Recent weak market conditions have been made worse by a 6.6 percent rise in the Canadian dollar since mid-September.
Whether it’s for products sold directly to the United States, such as soybeans, some special crops and piglets, or for products whose price is based on the U.S. currency, such as Canadian Wheat Board grains and canola, the loonie’s leap above 80 cents US means less money for almost everything prairie farmers produce.
For canola producers, prices have fallen a lot further than the sagging price of soybeans would justify.
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In hogs, it’s a cost some producers will only feel once the high market prices of today have faded and producers get the old price minus the currency losses.
“They haven’t felt it in their pocketbooks yet, simply because the hog market is so strong that they’re still averaging more per hog than they have for the past five years,” said Tyler Fulton, who oversees risk management contracting for Manitoba Pork Marketing Co-op.
“If we see some sort of a normalization of the hog trade, I think producers are going to get a rude awakening.”
That awakening is already happening in crop prices. Huge American corn and soybean crops have depressed prices for oilseeds and feed grains, but the plummeting U.S. currency has made things much worse for Canadian producers.
Canadian wheat board grains are sold on the world market to mainly non-U.S. customers, but the sales agreements are made in U.S. dollar terms. When the U.S. currency falls, the returns to prairie farmer in Canadian dollars also fall.
For example, a tonne of grain that sells for $200 US is worth $278 Cdn if the exchange value of the Canadian dollar is 72 cents US, but is worth only $244 Cdn if the exchange is 82 cents US.
The wheat board locks in currency exchange rates for deals already made, but has generally done little long-term risk management.
Wheat board spokesperson Louise Waldman would not say whether the board takes defensive speculative positions for sales not yet made.
“We have a disciplined and very consistent approach to hedging throughout the year and that has allowed us to lessen the impact that this higher dollar has had on pool returns,” said Waldman.
But with the board often citing currency fluctuations as the reason for Pool Return Outlook increases or decreases, it is obvious the currency risk is not hedged too far beyond cash sales.
Most individual producers do little to hedge their currency risks, said Ken Ball of Benson-Quinn GMS.
“It’s still a small, small, small fraction. I’d guess less than five percent,” said Ball.
Many producers don’t know exactly what their currency exposure is, especially if they don’t sell directly to American buyers and receive their money in U.S. dollars. Still, with almost all Canadian crop prices based on the U.S. market and dollar, some hedging is essential.
If a farmer has $1 million per year in crop sales, and the U.S. dollar moves by 10 percent, his revenues probably won’t move by exactly 10 percent, but they will likely move in the same direction.
“It’s a bit intangible to know what exactly your exposure is, but all growers should hedge to some degree,” said Ball.
“You should have some kind of exposure on the Canadian dollar on the long side to balance out that risk.”
Alan Day of Union Securities in Saskatoon said the shift of the dollar from about 60 cents US to more than 80 cents has been hard for many businesspeople, including farmers, to accept.
“When it went from 60 cents to 70 cents, there was disbelief,” said Day.
“For the first year or so, through most of last year, I think exporters were caught off guard … Now it’s begun to sink in that we’ve got a dollar that day after day is getting stronger and is probably going to continue going up.”
Both Ball and Day said many producers who sell products that are paid for in U.S. dollars can use over-the-counter contracts with their banks to cover their currency exposure risk. But Ball said these generally work only when the producer directly receives payment in U.S. dollars, because that’s what the bank demands.
Fulton said hog producers are probably more exposed to currency risk than they should be because futures markets have discouraged farmers from hedging.
Futures contracts for more distant months are not as strong as spot cash prices, so farmers have had little reason to lock in. Manitoba Pork Marketing Co-op’s risk management contracts contain both currency protection and price protection, so if farmers have avoided locking in because they don’t like the futures price offered, they’re taking on the currency risk.
“I don’t think producers right now have a grasp of the implications of the dollar going to the level that it’s at,” said Fulton.
