Canola and soybean prices parted company last week, due largely to currency exchange rates.
Soybeans usually lead canola, but canola futures slipped while soybeans climbed on thoughts that U.S. soybean year-end inventory could be tight due to strong exports.
Often at this time, demand shifts to South America’s newly harvested crops, but this year Brazilian producers are delaying sales as their currency, the real, soars, gaining 22 percent since the beginning of 2003.
So while world soybean prices denominated in American dollars are strong, the Brazil on-farm price in reals is falling.
Read Also
USDA’s August corn yield estimates are bearish
The yield estimates for wheat and soybeans were neutral to bullish, but these were largely a sideshow when compared with corn.
It’s the same with Canadian canola. The loonie has gained 11 percent since Jan. 1.
All Canadian commodities that take their price signals from U.S. markets are feeling the impact.
On the other hand, the weaker U.S. dollar stimulates demand for U.S. commodities and helps to support the futures price.
The weaker greenback also makes imported farm machinery and inputs more affordable for Canadians, but the majority of inputs come from domestic sources unaffected by currency fluctuations, so lower costs will not offset the reduced income.
The cause of all this flux is the tarnished American dollar, the golden child of world currencies for several years.
Initially attracted by the soaring stock market, currency traders stayed with the United States during the uncertainties caused first by the stock market melt down and then worries about terrorism.
But as the U.S. economy slowed, its current account deficit grew and government debt piled up, traders looked for greener pastures.
The loonie seems a particularly attractive alternative. The Canadian economy leads the G7 in growth, government debt is falling and interest rates are about two percentage points higher than in the U.S.
But most analysts expect the loonie’s rise will slow as the U.S. economy recovers later this year, peaking at 72-73 US cents.
But what happens if they are wrong and the loonie climbs higher to, say, 80 cents?
Let’s take an example.
The Minneapolis spring wheat May futures contract is about $4.45 per bushel. At a 70 cent exchange rate, that price in loonies is $6.36. At 80 cents, the price is $5.56, or 12.6 percent less.
Clearly, a stronger currency over the long term would make the drive to increase farm efficiency more urgent.
