WINNIPEG — With the Canadian dollar falling to its weakest levels relative to its U.S. counterpart in six years, the general sentiment holds that it should be good news for exporters, such as Canadian grain farmers.
However, any net benefit may depend on what exactly is being exported and who is doing the buying, according to an analyst.
The Canadian currency moved to US79 cents Jan. 29. Using canola as an example, that means the March canola contract trading at C$449 per tonne on the ICE Futures platform Jan. 29 would cost only US$354 in the international market.
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At its most basic level, a weaker Canadian dollar is beneficial for Canadian exporters but detrimental for importers. For a western Canadian farmer, this theory means they should be getting more Canadian dollars back for their commodities sold into the global market, but also spending more of those Canadian dollars on anything imported, such as equipment and fertilizer.
While there is some truth to the general theory, the reality is a bit more nuanced.
For grain exports, a weaker Canadian dollar that makes exports cheaper for international buyers “works in a demand-pull environment, where the buyers are really interested in buying your product,” said analyst Mike Jubinville of ProFarmer Canada.
In that scenario, the benefit of the currency exchange is translated back to the farmer, he said, referring to lentils as an example.
However, in a supply-push environment, where the grain has more challenges finding a home, the benefit of the currency exchange goes to the buyer, said Jubinville. He said wheat would be an example of a supply-push commodity because there are many competitors in the global market and other currencies are also going down relative to the U.S. dollar.
For canola, the impact is mixed.
“The lowest canola prices I’ve ever seen came at a time when we had the weakest Canadian dollar, and some of the best canola prices I’ve ever seen came at a time when we had the strongest Canadian dollar,” said Jubinville, highlighting the fact that explaining the market is not as simplistic as saying “a weaker Canadian dollar equals higher canola prices.”
While it depends on the commodity being sold, the potential returns for Canadian producers are also related to who is doing the buying.
“If you’re dealing in a direct relationship with the U.S., it works out,” said Jubinville, noting that there was an increasing incentive to sell as much grain to the US as possible.
However, the United States isn’t the main market for a majority of grains and oilseeds grown in the Prairies. Because other world currencies are also declining relative to the U.S. dollar, those buyers aren’t really seeing the same currency-related savings when dealing with Canada. In addition, competing grain exporters such as Australia and Europe have also seen their currencies weaken, thus increasing their competitiveness internationally as well.
The currency exchange is also having a roundabout negative impact on Canadian fertilizer prices. While Canada is a net producer of nitrogen fertilizer, the pricing tends to be established in the U.S. Midwest. From a U.S point of view, buying Canadian product looks attractive given the current exchange rates, so Canadian suppliers are selling into the U.S., said Jubinville. The U.S. price may be going down because of the increasing Canadian supplies, but Canadian prices are going up because Canadian growers are now competing with U.S. growers using the stronger U.S. currency.
