Collapsing oil prices have weakened Canada’s currency, but only against the U.S. greenback, which dilutes the benefit
The good news is that the Canadian dollar is likely to remain weak for the foreseeable future, according to most analysts.
The bad news is that the weakness, which tends to boost Canadian agricultural values, might only exist compared to the American dollar, and that might not mean much.
“Who am I competing with?” said Brennan Turner, market analyst and founder of the FarmLead grains marketplace, about what will affect the relative values of Canadian crops.
A weak United States dollar is an advantage “only on the ones we’re competing with the U.S. on.”
That’s because much of Canada’s export crop trade flows into a market only partially affected by U.S. production. When Canada is trying to sell canola, it faces competition not only from U.S. soybeans and soybean oil, but also Brazilian and Argentine soybeans.
For wheat, the U.S. is a major competitor for hard red spring wheat, but so too are Australia, Argentina and the nations of the former Soviet Union.
Most world prices are denominated in terms of the U.S. dollar, both in cash trade and in futures contracts. When the U.S. dollar rises compared to the Canadian dollar, that makes crop and meat prices look better in Canada than in the U.S., and is a major factor if farmers owe money. Debt levels are fixed in the local currency, so stronger relative crop prices make debt servicing relatively easier.
That is one reason U.S. farmers are in worse financial shape than Canadian farmers since 2014. Canadian ag prices in loonies have generally been 10-30 percent higher than U.S. prices in greenbacks.
However, even though this creates a dire situation for American farmers, it doesn’t necessarily produce an advantage for Canadian crops fighting for market share in the world market. Prices can become relatively stronger in U.S. dollar terms but remain nominally weak or become weaker compared to other competitors, depending on global supply and demand.
“If it’s our currency being devalued (compared to the U.S. dollar) just as much as the Aussie dollar (or other ag exporters’ currencies), from a competitive standpoint it isn’t any different,” said Turner. Canada and other competitors can still bid down prices in an attempt to make sales.
Canada’s dollar has greatly weakened since 2014 due to the slump in commodity values, but this year it has been hit by the simultaneous collapse in oil prices and the flight of money into “safe haven” assets, like the U.S. dollar. Since the start of the COVID-19 situation, the loonie has dropped from about 76 cents to the U.S. dollar to about 71 cents.
The Canadian dollar generally traded from $0.95-$1.02 between 2007 and 2014, during the commodity boom, but then fell to a general range of 83 to 71 cents compared to the U.S. dollar after the boom ended.
That created a cushion for Canadian farmers, even as crop prices fell.
However, today’s combination of commodity weakness and risk-avoidance currency flight also affects other key agricultural exporters, from Australia to South America to the former Soviet Union.
Turner thinks Canadian dollar weakness will continue as long as the COVID-19 situation persists, which might be 18 to 24 months, but so too will weakness of competitors’ currencies. Even as Canadian ag exports are more competitive than U.S. ones, so are those of the other competitors.
That leaves Canadian farmers and its competitors in the same boat, with a weak currency but also likely weak commodity prices.
“Are all boats going to move together here?” Turner wonders. To him, the answer is: probably.
The COVID-19 crisis is likely to cause financial shocks in various countries, so all exporters are unlikely to experience exactly the same currency impacts.
Ken Ball of P.I. Financial also says it’s hard to guess where the Canadian dollar will go in these early days of the crisis.
“Currencies can be pretty unpredictable, especially when everybody’s trying to assess who’s suffering the worst economic damage,” said Ball.
Over the next couple of years, Turner thinks the loonie will likely be worth 65-67 cents compared to the U.S. dollar. The present 71 cent level looks hard to justify over the medium term.
“I think there’s a lot more downside risk for the Canadian dollar the longer that COVID goes on,” said Turner.
That might leave Canadian farmers better off than U.S. farmers, but not necessarily any more competitive or comfortable than now compared to other exporters.
The currency can be a cushion, but it won’t stop a fall.