Higher interest rates and a rising Canadian dollar will require changes to Canadian agriculture, says a Canadian currency expert.
“If you export production or borrow money in your business then you need to take a look ahead at the world markets and see where Canada is headed,” said Michael Levy of Custom House, a company from Victoria that helps agricultural producers and others manage their currency transactions worldwide.
Speaking to the Saskatchewan Cattle Feeders’ Association annual meeting in Saskatoon on Jan. 28, he said the loonie has risen 40 percent against the American dollar in three years, but Canadian cattle producers are only now starting to ask how much higher it will rise and when.
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Levy’s message may have been intended for cattle producers, but a rising loonie will affect all export agriculture.
“You have to compete internationally at lower prices even though your domestic input costs will be rising,” he said.
In the short term, Levy recommended forward pricing as much production as is prudent to lock in revenues.
“You cattle feeders should be trying to lock in your returns based on U.S. futures (markets) to protect your margins from a rising (Canadian) dollar.”
Levy said the instability of the U.S. economy and the effect of China on world trade are causing investors in other countries to look for safe harbours for their money.
He feels these factors are in part responsible for the steady rise of gold.
“What I think we are seeing is investors who used to flee their own currencies for the U.S. dollar taking stock of the American government, its economy and turning elsewhere. Gold is a part of that trend,” he said.
“If you inverted a chart of the U.S. dollar index and placed the gold chart over it, they would track almost exactly. Canada is a beneficiary of the turn away from the American dollar. But it may not benefit agricultural producers.”
Ken McBride, president of the Agricultural Producers Association of Saskatchewan, told producers attending Crop Production Week meetings in Saskatoon in January that a weaker U.S. dollar would make American producers even more competitive in export markets.
“Combined with U.S. subsidy and farmer support programs, a taller Canadian dollar could create strong competition for Canadian producers,” McBride said.
Levy said oil’s influence over the Canadian economy and its dollar will continue to grow over the coming decades.
“Canada and its petro-loonie profile is seen as a very good place to invest,” he said.
“But that is putting upward pressure on the loonie and the economy as a whole.”
Higher oil, metals and wood prices are also strengthening the Canadian economy.
China’s continued urbanization, expanding auto industry and increasing access to consumer credit will combine to push that country’s petroleum consumption upward for the foreseeable future. As a result, significant weakness in the Canadian dollar won’t likely show up soon.
“Canada’s economy is one of the strongest in the G-8. That isn’t something that will go away anytime soon,” Levy said.
The election of a Conservative government in Canada is also considered a sign of safety for investment.
“They may or may not be good for the economy, but they are generally not seen as bad for business and that attracts investment.”
University of Saskatchewan agricultural economist Ken Rosaasen hopes value-added agriculture will receive some of that investment.
“Processing agricultural output domestically into energy and industrial products would help create returns for Canadian producers … but governments are going to have to help make that investment happen,” he said.
The Canadian dollar rose along with that of the U.S. as the American currency regained ground after terrorist attacks in the United States on Sept. 11, 2001, but Levy and others say the American currency is set to falter in the coming years.
Levy told the cattle feeders that he is predicting increases in interest rates over the near and long term.
The monetary trader said he has recommended that not-for-profit organization boards lock in interest rates now on their long-term borrowings.
“Historically speaking, money is cheap right now, but I don’t think it always will be.”
