As farmers we place an enormous amount of focus on crop conditions as a decision-making criteria for our marketing.
But the biggest single variable in grain prices for Canadian farmers this winter is the exchange rate of the Canadian dollar. It has created a really nice up-swing in cash values for corn, soybeans, and wheat since the end of harvest in a market climate where U.S. cash prices showed essentially no strength at all.
We should never lose track of how much impact the exchange rate has on our gross farm receipts in Canada. If soybean futures are US $9, and the U.S. basis value is $0.00, then in mid-December when the Canadian dollar was US $0.72, a bushel of soybeans is worth CDN $12.50/bu. In this scenario, the weakness in the Canadian dollar is contributing $3.50/bu to the local price of soybeans, or about $160 per acre to farm gate revenue. In a higher yielding crop like corn, US $5/bu on a US $0.72 Canadian dollar is only US $3.60/bu. On 160 bushels per acre corn, the exchange rate is contributing $224 per acre in gross receipts. Certainly some of the farm’s variable expenses, like fertilizer, will rise as the dollar drops but longer term fixed costs, like mortgages and rent, are not directly impacted by exchange.
The trick for business operators is to recognize that currency exchange is a variable, and then develop management tactics in order to use variations in the value of the Canadian dollar to your advantage (buy things when the Canadian dollar is high, and sell things when the Canadian dollar is low). We are in a situation right now where the Canadian dollar exchange rate is impacting farm businesses to the impact of $150 to $250 per acre. That’s a more significant market impact than one could anticipate from a major crop disaster in South America or Australia.
Not having a strategy in place for what to do if the Canadian dollar were to rally back up to US $0.85 is equally absurd as saying that if half of the Australian wheat was wiped out, we wouldn’t have a marketing plan for that either. If we accept that currency strength is a significant cue for our transactional behaviour, then the trick is to develop a strategy for monitoring the Canadian exchange rate, and evaluating its movement potential.
The Canadian dollar is basically a commodity currency. This means that the loonie’s value is very closely correlated to the price of commodities like copper, iron, and oil. If you overlay oil prices with the Canadian dollar’s value on a chart, the correlation is unmistakable. As West Texas Intermediate oil futures dropped down into the low US $30’s per barrel before Christmas, the loonie followed it down to trade below US $0.72. But 22 months ago when the oil futures were nearing US $100 per barrel, the Canadian dollar was very close to par. When I was a kid in my parents’ house, there was an expectation of silence at meal time when the farm market report came on the radio. In today’s world, an equal measure of attention should be paid to world oil inventories and the energy market reports. If U.S. petroleum inventories start to drop, oil prices will begin to rise, and Canadian farmers should get busy executing their grain marketing plan.
Canadian farmers need to be prepared for the dollar’s inevitable recovery. A rising loonie results in lower cash prices for Canadian producers, so watching the dollar drop is an easy business management tactic. But being able to recognize a turn-around in the loonie’s fortune, and being ready to make sales decisions to take advantage of the currency situation in your crop marketing plan is critical. Even if the Canadian dollar is apt to remain soft for the next few years, there is a $100 per acre gross revenue swing between a $0.68 Canadian dollar and a $0.78 Canadian dollar with even modest average farm yields.
When the Canadian dollar bottoms out and starts to turn around, Ontario producers should aim to be 80 % sold on their 2015 crop production and 25 % to 30 % sold on their 2016 production. World-wide grain stocks are sufficiently large to limit significant upswing potential in U.S. grain prices this winter and spring. While there is certainly potential for drought or other weather-based production problems in the growing season ahead, carrying 20 % of the old crop and 70 % of the new crop forward un-priced is still a substantial portion of a business’s production to wager on a weather event which has yet to develop.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
