I was talking to a customer who was getting his shipping schedule in order prior to leaving on a trip to Florida. The subject of the Canada-U.S. exchange rate came up. I said that the price of the vacation must have gone up due to the lower Canadian dollar. He replied that it cost the same number of bushels of soybeans, and since he had a lot more bushels of soybeans in his bin going up in price as the dollar went down than he had trips to Florida coming up, he was perfectly okay with the weaker Canadian dollar. I really loved the “glass is half-full” approach to the Canadian currency situation.
I don’t normally plow the same field twice, but since last month’s column on how the lower Canadian dollar has positively impacted Ontario farm revenues, there have been some questions with regards to the negative impact of a lower loonie. Yes. A lower Canadian dollar makes many things cost more and our business expenses will be higher with a lower dollar, but it’s not as bad as one might think.
The Canadian dollar is what is described as a “commodity currency.” Since the Canadian economy is so clearly connected to the health of the raw materials market, the Canadian dollar rises and falls in conjunction with commodity values. You can build graphs that show a very tight relationship between resource commodities like copper or nickel and the Canadian dollar, but the most commonly referenced relationship is the one between the price of oil, and the value of the Canadian dollar.
We’ve all watched the price of oil plummet over the past three months, and with some enjoyment watched the prices of gasoline, diesel, and furnace oil drop as well. The fact of the matter is that if the Canadian dollar were on par with the U.S. greenback, gasoline at the pump would be less than CDN $0.60 per litre, but considering how much we’ve paid for gas in the past, nobody was really upset about paying CDN $0.88 in mid-January. We are paying a little too much for products which have become a lot cheaper.
The same is true for most of our farm business inputs. Strictly speaking, fertilizer should cost more with a weaker loonie, but like most other commodities, world fertilizer prices have also trended lower over the past few months, cushioning the impact of the low dollar on farm business inputs. On Jan. 7, granular urea was worth US $226 per metric tonne in the Middle East, and by Jan. 21 (only three weeks later), it was $197.50. That’s a decline of 12 % in only 21 days. On Jan. 6, the Canadian dollar closed below US $0.71 for the first time in years, then traded below US $0.68 and by Jan. 21, was back to $0.70. But while the dollar is weak, commodities like nitrogen fertilizer are weaker and their price is dropping faster than the dollar.
Before any fertilizer retailers become offended, I need to point out that the world fertilizer market is like every other commodity market in this day and age. It is extremely volatile, and subject to radical shifts in both directions. The Jan. 7 to Jan. 21 window in urea pricing serves as a stark example of what can happen in commodity prices. It has popped back into line since, so don’t use this column as leverage if you’re negotiating prices with your local crop inputs retailer.
While commodity inputs, like fertilizer and fuel, are all under pressure from a weaker global commodity market, the same is not true for manufactured goods. Machinery, especially machinery manufactured in the United States, is going to cost more. That is because a major portion of the cost of producing such goods, like labour, facilities, and energy, are fixed costs in U.S. dollars and not subject to the weakening world commodity situation. Until the loonie recovers, things manufactured in other parts of the world are going to cost more.
When commodity prices start to go back up, the Canadian dollar will go back up with them. We will simply be using bigger dollars to pay for more expensive products and the net impact will partially be a wash. Conducting business in a commodity currency like the Canadian dollar buffers the swings in volatility in the intrinsic commodity prices. We aren’t able to capture the full gains on the inputs which we purchase, but neither are we subject to the full lows on the production that we sell.I was talking to a customer who was getting his shipping schedule in order prior to leaving on a trip to Florida. The subject of the Canada-U.S. exchange rate came up. I said that the price of the vacation must have gone up due to the lower Canadian dollar. He replied that it cost the same number of bushels of soybeans, and since he had a lot more bushels of soybeans in his bin going up in price as the dollar wentdown than he had trips to Florida coming up, he was perfectly okay with the weaker Canadian dollar. I really loved the “glass is half-full” approach to the Canadian currency situation.
I don’t normally plow the same field twice, but since last month’s column on how the lower Canadian dollar has positively impacted Ontario farm revenues, there have been some questions with regards to the negative impact of a lower loonie. Yes. A lower Canadian dollar makes many things cost more and our business expenses will be higher with a lower dollar, but it’s not as bad as one might think.
The Canadian dollar is what is described as a “commodity currency.” Since the Canadian economy is so clearly connected to the health of the raw materials market, the Canadian dollar rises and falls in conjunction with commodity values. You can build graphs that show a very tight relationship between resource commodities like copper or nickel and the Canadian dollar, but the most commonly referenced relationship is the one between the price of oil, and the value of the Canadian dollar.
We’ve all watched the price of oil plummet over the past three months, and with some enjoyment watched the prices of gasoline, diesel, and furnace oil drop as well. The fact of the matter is that if the Canadian dollar were on par with the U.S. greenback, gasoline at the pump would be less than CDN $0.60 per litre, but considering how much we’ve paid for gas in the past, nobody was really upset about paying CDN $0.88 in mid-January. We are paying a little too much for products which have become a lot cheaper.
The same is true for most of our farm business inputs. Strictly speaking, fertilizer should cost more with a weaker loonie, but like most other commodities, world fertilizer prices have also trended lower over the past few months, cushioning the impact of the low dollar on farm business inputs. On Jan. 7, granular urea was worth US $226 per metric tonne in the Middle East, and by Jan. 21 (only three weeks later), it was $197.50. That’s a decline of 12 % in only 21 days. On Jan. 6, the Canadian dollar closed below US $0.71 for the first time in years, then traded below US $0.68 and by Jan. 21, was back to $0.70. But while the dollar is weak, commodities like nitrogen fertilizer are weaker and their price is dropping faster than the dollar.
Before any fertilizer retailers become offended, I need to point out that the world fertilizer market is like every other commodity market in this day and age. It is extremely volatile, and subject to radical shifts in both directions. The Jan. 7 to Jan. 21 window in urea pricing serves as a stark example of what can happen in commodity prices. It has popped back into line since, so don’t use this column as leverage if you’re negotiating prices with your local crop inputs retailer.
While commodity inputs, like fertilizer and fuel, are all under pressure from a weaker global commodity market, the same is not true for manufactured goods. Machinery, especially machinery manufactured in the United States, is going to cost more. That is because a major portion of the cost of producing such goods, like labour, facilities, and energy, are fixed costs in U.S. dollars and not subject to the weakening world commodity situation. Until the loonie recovers, things manufactured in other parts of the world are going to cost more.
When commodity prices start to go back up, the Canadian dollar will go back up with them. We will simply be using bigger dollars to pay for more expensive products and the net impact will partially be a wash. Conducting business in a commodity currency like the Canadian dollar buffers the swings in volatility in the intrinsic commodity prices. We aren’t able to capture the full gains on the inputs which we purchase, but neither are we subject to the full lows on the production that we sell.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
