Bruce Burnett believes the Canadian dollar will continue to strengthen throughout the remainder of 2018, which doesn’t bode well for grain prices.
The dollar went on a tear in 2017, rising from a low of 73 cents U.S. in May to a high of 82 cents in September. It has bounced up and down since then and is currently sitting around 78 cents.
Burnett, who is director of markets and weather with Glacier MarketsFarm, believes the loonie is poised for another bull run, and this one could last a while.
Glacier MarketsFarm is owned by Glacier FarmMedia, which also owns The Western Producer.
The exchange rate is usually determined by the relative strength of the U.S. and Canadian economies and the spread in interest rates between the two central banks.
“My concern is we’re probably getting close to that stage where people are now going to start to trade the Canadian dollar based on the price of oil rather than the relative economic growth,” he said.
That happened in the earlier part of this decade and resulted in an overvalued petro-loonie that at times traded at par with the U.S. dollar.
Crude oil prices have steadily climbed from a low of $30 per barrel in early 2016 to about $77 per barrel.
Burnett said many analysts believe they will end up in the $80s before too long because the global supply and demand fundamentals are tighter than they have been for years. He believes prices will stay high to encourage investment around the world.
He thinks that could push the loonie into the mid-80 cent to low-90 cent range, which would not be a good development for exporters of agricultural products because it decreases the farmgate price.
For instance, the loonie has appreciated about seven percent since this time last year, which means a seven percent reduction in grain prices. As a result, $7 per bushel wheat would be worth $6.51.
Further currency appreciation will most likely show up in basis levels, depending on the grain company.
“We could look at basis levels next fall that are certainly not very good,” said Burnett.
That is one reason why growers may want to consider locking in basis levels today.
“If you see some attractive basis in new crop and you think that this might be an issue, it would be something that you maybe take a look at doing,” he said.
J.P. Gervais, chief agricultural economist for Farm Credit Canada, said an 85 cent loonie is the threshold where crop and livestock margins tend to approach break-even levels.
“If we were to see the dollar between 85 and 90 for sure, it has a big impact on profitability,” he said.
However, he doesn’t think that will happen. Gervais said the Bank of Canada will likely hike interest rates one more time before the end of 2018, while the U.S. Federal Reserve will probably do it twice, increasing the spread between the two countries.
And while crude oil prices may be on the rise, he doesn’t see that having the same impact it did earlier this decade because of one key difference.
“A lot of oil has been hedged, so that relationship with the (crude) price and the exchange rate is weaker than what we had prior to 2014,” said Gervais.
That is why he is not revising his forecast calling for the dollar to trade at an average of 78 cents in 2018.