Canada’s petrodollar continues to pull Canadian farm commodity prices around as it rides the wild waves of oil prices.
That has given farmers a few lucky breaks recently, but has generally meant a longer term hammering. While some analysts think oil prices, and therefore the Canadian dollar, could drop substantially over the winter, most farm marketing advisers suggest farmers not try to outguess the markets.
“Farmers have got to be looking at locking in the futures price,” said Brad Marceniuk of Saskatchewan Agriculture. “It’s been a big risk factor.”
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Farmers still tend to disregard the enormous damage that currency swings can cause, said Kim Pottinger, manager of risk management for Phoenix Agritec in Winnipeg.
“They don’t do nearly enough hedging,” said Pottinger, whose company markets hogs, establishes marketing programs for farmers and offers risk management planning.
“Not nearly enough hedging is going on considering that it has probably been their biggest risk factor for the past 18 months.”
Although the Canadian dollar has recently settled into a range of 84-86 cents US value, some analysts see it reaching 90 or 100 cents in coming months and years.
Canadian hog prices are based on United States hog prices, so whenever the Canadian dollar drops in value, the hog price in Canadian dollars rises and vice versa. The same is true for most grain prices, which are set in U.S. dollars.
Currencies like the U.S. and Canadian dollars are allowed to trade freely, so there is always a relative weakening or strengthening of one against the other.
But in recent years two long-term trends have dominated their relationship and had a huge impact on farmers.
For much of the 1990s and early 2000s, the Canadian dollar tended to gradually fall in value compared to the American dollar, giving farmers here better prices than they would otherwise have received. By early 2003, the dollar had fallen to about 63 cents U.S.
But then the loonie started climbing. With every cent the dollar climbed, the Canadian farmer got less for crops and livestock.
The Canadian dollar recently peaked at 86 cents and has since fallen to about 84 cents.
Currency market analysts credit the loonie’s recent resurgence mostly to the value of oil, of which Canada is a major producer. As oil roared higher, so did the Canadian dollar. The recent drop to 84 cents was caused by oil’s fall back to below $60 per barrel after Hurricane Wilma spared oil rigs in the Gulf of Mexico.
While high oil prices support the Canadian dollar, they push down the American currency because it is a net importer of oil.
Analysts are all over the map about what oil prices will be this winter, with predictions ranging from $85 per barrel to less than $50.
“Our currency is completely oil-driven,” said Pottinger. “It’s moving in step with oil.”
Added Marceniuk: “You’ll see a strong day or two of oil prices and the dollar goes up. If you get a weak day or two for oil prices, the dollar will fall.”
Pottinger expects a short-term fall of the dollar to below 84 cents, before it rises near the end of the year.
All this currency volatility can be avoided.
“I would like to see more producer hedging,” said Pottinger.
Farmers can use futures contracts to lock in currency exchange rates. Producers who are unfamiliar with or uncomfortable with futures markets can get the same protection through their banks, which will lock in exchange rates for them.
“That way you don’t have to face the daily marking to market (of a futures position, which can cause a margin call),” said Pottinger.
