Currency volatility overseas could hurt Canadian exports

The winding down of an economic stimulus program in the United States is hurting many of the emerging markets that are big buyers of Canadian crops.

Starting in January, the U.S. Federal Reserve began tapering back its bond-buying program, which had been injecting $85 billion per month into the U.S. economy.

The stimulus program has already been scaled back to $65 billion per month and will likely disappear before the end of this year.

Some of the money made its way into the economies and currencies of emerging markets but is now migrating back into the strengthening U.S. economy and the U.S. dollar.

“That has caused a lot of currency volatility and quite big drops in the currencies of some of the emerging markets,” said Patricia Mohr, vice-president of economics at Scotiabank.

A strengthening U.S. dollar and weakening local currency have been hard on countries such as Argentina, Brazil, South Africa, Turkey and India.

“Prices are essentially going up in local currency,” she said.

As well, problems are mounting with the increased costs of financing purchases.

“Some of these countries have had to put in place quite severe hikes in interest rates,” she said.

In January, Turkey’s central bank raised its key interest rate to 12 percent from 7.75 percent to keep inflation in check and support the lira. The move makes it more expensive for importers to obtain credit for buying product.

“It creates head winds,” said Mohr.

Vijay Iyengar, chair of Agrocorp, a major exporter of Canadian pulses, said what’s happening to the currencies and economies in emerging markets is “terrible” because India is Canada’s top pea buyer and Turkey is the number one destination for Canadian lentils.

“It’s a big point of concern.”

Iyengar believes sales will continue into those markets but price volatility may increase.

The good news is the Canadian dollar has also been falling, which means exporters may be able to drop their prices to help offset the currency volatility overseas.

Murad Al-Katib, president of Alliance Grain Traders Inc., doesn’t expect a big impact on his pulse exporting business.

“It certainly affects non-discretionary goods more. Staple foods like pulses and rice and cereal grains, they’ll continue to move into the markets.”

However, Al-Katib has previously blamed currency devaluation and credit problems for poor sales performance in emerging markets such as India.

Viterra president Kyle Jeworski said his company is selling crop in a deferred position, so he doesn’t expect to see an immediate impact on sales.

However, he realizes it could affect future sales to markets such as India and Turkey if they can find cheaper substitutes or increase domestic production.

“It is definitely a concern when you see some of the rapid changes and devaluation of some of these currencies,” said Jeworski. “When most of what we trade globally is in U.S. dollars, it is a very serious issue.”

He said it’s possible that the governments in emerging market countries could intervene if their falling currencies lead to reduced imports and food price inflation.