Politicians do not pay much attention to demography. Given their electoral horizons, this is hardly surprising. The so-called demographic crisis and its consequences unfold over decades, while in most countries elections of some sort take place at least every two years. Little heed is paid to whether, in the near future, the electorate might get a few months older and possibly a little more worried about how they will make ends meet in their retirement.

However, politicians do worry about the state budget, and an aging population is a source of greater and greater concern in economies where it is the government, not individual savings, that funds most people’s pensions schemes. The problem is especially acute if these state programs operate on a pay-as-you-go principle, where pensions are funded by a share of the tax revenues from current workers. Of course, all other things being equal, the larger the number of retirees and the smaller the number of taxpayers, the larger the share of tax revenue state pension funds need. Not surprisingly, in some countries – such as Italy and France – the system is cracking.

Painful but effective: Restrict pensions

Policymakers have engaged in some makeshift fixing, which is rational for typical, myopic governments. State-(mis)managed pension schemes can be fixed – painfully, but relatively simply. The retirement age is being gradually increased and early retirement more heavily penalized, to contain the ballooning ratio between retirees and taxpayers. Payments are being cut by changing the parameters that define the annual amount to which each retiree is entitled. Typical examples are the move from the wage-linked criterion to capitalization; being less than transparent about the implicit returns on the taxpayers’ forced savings; and failing to fully index current pensions to price inflation.

These mechanisms are already in place. They are effective, and they will eventually transform the current state pension systems into some sort of basic-income scheme where small amounts are handed out to the elderly who failed to save enough for their old age. By contrast, efforts to rely on indiscriminate immigration of potential taxpayers are rife with problems: Many argue that their cost (reliance on the welfare state of the hosting countries and the burden of failed integration) outweighs the benefit for the treasury.

Longer lives and fewer births

Demography is largely the outcome of two variables: birth and mortality rates. Birth depends on the natural drive to reproduce one’s genes and on the costs and benefits of having children. Mortality depends on accidents, diet, lifestyle, environmental conditions and healthcare. The good news is that over recent decades, all the variables affecting mortality have changed for the better. In short, people’s living standards have increased dramatically and medical treatments have improved enormously.

The problematic aspect is fertility. In 2022, the fertility rate was 2.3 children per woman for the entire world (it was 4.9 in 1950 and 2.7 in 2000). It is currently about 2.0 in India, 1.7 in the United States, 1.5 in the European Union, 1.4 in Russia, 1.2 in China and 0.8 in South Korea. World population declines with a fertility rate below 2.2. The explanation of low (and declining) fertility is relatively simple: Many couples now believe that the opportunity cost of having even one child is too high, let alone two or three. It appears that many households are unwilling to cut their material living standards to have children, especially if those children are unlikely to support their parents if the need arises.

Can we pay people to procreate?

Handing out subsidies to encourage birth is unlikely to produce significant results. On the one hand, subsidies must be financed somehow, whether that be raising taxation, increasing public debt or printing money. This could reduce disposable incomes and further discourage couples from having children. Of course, one could tax childless couples and use the proceeds to finance those with children. Although this was actually overtly done in the past (for example, in fascist Italy), today such measures are impractical and morally murky, to say the least.

On the other hand, it is unlikely that a few hundred euros a year for a limited number of years would really make a difference. Rather, a large share of the subsidies would probably end up as a gift to those who would have had children anyway, or who decide to have children just to pocket the subsidy.

Living standards also play a role in the declining birth rates. If one considers the official national statistics, it is clear that over recent decades, most people in the world (including in the West) are better off. Today’s households may find it hard to obtain a satisfactory living standard, either because the notion of “satisfactory” has changed significantly, or the official figures are misleading, or both – the third option is probably closer to the truth. The race for electoral consensus has encouraged politicians to promise the moon to their voters.

Not surprisingly, the moon is kindly provided by governments through taxation and regulation, and the suppliers themselves (governments) proclaim that reaching out to the moon is a basic right. People adjust their expectations accordingly, and give up on having children if the moon is at risk. Nowadays all households are de facto forced to buy state services that allegedly guarantee “basic rights” at a price that exceeds their value for the buyer (for example, education and health). Households spend more, consumption figures rise, but individuals do not get their value for money. There is some truth in the common feeling that one works harder than in the past, but ends up worse off.

