Canada’s sickly dollar is producing a healthier bottom line for prairie livestock producers.
But if they want to keep that money in their pockets, say financial advisers and industry officials, they should take steps to insure themselves against the inevitable upturn in the dollar.
“I think this would be a good time to take some protection against a rise in the dollar,” says Doug Walkey, a marketing specialist with Alberta Agriculture.
That’s a view shared by Larry Helland, chair of the Alberta Cattle Commission.
Read Also
Government, industry seek canola tariff resolution
Governments and industry continue to discuss how best to deal with Chinese tariffs on Canadian agricultural products, particularly canola.
Currency fluctuations are a key factor in determining profitability, he said in an interview from his farm at Lomond, Alta., and producers should do whatever they can to manage that risk.
Unfortunately, he said, many are intimidated by what they see as the financial wheeling and dealing necessary to do so.
“We find the larger operators are comfortable and familiar with it,” he said. “Now we’re trying to create an awareness level so that smaller and medium-sized operators will consider it.”
Too many producers consider anything involving futures markets as speculation, when the whole idea is to reduce risk. He added that farmers need to become better educated about risk management generally.
Analysts say every time the value of the Canadian dollar changes by one cent relative to its U.S. counterpart, the price of slaughter cattle moves in the other direction by one to 1.25 cents.
The good news for livestock producers is that last week the dollar dropped to just under 71 cents, reflecting concerns that flat interest rates are making Canada a less attractive place to invest.
The bad news is that it probably won’t stay there, with many analysts predicting the dollar will rebound to 73 or 74 cents, maybe even higher.
Barry Smith, a Manitoba-based agriculture adviser with the Canadian Imperial Bank of Commerce, said farmers shouldn’t leave themselves at the mercy of the often unpredictable currency market.
“If you hedge your inputs side and you hedge your price side, you’ve pretty well got to hedge the dollar side to be able to lock in what you think is a profit you can live with,” he said, adding more and more livestock producers are asking for advice on currency protection.
Analysts say there are three main ways for producers to protect themselves against an increase in the dollar:
- Hedge by buying Canadian dollar futures on the Chicago Board of Trade while the dollar’s value is low. The contract can then be sold for a higher value if the dollar rises. The dollar is sold in $100,000 lots, for which a buyer would have to put down a margin deposit of $1,500 to $2,000 (U.S.).
- Go to the options market and buy an option against Canadian dollar futures. That gives the buyer the right to trade at a particular price. For example, buying a call option at 71 cents provides the right to buy futures at 71 cents even if the market has gone up to 73 cents. If the market goes down, the option is allowed to expire and you take advantage of the lower dollar. The farmer is then out the transaction fee, perhaps around $1,000 on $100,000 protection, but advisers say farmers should look at that as simply the cost of insurance.
- Go to a bank or other lending institution or currency broker and acquire a forward contract that locks in a particular exchange rate at a particular date in the future. Someone who deals regularly with U.S. customers could also look into setting up an account in American dollars although that can create a cash flow problem.
Paul Cassidy, president of Mitcon Ltd. of Calgary, said his company recommends the call option because it provides protection against a rise in the dollar and is less risky than the futures market.
