WINNIPEG, Sept. 7 – Higher interest rates and a stronger Canadian dollar relative to the American currency is giving Canadian farmers a double whammy.
According to Farm Credit Canada’s chief agricultural economist it is a situation farmers will likely have to deal with for at least the remainder of the year.
J.P. Gervais said he thinks farmers and agribusinesses will be able to manage the higher interest rates, but the higher dollar may prove more problematic.
He said Canadian farmers during the past two to three years have been shielded from a slowdown similar to what’s been happening in the U.S. farm sector. The weak loonie meant better on-farm profits from exports proced in U.S. dollars.
“Because I know given current pricing in the marketplace — and that’s across all sectors: grains, oilseeds, livestock — that a dollar at 85 cents is really a threshold or a point we’re starting to see margins getting a little bit of pressure,” he said.
The Canadian dollar was trading at US82.37 cents at noon today. Back on April 3 it was at 74.72 cents.
Gervais said that for the time being, the dollar’s main influencing factor is no longer oil, but rather the spread between American and Canadian interest rates.
“I think if you are looking at the spread between Canadian rates and the U.S. rates, I think for some terms we actually have higher rates in Canada than in the U.S. I think that’s consistent with a dollar around 82, maybe slightly higher than that.”
He said as long as the U.S. Federal Reserve holds its present course and doesn’t raise its interest rates, the loonie’s strength relative to the American greenback will continue. He expects it to last at least until the end of the year, he said.
The Bank of Canada yesterday raised the benchmark overnight lending rate to one percent from 0.75 percent. Gervais said he expects Canada’s central bank will not apply further rate increases until it has time to assess the effects of the latest hike.
He added there may be some upside to the rising loonie in that input or equipment purchases priced in American dollars will be more affordable for Canadian producers.
But on balance, a lower Canadian dollar is more important to the long-term health of the agricultural industry.
He added he doesn’t believe the higher interest rates will have a serious effect on farmers’ debt servicing because that depends more on income than on assets.
However, if the dollar rises again, further cutting farmers’ margins, it could affect their ability to meet debt obligations, he said.
Don Mazier, president of Keystone Agricultural Producers, said the dollar isn’t exceptionally high yet, but it still will have an impact, especially because farmers entered the growing season with a much lower dollar in play.
“We’ve grown a crop, say on a 75-cent dollar and now we’re taking off a crop on an 82-cent dollar, and that’s a totally different scenario.”
He said many of the crop decisions would have been based on a lower dollar and higher value exports that go along with that. Many of those plans will have to be reworked.
He added producers can take some actions to minimize the damage, such as locking in basis levels or hedging currency.