The sudden strength of the Canadian dollar, and the sudden fall of commodity prices in response, are making some farmers think about hedging their currency risk – a risk many didn’t realize they bore.
In the years when the loonie was falling, currency hedging didn’t seem important.
“People tended to be complacent and doing nothing turned out to be the best thing you could do,” said Benson Quinn-GMS commodities trader Ken Ball.
“That’s changed quite a bit. Now doing nothing is dangerous.”
Farmers generally benefited from a weaker currency. As the Canadian dollar’s value dropped, farmers received more Canadian dollars when they sold commodities priced in U.S. dollars.
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But some market segments were involved in currency hedging.
Ball said many exporters of live pigs, cattle and crops such as sunflowers had sales transactions in U.S. currency and have used hedging to protect themselves.
Now, even producers of commodities such as canola, sold in Canadian dollars, are trying to protect against the devaluation of the U.S. dollar.
Ball said while prices on the Winnipeg Commodity Exchange canola contract are listed in Canadian currency, foreign buyers calculate their offers based on the value of the U.S. dollar and U.S. commodity prices. As those have slid, so have canola values.
Exchange rates can be hedged by buying currency futures, which lock in an exchange rate for some time in the future. But for farmers who are already hedging their crop price risk by buying commodity futures, adding another layer of futures may be dangerous or simply too demanding.
Ball generally recommends farmers hedge their currency risk with options rather than futures contracts.
“You don’t want to be watching too many things at once,” said Ball.
Unlike futures contracts, options don’t lock buyers into an obligation. Options act like insurance and don’t have to be used.
Buying call options on Canadian dollars offers farmers the chance to insure their return without exposing themselves to too much risk.
The call option allows the farmer who knows he will receive American dollars at some point in the future to buy Canadian dollars at a set exchange rate to the U.S. dollar at that time. If the value of the U.S. dollar drops, the call option can be used and the farmer will get the amount of Canadian dollars that he expected to receive.
“It’s insurance and growers are used to that,” said Ball.
The sudden rise of the Canadian dollar has shaken many farmers who might never have realized how big an impact currency exchange rates can have on their farmgate returns.
“The desire to have some protection is certainly stronger now,” said Ball.
