Currency hedging helps producers protect basis levels

By Ed White

Canadian dollars are on sale. Are you buying?

You can do it with American dollars, which you actually have right now in your future pocket, even if you don’t realize it.

It’s because your crops and meats are priced in American dollar terms, regardless of whether you sell them in Canadian dollars and sign contracts paid out in loonies.

This is true of wheat, canola, pigs and cattle. These are North America-priced commodities, and the Canada-U.S. dollar exchange rate exists in whatever price you are seeing today and for the future.

The Canadian dollar has taken a dive since April, which you might have missed if you’ve been too busy farming to worry about the markets.

The loonie has fallen from a value of about US80 cents to the loonie to about 75 cents. That’s the biggest reason canola prices have been stronger than soybean prices in recent weeks. As the Canadian dollar weakens, you get more Canadian dollars for every tonne of canola, all other things being equal.

So, when do you do something to protect that currency exchange rate and book a rate much better than available from March to April? And how do you do it?

“That is the discussion that is being had,” David Derwin, an adviser with P.I. Financial, told me the other day.

“There will come a time when hedging that currency will be a way of protecting some of those basis levels.”

Nobody wants to jump in too soon and lock in a loonie that could keep dropping, but at some point, making sure it doesn’t bounce back up becomes prudent risk management.

“We don’t have a clue (where the loonie is going.) We’re just being insurance salesmen,” said Errol Anderson of ProMarket, who has been organizing fall canola put option hedging.

With canola prices being stronger than soybean prices because of the U.S. dollar’s strength, protecting fall canola prices is an indirect way of hedging the Canada-U.S. exchange rate at an attractive level.

Another way of protecting it is with fixed price contracts. That takes the moving parts out of the hedging machine and provides certainty in uncertain times.

Tyler Fulton, director of risk management for pork industry marketer Hams Marketing, said he thinks forward pricing should be popular with anybody not comfortable with juggling all the balls that U.S. President Donald Trump has thrown up into the air, affecting everything from currency exchange rates to basis swings between the U.S. and Canadian cash markets.

“You’ve got to be on top of it because it’s changing all the time,” said Fulton.

“To attempt to try to beat the market in these types of conditions seems exceedingly difficult.”

Indeed, none of the advisers I spoke with sounded confident in guessing how far the loonie could fall before reaching a bottom. However, they all saw today’s much-lower loonie today as being something that at some point Canadian farmers will want to protect.

“We’re just trying to get as many producers (as possible) hooked onto protection,” said Anderson.

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