Exchange rates can have major impact on farm margins

Few farmers think much about hedging their currency exposure.

It can seem like an indirect factor in most farm-related prices, but it’s well worth considering.

“It can have a huge impact on what you sell your grain for in the cash market,” Dustin Gabor, an analyst known as Grain Shark, told me at Manitoba Ag Days in Brandon last week.

“The grain companies are using the exchange rate to reflect in their basis.”

One reason farmers don’t often realize how important the exchange rate is in their cash prices is that it is often hidden in that black box of basis among other factors.

Speculating on currency exchange rates is for the pros and gamblers, but there are probably times when it’s worth at least considering some protection on rates.

One of those times is now, because the Canadian dollar is at the low part of a range that has held for more than a decade. That doesn’t mean it won’t go lower, but at 75 cents (value compared to the U.S. dollar), it is close to the 72 to 73 cent lows that it hasn’t fallen beneath since before the commodity boom began.

The fact that it has held in the years since the boom ended gives some confidence that it is unlikely to break far below that unless something really big changes.

There might not be huge potential for the loonie to strengthen because since 2015 it’s been unable to stay above 80 cents. However, that range between 72 and 80 cents can have a giant impact on the price of anything in the hundreds of thousands of dollars.

Most farmers are marketing hundreds of thousands of dollars of crop or livestock every year, while farmers often make machinery purchases in the hundreds of thousands of dollars.

A higher Canadian dollar is great for buying machinery, but sucks for selling crops, and vice versa.

“At 75 cents you really have to start paying attention,” P.I. Financial’s David Derwin told me at Ag Days.

Even if farmers don’t hedge currency, understanding how it is affecting their prices is valuable, he said. A cash price mashes up futures, exchange and other factors, and farmers need to see the different components at play.

“They really are two different factors.”

If profitability is based on tight spreads between the cost of production and the price of sales, as it generally is in farming, covering exchange rate risk can be a useful part of the risk management equation, even if it doesn’t seem like a major thing to worry about.

It can have a major impact on your margin.

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