Last, but not least, today’s incomes do not really correspond to purchasing power at market prices (a share of what we buy is overpriced) and people find it difficult to lower their living standards. As a result, households actually stop saving and, in many cases, eat into their capital. This phenomenon has been observed in the U.S., but is more and more frequent in Europe, too. One of the consequences is that adult children know they will rely on a smaller amount of family wealth to meet emergencies and will be discouraged from having children in turn.

Source: GIS

Bitcoin (BTC) could be nearing a test of its all-time high, but how quickly traders will take profits remains uncertain, says a crypto analyst.

“Should history repeat itself, Bitcoin is likely to retest its all-time high above $73,750 from the third week of October into November,” Bitget chief research analyst Ryan Lee told Cointelegraph.

Bitcoin sell-off intensity will hinge on US election

Lee explained there are signs of a Bitcoin “breakout imminent in the coming month,” but the price action may get choppy.

“This bullish breakout will likely be accompanied by occasional cool-offs that will translate as selloffs,” Lee explained while arguing that the sentiment of investors leading up to the United States election in November will play a significant role.

“The intensity of these selloffs might vary, depending on investors’ disposition to the coming election.”

Lee noted that optimism among traders has increased since the US Federal Reserve cut rates by 50 basis points and the People’s Bank of China followed with a 30 basis point cut, making riskier assets more appealing. 

He argued that if confidence builds around the possibility of a “pro-Bitcoin” president, traders might hesitate to sell, worried they could miss out on larger profit opportunities.

Bitcoiners ‘may want to lay out their bets’

“They may want to lay out their bets early to capture future gains. This sentiment will likely help Bitcoin record a bullish uptick rather than selloffs,” he said.

Nansen CEO Alex Svanevik said a Donald Trump victory would be “bullish for crypto in the US.” However, if Kamala Harris wins, he believes it would be “bullish for crypto outside the US,” as crypto firms might relocate from the US.

During his election campaign, Trump has consistently supported the crypto industry. Speaking at the Economic Club of New York on Sept. 5, he reaffirmed his commitment to making the US a global crypto hub.

“Instead of attacking industries of the future, we will embrace them, including making America the world capital of crypto and Bitcoin,” Trump stated.

Source: COINTELEGRAPH

Strategic consequences for food manufacturers and distributors

Food and agriculture companies are under increasing pressure to adapt to the many challenges posed by climate change, as we wrote about here. In this article, we spotlight Spain, Italy and Portugal as key case studies. These countries are major producers and exporters of everyday products like oranges, tomatoes, wine and olive oil, which find their way to the tables of consumers all across Europe. However, their status as leading suppliers is at risk. The European Environment Agency assesses that the risks from climate change to crop production are most urgent and severe in Southern Europe. This shows that there is a lot at stake for farmers, food and beverage manufacturers and distributors in the region. But how companies in these countries adapt will also influence their competitors in other regions.

To identify long-term trends and shifts in production and consumption we use a range of databases on the production of six important crops in the region (wheat, wine grapes, olives, tomatoes, oranges and strawberries), production area, trade, household consumption and weather patterns. There are many lessons that we learn from this exercise. We consider the following five to be the most important since each of them comes with a strategic consequence for food manufacturers and distributors.

Lesson 1: Climate change, crop volatility and crop yields: it’s not all doom and gloom

Long-term trend doesn’t show more volatility for most crops

Larger fluctuations in production per hectare are a concern for farmers and food companies. Climate change acts as a catalyst for extreme weather events, which could lead to larger production swings. Agribusinesses also express concerns that stricter environmental regulations leave them with fewer options and tools, such as pesticides, to counter the impact from extreme weather going forward. However, our analysis for Spain, Italy and Portugal shows fluctuations in yields have not increased for most crops if you compare sets of years over a 50-year timespan. To us, this is a sign that, in general, farmers have been able to adapt their production systems thus far. In Spain and Italy, wheat is an exception with larger fluctuations due to a combination of bumper harvests and crop failures in recent years. For wine grapes, there was quite a drop in Spanish production in 2023, but in general wine grape yields are less volatile compared to the second half of the last century. Similar patterns can be observed in Portugal and Italy.

