Although it’s still bouncing around, Canadian farmers are getting some relief from what was a high Canadian dollar.
But they haven’t benefited from the recent decline as much as they were hurt by the previous runup, note some market analysts. For that, you can blame upsets in China’s oilseed market, said Errol Anderson of Pro Market Communications.
“Even though the Canadian dollar has skipped back down, canola prices have still dropped a buck a bushel,” said Anderson.
China’s oilseed crushers are caught between owning large stocks of high priced soybeans but falling soy meal and oil prices.
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“It hasn’t encouraged importers to step up and buy, because they’re wondering whether they’re going to get paid from China or not. Because of that, it doesn’t matter where the dollar is. They aren’t buying.”
Generally speaking, when the Canadian dollar appreciates compared to the American dollar, Canadian farmers get less for what they produce. That’s because most commodity prices are set by world markets that are based on the U.S. dollar.
When the loonie drops compared to the U.S. dollar, Canadian farmers tend to get more than they expected.
For many years the Canadian dollar slid predictably, if fitfully, downhill, but in 2003 the Canadian currency abruptly switched course and shot upward, surging past 78 cents US in January. The key reason was a weak U.S. dollar, pressured by traders’ concerns about the high trade and government deficit in the U.S.
That hurt Canadian farmers who had locked in U.S. prices for their products and generally hurt the outlook for most farm commodities because world markets did not quickly adjust to the cheaper U.S. dollar.
In the last couple of months the loonie has retreated to the 72-74 cents level as the U.S. economy improved. But analysts say the exchange rate benefit to farmers depended on what they produce.
Canadian Wheat Board grains have gained from the weaker loonie because they are mostly sold on the world market.
“The weakening dollar since January has had a substantial impact on the Canadian dollar return for farmers,” said wheat board market analyst Dwayne Lee.
The recent increase in initial prices and the rise in the Pool Return Outlooks were partly due to the weaker loonie.
Lee said the impact can be seen in a comparison of a recent average price for Dark Northern Spring, or DNS, wheat to various recent Canadian dollar values.
If a tonne of DNS was worth $187.91 US on Jan. 13, it was worth $239.62 Cdn. Because of the fall of the loonie, that same tonne of wheat was worth $250.41 Cdn by March 25 and $255.35 by May 27.
But some Canadian commodities, like canola, have not fared as well.
Anderson said canola’s independence from other oilseed markets means that it will not always track the Canadian currency’s relationship to the U.S. dollar. That has meant canola missed some of the gains that have come to wheat prices.
“It’s really a third rate factor right now,” said Anderson.
“When demand isn’t there, it doesn’t matter what the currency is.”Ken Ball of Benson Quinn-GMS said exact currency exchange relationships are not available for every type of farm commodity.
“The actual impact is hard to gauge,” said Ball.
“There’s no evidence that a five cent fluctuation in the Canadian dollar has any impact at all on barley prices. Sometimes it does. Sometimes it doesn’t.”
That makes it hard for crop producers to protect against currency exchange risk. One good way is with options. Because of the indirect relationship in crop prices, currency hedging with futures contracts can be risky. Using options is like buying insurance and brings no additional risk.
Cattle and hog producers are better able to protect their currency risk with futures contracts, Ball said, because many sales are made to U.S. buyers and many others are made based on the U.S. market. Canadian livestock prices often have a close relationship to the U.S. market and therefore to the currency exchange rate, Ball said.
Last week the Canadian dollar surged higher again, a result of the U.S. dollar weakening, analysts say. That’s kept market analysts hopping.
“It’s been a challenge,” said Lee.
