MONTE Solberg has seen first-hand the harsh economic impact of Canada’s newly muscular dollar, one of the dozen or more horsemen of the apocalypse that rode across the agricultural landscape during the past year.
In his Medicine Hat riding in southeastern Alberta, much of the economic activity is based on American dollar pricing, including energy and agriculture.
“It has been devastating,” the Conservative finance critic said.
“It wasn’t so much the rise of the dollar as its speed. My industries just didn’t have a chance to adjust. They didn’t see it coming.”
Read Also
Agriculture ministers agree to AgriStability changes
federal government proposed several months ago to increase the compensation rate from 80 to 90 per cent and double the maximum payment from $3 million to $6 million
The almost 20 percent increase in the value of the Canadian dollar compared to the U.S. dollar took billions of dollars out of the value of Canadian farm produce during the past 12 months and became one of the biggest factors in the crash of farm incomes to record low levels in 2003.
“In the Saskatchewan farm economy, that was $1 billion right off the top of revenue,” said Saskatchewan assistant deputy agriculture minister Hal Cushon.
Larry Martin, head of the George Morris Centre in Guelph, Ont., has calculated that a bushel of grain worth $3.85 when the dollar was at 65 cents US dropped to $3.33 when the dollar hit 75 cents last winter. The market price of a hog dropped more than $18 per hundred kilograms.
On a 1,200-sow hog operation, that would have reduced revenues by more than $200,000.
The impact is felt because most Canadian farm commodities are priced in U.S. dollars.
“The rising Canadian dollar was one of the very key factors in the farm income crash of last year,” Martin said.
He blames the Bank of Canada for mismanaging the file.
“I think the Bank of Canada’s management of the Canadian dollar is nothing short of criminal.”
He argued that the central bank should have lowered interest rates much below U.S. levels so capital would go to the American money markets, strengthening the American dollar and tempering the rise of the loonie.
“The bank let this go too far and it has done great harm to people who were caught in the expectation that the bank would manage it,” he said.
Martin called for enough of an interest rate cut to depress the dollar’s value below 72 cents.
“Then the bank should keep it stable.”
Solberg does not agree that the government mishandled the file or that the dollar should have been depressed below values set by the market, even though he has seen the economic damage that Martin describes.
“I don’t think it’s really possible for the Bank of Canada to intervene to influence the dollar value and even if it was, I would argue it would not be a good idea.”
The value of the dollar reflects the competitiveness of the Canadian economy relative to the U.S. economy, he said.
“The government should create policies that allow industry to invest in ways that increase the competitiveness of the economy and that will raise the dollar naturally.”
He noted that while a higher dollar reduces the value of farm sales, it also reduces the cost of inputs, including farm machinery.
“In some ways, I think it is a wash.”
At Carleton University’s school of business in Ottawa, currency specialist Bill Lawson believes Solberg has it right.
The Bank of Canada’s mandate is to control inflation and not manipulate currency values, he said.
“The rise in the dollar in such a short time period is unprecedented, at least in the past 50 years,” Lawson said.
“It had a tremendously negative impact on many sectors, export sectors, agriculture, many pension fund investments. But it really was a dollar correction. The dollar had been undervalued for years.”
He said the bank has limited tools to influence the value of the dollar. Interest rate setting is one, “but its room to manoeuvre there is limited and its long-term effect likely isn’t great.”