For most crops, fluctuations in yields have not increased in the past 50 years

Changes in the size of fluctuations in yields based on absolute deviation from the three-year average, 1966-2022

Source: Eurostat, ING Research, *Portugal 1977-2022

Yields tend to go up in the EU but at the national level, trends can diverge

Historically, yields for most crops in Europe tend to improve as farms become more specialised and farmers introduce new technologies such as precision irrigation & fertigation and improved crop varieties. But particularly in Spain, 2022 and 2023 were bad years for crops like wheat, oranges and olives due to a prolonged drought. This has fostered concern among farmers about future crop yields, among food manufacturers and distributors about future supply, and among consumers about prices. The spike in olive oil prices is probably the most striking example.

Still between the late 1990s and 2022, yields for olive trees in Spain improved a lot thanks to improved production methods such as an increase in irrigated area, and the roll-out of super high-density farming. The same is true for Portugal since around 2008. However, yields per hectare in Italy have been on a downward trend for almost two decades, in part because many olive trees in Southern Italy have been severely affected by bacteria (Xylella) and water deficits.

But should the bad harvests in Spain in 2022 and 2023 be considered a ‘one-off’ or do they spell the end of a long-term trend? In our view, these two years show what climate change is capable of, but it is not necessarily the end of the long-term upward trend. Looking at harvest forecasts for the 2024/25 season, yields are expected to recoup some lost ground. Still, it will require constant investment to continue the upward trend.

Upward trend in olive tree yields in Spain and Portugal has stopped in recent years

Based on three-year moving average olive tree yields (tonne/hectare)

Source: Eurostat, ING Research

Extreme weather events put supply risks top of mind

The narrative about the impact of climate change on crop yields and the amount of volatility is quite nuanced. Yields do suffer from unfavourable weather in the short term. However, in the longer term, they tend to improve. And yes, there are fluctuations in yield at the national level if you compare individual years, but such fluctuations were also common in the past.

Still, extreme weather events are often regional and differences in yields between regions can be significant, especially in geographically diverse countries like Spain and Italy. The flooding in Emilia Romagna in 2023 which badly affected the region’s fruit production is one example. Such events carry a direct supply risk for companies that mainly source from a certain area. On top of that, there is also a price risk for all companies when a regional shortfall leads to general shortages. Sourcing from multiple regions or having production facilities in multiple regions is a way to reduce such risks.

Lesson 2: Farmers do what they can to make their land climate-resilient

Irrigation as an adaptation strategy

In Southern Europe, in particular, measures to adapt to climate change often include irrigation or, in the case of tomatoes and strawberries, moving production from open fields to greenhouses. In the last 20 years, the proportion of irrigated area in Spain has increased for most of the crops in our analysis. Vineyards (+19%) and olive groves (+12%) have undergone the biggest increase in the proportion of irrigated land between 2004 and 2023.For vineyards, 60% of the increase in the irrigated area comes from Castilla-La Mancha, which is one of the most important production regions. The proportion of irrigated vineyards in this region has almost doubled, from 28% to 52%. In La Rioja and Castilla y León, probably the most iconic wine regions (with Rioja and Ribera del Duero wines), the irrigated area has also increased by around 20%. The rise of irrigated area dedicated to olives in Spain has been driven mainly by Andalucía and Extremadura, amounting to 65% and 15% of the total expansion, respectively. While in Andalucía, producers started to introduce irrigation a long time ago, in Extremadura the process has been more intense in the last few years.

Clear increase in irrigated area for wine grapes and olives

Proportion of Spanish vineyards and olive groves that are irrigated

Source: Spanish Ministry of Agriculture and Fisheries: ESYRCE, ING Research

Irrigation boosts production but by itself, it’s not a solution to water issues

For both vineyards and olive groves, the proliferation of irrigation has significantly boosted productivity in the last few decades. Since the strong increase in irrigation that started in the ‘90s, Spanish yields for olives and wine grapes have approximately doubled. More and better irrigation can offer a solution for farmers in certain areas, but by itself, it often fails to solve the long-term problems around water scarcity. That’s partly because technologies that promote more efficient ways to use a resource like water come with a ‘rebound effect’. Such technologies lower the cost of the resource which enables companies to expand irrigation to more land rather than reduce overall water consumption. The agricultural sector is a key factor in total consumption since it accounts for almost 80% of the total water use in the country.  

