If Canadian canola farmers had the chance on Jan. 1 to convert all their stored canola into an equivalent value of gold bricks, should they have done it?
“Your investment in gold bricks would have performed worse than canola,” said MarketsFarm analyst Bruce Burnett.
That is because the Canadian dollar has weakened substantially versus the United States dollar and that has been beneficial for exporters of Canadian agricultural commodities.
The loonie was trading at US$0.77 at the beginning of the year. By the end of last week it had tumbled to about US$0.70.
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“That’s a significant swing in the exchange rate, so that does change things dramatically,” Burnett said.
Agricultural commodities are traded in U.S. dollars, so a weaker Canadian loonie results in more money in farmers’ pockets.
“It has helped support the canola price here as the other oilseed markets have been devastated,” said Burnett.
“It doesn’t mean that canola hasn’t gone down. It has gone down. But that has been cushioned a bit by the drop in the dollar.”
Nearby canola futures tested $450 per tonne last week, which is the bottom end of the commodity’s trading range. But it bounced off that range and was back up around $460 per tonne by the end of the week.
It has performed far better than competing oilseeds, such as soybeans and soybean oil because of the weak loonie.
Wheat has gone through a similar scenario with a $20 per tonne improvement in basis over the past few weeks.
One of the main reasons the loonie has depreciated is the investor “flight to safety” to the U.S. dollar, a benchmark currency.
Another reason is the slumping Canadian economy due to recent challenges such as rail blockades and crude oil prices that are at the lowest level since 2002.
Burnett doesn’t see any of those contributing factors going away soon.
“There’s no compelling reason for the Canadian dollar to rally,” he said.
He thinks the depressed dollar will help keep Canadian agricultural exports strong through the end of the crop year. Wheat, canola and pulse shipments were already benefiting from a short crop in Australia.
Of course there is also a downside to the depressed loonie. Crop inputs and farm equipment are also traded in U.S. dollars and that means many of those products will become more expensive for Canadian farmers because they must be imported.
But overall, Burnett thinks the weak dollar is a net positive for Canadian farmers.
He also expressed optimism about the general resiliency of agricultural commodities during times of crisis.
They are more insulated from the global economic slowdown than other commodities such as coal, oil and metals because people still need to eat, whether or not a pandemic is occurring.
Burnett thinks agricultural commodities could be among the first to experience a rebound when the COVID-19 scare is in the rearview mirror.
