Vancouver — Canadian farmers are in jeopardy of losing the currency buffer that has partially shielded them from slumping commodity prices, says an economist.
Like most international currencies, the Canadian dollar has been weakening versus the U.S. dollar in recent years.
That has resulted in better returns for exporters of Canadian products because most trade is conducted in U.S. dollars.
The weak loonie is a big reason why farmers in Canada are in better financial shape than their neighbours south of the border.
However, that could be about to change, says J.P. Gervais, chief agricultural economist with Farm Credit Canada.
The Bank of Canada on July 12 increased its overnight rate by a quarter percentage point to .75 percent, the first hike in seven years.
Canada and Australia are among the only countries that have signalled their intention to boost interest rates in lockstep with the United States.
The Canadian dollar jumped up more than one cent to about US78.5 cents on the day of the increase.
Gervais thinks the higher rates will maintain or strengthen the loonie in relation to the U.S. dollar while most other currencies continue to fall.
“We are probably going to hold still against the U.S. dollar, even gaining value,” Gervais said in an interview following a presentation he made at Pulses 2017.
“It may put us in a spot where it hurts a bit of our competitiveness.”
He said the low Canadian dollar has helped the entire agriculture sector, and pulses are no exception.
Key pulse importing nations such as India and China have currencies that have lost eight percent of their value against the U.S. dollar in 2017 versus the five-year average.
However, key pulse exporting countries such as Australia and Canada have currencies that have performed even worse, losing 14 to 15 percent of their value versus the five-year average.
That is why devalued currencies in overseas markets haven’t been a big issue for Canadian pulse exporters, said Gervais.
However, it could be in the future, so farmers and exporters need to keep a close eye on currency fluctuations.
The other worrisome development is the growing anti-trade sentiment in the U.S. and elsewhere around the world.
Pulses are a lot more trade dependent than other crops, said Gervais.
“You have a vested interest in ensuring borders remain open,” he said.
The U.S. exit from the Trans-Pacific Partnership agreement was a big blow to the pact, and it may never recover.
However, while the U.S. retreats into its protectionist shell, other countries and regions are filling the leadership void.
The European Union has inked deals with Canada and Japan and is in negotiations with a number of South American countries.
“Hats off to the European Union because they are exercising quite a bit of leadership when it comes to opening trade,” said Gervais.
China is also playing a leadership role in negotiating the Regional Comprehensive Economic Partnership, which he described as the TPP on steroids. It includes most of the TPP countries minus North America with the additions of China and India.
“I don’t think the discussion around trade is over. I’m actually very confident that we’re going to see more trade liberalization down the road,” said Gervais.
“For us willing to dance, we may have some partners out there.”