Support from food companies is needed given the increased risks that farmers face

Food manufacturers and distributors are likely to favour sourcing from those farms that are best able to adapt (often the bigger farms) to reduce supply risks. However many farmers struggle to adapt because they lack the means. In the longer term, this can pose a supply risk for manufacturers and distributors. Becoming more involved in the challenges at the farm level leads to a more resilient value chain but it comes with obligations. Involvement can be through R&D into better crop varieties and farming practices, offering more security in contracts or by promoting more sustainable water management practices. Securing the backing from large customers like retailers is also crucial to distributing the risks and costs throughout the value chain.

Lesson 3: Heat and drought push some production to more suitable areas

Structural shifts in crop areas

In Spain, the main crop production regions of the past continue to dominate in the present. But some parts have become less favourable due to climate conditions and reduced water availability So within these regions we notice the following shifts:

Wheat: in Aragon (which is one of the main regions for wheat) the focus for both common and durum wheat production is moving towards its northern provinces as the south of the region is heavily affected by drought.

Tomatoes: Andalusia is the heartland of tomato production and within Andalusia, the area devoted to tomatoes is shifting from Seville to Cadiz due to limited water for irrigation in the Guadalquivir basin. Meanwhile in the Valencian Community (‘Comunidad Valenciana’) there is a shift in area from Alicante to the northern provinces of Valencia and Castellon.

Oranges: for many the region around Valencia is synonymous with oranges. Within the ‘Comunidad Valenciana’ the province of Alicante has been losing almost 50% of its production area in the past 20 years. This means that the geographic focus for orange production has shifted even more towards the province of Valencia. A similar pattern takes place in Andalusia, with a decrease in Huelva and an increase in the regions of Seville and Cordoba.

Wine grapes: In Spanish wine regions it’s harder to distinguish shifts that directly link to climate change. In Castile and Leon, some area has moved from Zamora (Toro) to Valladolid and Burgos (Ribera del Duero). The increased popularity for the latter could also be a driver for the trend. In Italy, we notice a broader movement from south to north. Veneto has driven the upward trend in the north while the total production area in southern regions like Puglia and Sicily has been falling steadily over the last 20 years.

Tropical fruit: the growing presence of tropical fruit like mango and avocado in Spain and Italy is another example of a change in crop area which is supported by climate change (especially milder winters). More favourable weather is not the only factor, as growth is also driven by increased demand and better financial returns for such products compared to other fruit.

While moving cropland to more favourable locations makes sense at a company level, it potentially also relocates problems such as water scarcity rather than addressing the root causes of the problem, especially considering that climate change is an ongoing process. When farming areas that were once fertile and productive become abandoned it is also up to actors in the food value chain and policymakers to ensure that there are also long-term solutions to regenerate land and ecosystems as this will help combat climate change.

Direction of crop movement across provinces in the last 20 years

Source: Spanish Ministry of Agriculture and Fisheries: ESYRCE, ING Research

Food companies reconsider whether production facilities and warehouses are still in the right place

The observed movements in crop areas are quite gradual, but they can carry implications for manufacturers and distributors, especially when they heavily depend on the proximity of supply like in tomato processing. Deteriorating conditions in some regions can be a reason for these companies to reassess if processing plants and warehouses are still in the right location in 5 to 10 years from now. While we focused our analysis on moves within Spain we have also noticed interest from Spanish companies to invest in land or production abroad (Portugal, North Africa, Latin America).

Lesson 4: Imports serve as a backup when extreme weather hits domestic supply

Reducing supply gaps

Improving irrigation and shifts in crop areas towards more suitable locations are mid- to long-term adaptation strategies. However, food processors and distributors also have to deal with unfavourable weather events that can reduce supply at short notice. For crops and agricultural products, one of the most common strategies is to turn to imports to reduce the gap between the anticipated and the actual supply.The case of wheat in Spain illustrates this point quite well, particularly after the shortfall in production in 2022 and 2023 that happened due to heat waves, drought and the strong increase in costs of inputs like diesel and fertiliser. The graph below clearly depicts how imports increase following a bad year in terms of production. In other words, to cope with demand, in 2022 and 2023 companies switched to imports due to sharp drops in total production (25% and 36%, respectively).

