It’s like the pandemic never happened, at least for canola and the loonie

If I remember right, six months back a pandemic hit us like a tumbling asteroid.

Flames, smoke and a succession of massive shockwaves hit the world’s economies and societies as our hopes and sense of security were blotted out by heavens of blackness and acid rain.

But here we are today, at least in much of the Canadian crop growing world, floating along like nothing happened. Canola futures are around $500 a tonne, just like they were from mid-December to mid-January, before COVID-19 supposedly changed everything. They had tumbled to just above $460 in mid-March as the severity of the pandemic became clear, but since June they’ve been grinding steadily higher. The Canadian dollar plunged to 68 cents compared to the U.S. dollar in mid-March, but is now back to about 75 cents, where it spent much of its time pre-COVID.

A quick take on this could be that grain commodities are more resilient than other types of commodities and certainly less vulnerable to shocks than stocks, and that the Canadian dollar is a pretty sound currency because it represents a diversified economy governed by a relatively competent democratic government that has been handling the pandemic as well as most advanced nations. In other words, our ag economy is skipping through this thing mostly unaffected, beyond the weeks of the initial shock. There’s little reason to worry beyond the pre-existing fundamentals of supply and demand.

As a risk averse guy, that’s not what I take out of it. I don’t see COVID-19 as being done with us, and I think it’s reckless to look at recovered price levels as the sign that the markets have returned to “normal” and we have no extra risks to hedge.

I reached out to a few foreign exchange (f/x) pros and that’s the sense I got from them. The rebound in the $C looks like everything’s back to normal, but that disguises serious risks of wild volatility if something goes haywire as the pandemic and its eventual aftermath continue to roll along. If you’re exposed to f/x risk, as some commodities and export products are, hedging that exposure before the next COVID tsunami might make sense.

“You’re looking at an asymmetric risk environment: the Canadian dollar could grind its way further up the stairs, or it could fall down an elevator shaft. So it makes sense to hedge yourself using option strategies that protect against a rally in the loonie, while preserving participation in renewed weakness,” Karl Schamotta of Cambridge Global Payments told me.

“And it makes sense to keep your eye on the ball, as the pandemic has proven. The unexpected has a tendency to happen.”

Indeed. It’s when things seem like they’re all back to normal that we can be at our most vulnerable. With canola at $500 and the loonie at 75 cents it’s tempting to think the tail risk of the pandemic is gone. But it’s probably a year early to think that, risks have increased even if prices have stabilized, and this might be closer being in the eye of the storm than it is to being caught in the placid seas of the doldrums.


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