Africa are going to be the engine room of population growth, while North America, Europe and Oceania are likely to incrementally grow or shrink, depending on the country.
However, it is important to note that future demand for Australian grain exports such as barley will be determined by a long list of factors beyond just population changes. In other words, understanding future population changes is a necessary, but not sufficient component of understanding the future demand for Australian barley. Other important components to consider include –
- Are the “growth” countries big consumers of imported grains and grain products? If all the population growth occurs in countries that can produce enough grain to satisfy demand or don’t typically consume much grain, the implications of population growth will vary significantly from scenarios where growth occurs in net grain importing countries.
- What mix of grains is likely to be demanded by consumers in the growth countries? For example, a billion new consumers who eschew bread in favour of cheap animal protein is likely to directly benefit corn, soybeans, and to a lesser extent, feed wheat and feed barley. However, many of the developing economies that are expected to grow are also Muslim majority countries, which has implications not only for malting barley but also the mix of feed grains, considering the dietary restrictions associated with Islam.
- Considering that much of future population growth will occur in low income, developing economies, while many of the most developed economies will shrink, what are the implications for higher cost producers like Australia? Do 100 new consumers in Nigeria offset the loss of 100 Japanese consumers in the context of grain demand?
Multifactorial scenarios such as these, which unfurl over a long period of time, make accurate and confident forecasting difficult. Perhaps a more worthwhile undertaking would therefore be to instead identify the main factors that will determine future demand for Australian grain and then establish which of these factors could be proactively ‘nudged’ by the Australian grains sector.
While there is nothing the Australian grains industry can do to arrest the decline of Japan and Korea’s population, there are other strategically focused activities that could be undertaken to mitigate their effects. Put simply, activities could aim to capture a bigger slice of declining, yet still hugely valuable markets like Japan and Korea, and/or to capture a slice of smaller, fast-growing markets. Importantly, positioning for one doesn’t necessarily preclude the other. So, it makes sense to establish a strategic and tactical framework that is adaptable to shifting market dynamics, as populations grow and shrink in different parts of the world.
This also provides a useful reminder why Indonesia is, and will continue to be, such an important player in the future prospects of Australian grain exports – despite already being a significant market for Australian grain exports, it continues to grow at a pace normally associated with much smaller markets. Indonesia serves as a useful reminder that a growing population can help paper over any number of ‘demand cracks’ that can emerge. For example, instant noodle consumption in Indonesia has recently started declining on a per capita basis – which is highly salient as this is the single biggest market for Australian wheat exports. However, despite such worrying signs, the growth in Indonesia’s population means that any per capita decline in instant noodle consumption is being offset by a larger pool of potential consumers. However, for those supplying, or hoping to supply, grain to the Japanese and Korean markets, population changes will need to be managed, rather than embraced.
Ultimately, population changes are just one of the factors that influence the role a specific country will play in Australia’s export grain future. Particularly in the case of Japan, this can sometimes become lost in the pessimistic forecasts regarding Japan’s prospects. As recently as 1990, this same country was viewed as the key to Australia’s economic fortunes – particularly the tourism and export sectors. However, in the years since the Japanese ‘bubble’ burst and their population began collapsing, along with the emergent Chinese economic ‘miracle’, Japan can sometimes be the ‘forgotten market’.
Additionally, a country’s relative attractiveness as a destination market isn’t solely determined by its population size or trajectory of growth. Other factors, such as economic growth, relative demand for the things you want to sell, and geographic proximity are fairly well-recognised. There are also a number of factors that might be less immediately obvious – such as income distribution. Out of the 178 countries included in the World Bank data for 2017, 8 of the bottom 10 countries for income distribution were located in Africa. We could get bogged down in all the reasons why income inequality is a socially and economically corrosive phenomenon. However, from a purely commercial standpoint, a country where a small number of ultra-rich control most of the wealth, while the rest live below the poverty line does not create the necessary conditions for class mobility that enable someone to trade-up from rice or cassava to noodles and bread.
We shouldn’t forget that Japan is still the world’s 3rd largest economy and home to more than 100 million consumers with a per capita income of around US$45,000 pp (South Korea has the world’s 12th largest economy, with a similar per capita income to Japan). By comparison, South Sudan, currently with the world’s fastest growing population, has a per capita income of around USD$1,500 – less than what a Japanese person makes in a month.
Whilst it is important to understand future population shifts in Australia’s current or prospective grain export markets, this should not be the sole determinant of where the Australian grains industry should focus its efforts. Japan and Korea are two of the most important markets for Australian grain exports in 2020, and despite the fact that they will both be economically and demographically smaller countries in 2050, in all likelihood they will still be valuable markets for grain exports.