Imports made up for the drop in Spanish wheat production in 2022 and 2023

Annual common wheat production and import volumes in Spain

Source: Eurostat, European Comission: Weekly Taxud imports, ING Research

Incorporating more imports does come with operational challenges

When companies have strong alternative supply networks this will alleviate some of the impact for processors, retailers and consumers. Incorporating more imported products can still create operational challenges for food manufacturers since imported products need to meet EU standards, and products often also need to meet certain specifications (such as size, colour or taste). Passing on any additional costs into their selling prices is another operational challenge.

Lesson 5: Rising temperatures change consumption patterns

Soup and ice cream consumption affected by climate change

The effect of climate change on consumption patterns is most pronounced for ‘seasonal’ products such as soup and ice cream. Monthly data on Spanish household consumption over the last 25 years shows a clear decline in soup consumption per capita and an increase in ice cream consumption. Rising temperatures are part of the explanation. When we combine data on consumption with data on average monthly temperatures, it shows that the drop in soup consumption is most pronounced when the temperature in a certain month is much higher than the long-term average for the same month. Meanwhile, for ice cream consumption it is positive when months are hotter than usual.We also observe shifts in how much households consume each month. While ice cream consumption has increased in every month, typically colder months such as February and November, show the strongest growth rates. Therefore, as temperatures are expected to keep rising, distributors could expect to see demand grow as the ice cream season lengthens further.

The relative increase in ice cream consumption in Spain is more pronounced in colder months

Ice cream consumption, five-year average (Index, 1999-2003 = 100)

Source: Spanish Ministry of Agriculture and Fisheries, ING Research

Opposite trends for beer and wine

Regarding beverages, it is particularly interesting how consumption patterns have changed for beer and wine (often considered substitutes). On the one side wine consumption (at home) has decreased by approximately 35% in the last 20-25 years. This trend has been more pronounced in the summer months, with a close to 40% decline. On the other side, at-home consumption of beer has expanded (+60%) over the past 25 years. But growth has been especially strong during the colder months  (+75% in winter months). The reason behind this pattern is that red wine, in particular, is traditionally associated with colder seasons and, as winters become warmer, it gradually loses popularity in comparison to beer. While we do find a clear link with temperatures, other factors are also influencing the trend. Within the beverage category, consumer preferences tend to shift over generations, and the introduction of more non-alcoholic beers is attracting new buyers to the category.

Also, it’s good to keep in mind that the consumption data we used has some limitations: it only covers at-home consumption (while the majority of beer consumption is outside the home) and it disregards consumption from an ever-increasing number of tourists.

Changing demand for beverages, ice cream and soup could push food makers into rethinking their product portfolio

Temperature increases will continue to shape consumption patterns of certain products. Some producers and distributors will look for alternatives to prevent losses in revenues and will consider actions to make their product portfolio more ‘climate proof’. At the same time, it can be a growth driver for other products. However, growth is not evenly distributed throughout the year and periods with extreme temperatures are tricky to predict. So besides models that forecast demand, producers and distributors also need a certain level of flexibility to be able to cater to additional demand on short notice.

Five lessons that provide a starting point for a strategic discussion on climate adaptation

When looking at the impact of climate change on food production in Spain, Italy and Portugal it is clear that there are risks for agriculture and food manufacturing, especially when farmers are not able to adapt. However, these changes also create opportunities for innovation and opportunities for companies to tap into changing consumption patterns.

The five lessons in this article illustrate how the impact of global warming leads to structural changes in food production and consumption. By highlighting five strategic consequences, we aim to provide a starting point for large food companies to engage in an integral discussion about how an effective climate adaptation strategy should look. Given the structural changes that we observe, we believe such a strategy is essential for food companies in Southern Europe and other countries, too.

With thanks to Xisco Sureda Llompart for his general contribution to the article and specifically the data analysis and desk research.

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