Canadians were feeling a little prouder last week as the Canadian loonie reached par with the U.S. dollar, but prairie producers prepared for eroded profits.
That’s because every penny that the loonie climbs compared to the American dollar is often a penny lost on the farmgate return from sales of crops and livestock.
“It certainly squeezes the profit margin,” said Larry McIntosh, general manager of Peak of the Market vegetable growers co-operative. “We all knew this day was going to come one day, and everyone was enjoying it when the dollar was at 80 cents or less, and it’s not going to be the end of the world, but it’s really going to squeeze things.”
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Peak of the Market sells millions of dollars of fresh vegetables to the United States each year. McIntosh estimates that the loonie’s increase from an average of 87 cents last crop year to one-for-one parity – if that’s what the average ends up being for this crop year – would reduce his growers’ earnings by $2 million if sales volumes were the same. Last year, sales totalled $65 million.
That’s entirely due to the exchange rate difference.
Hog producers are hit the same way, especially in southern Manitoba where most of the weanlings and many of the market hogs are shipped to the U.S.
American hog producers have been in a break-even position this year and are generally happy, but Canadian producers have struggled to make a profit as the loonie rose.
Farmers who hedged their currency exposure through contracts or derivatives have avoided some of the squeeze, but even the most adept at risk management will soon feel the pain.
“(Financial risk management and hedging) can only be a short-term approach to a bigger picture because really the furthest out that you can contract is about a year,” said Tyler Fulton, risk management specialist with Manitoba Pork Marketing Agency. “At some point everyone has to deal with where the dollar’s at.”
Not only do pigs sold directly to the U.S. bring a lower farmgate return when the loonie rises, but Canadian domestic hog prices are generally based on the U.S. price, so the pain filters through regardless of where the hogs are marketed.
World grain prices are generally set in U.S. dollar terms, so the currency effect comes through there, too.
However, a 10 percent decrease in the value of the American dollar is not a dominant factor in a market in which grain and oilseed prices have jumped by 50, 70 or 100 percent in the same period.
Robust world demand and prices are pulling grain from the Prairies, when it would normally be fed to livestock.
This is leaving livestock producers short of feedgrain supplies.
For them, the weaker U.S. dollar is partial mitigation for the sudden scarcity and costliness of prairie barley and other feedgrain.
“There’s a bunch of (American corn) that has been booked for late-October, November, December to come up into Canada,” said Doug Chambers, a broker with Quality Grain.
“I know of half a dozen feedlots that have booked 50 percent of their needs (with American corn).”
Corn is more expensive than it was a year ago, but the lower U.S. dollar makes it cheaper than Canadian barley in many cases.
“It definitely helps to make the corn work into Lethbridge. If you’re looking at a $200 (per tonne) product and you’ve got an extra five cents for the dollar, that effectively reduces the cost by $10 per tonne,” Chambers said.
While many people think of the currency situation as one of a strong Canadian dollar, the reality is more that of a weak
U.S. dollar. The greenback’s value has fallen versus almost all other major world currencies, with its nearest competitor – the euro – hitting record levels recently.
For years, economists and investors have warned that the American budget and trade deficits threatened to badly devalue the dollar. Few analysts are surprised that the U.S. dollar is weak compared to currencies such as Canada’s, which reflects trade surpluses and balanced government books.
While analysts suggest that the Canadian dollar rally might have gone too far and too fast, virtually none argue that the overall, long-term fall of the U.S. dollar is anywhere near reversing.
Fulton said most hog producers aren’t surprised by the present situation. Currency outlooks have been talking about this situation for years.
“The trend has been about as strong as you ever get, over the last three or four years.”
The only long-term defence is to focus on production efficiency.
“We’ve had a 40 percent reduction in competitiveness because of the dollar,” said Fulton. “The only way it can be addressed is if they make hard changes to their operations.”
