It has often been said that there’s really only one commodity that makes farmers happy as it drops and that is the Canadian dollar.
Through the spring and summer of 2018, the loonie traded inside of a relatively compact range between US $0.76 and $0.78. It peaked at about US $0.79 on October 1, then slid 5 cents within 3 months.
It’s important not to lose track of how much of a difference the recent slide in the Canadian dollar has made to the cash prices of grain for Ontario farmers. At year’s end, old crop soybeans were worth about US $8.50/bu delivered to the Hamilton crush market. With the Canadian dollar ending 2018 slightly below US $0.74, it converted to roughly CDN $11.50 per bushel, ($423.50 per tonne). If the Canadian dollar had not gone on a 3-month slide, the Canadian cash price would only be CDN $10.75/bu, (or $395 per tonne). There are a lot of farmers who aren’t impressed with $11.50 soybeans but $10.75 would have been a lot worse.
In soybeans, Canadian farmers didn’t see cash prices rise this fall as the value of the Canadian dollar dropped, but that was because the underlying U.S. basis value of soybeans (and since mid-December futures prices as well) have been in a sharp decline. For Canadian farmers, the lowering loonie has served as something of a parachute as we jump away from the crashing airplane that has been American soybean prices.
For all of our cash grain prices, the exchange rate makes a big difference in the size of cheque that we receive. While the grain industry has a rather Chicago-centric view that futures values are the main driver for price, in Canada the exchange rate is a significant source of price risk, and needs to be managed as part of a farm’s risk management strategy.
There is also a tight price correlation between the Canadian dollar and oil prices. It is also true that the prices of other resource commodities such as copper or nickel track really closely to the value of the loonie. Essentially every newscast includes a recap of oil and gold prices which makes change easy to monitor. It’s not an accident that West Texas intermediate oil peaked at US $76.01 on Oct. 3, two days after the loonie peaked at US $0.79. By year’s end oil was down to US $45 and the Canadian dollar under US $0.74. They are certainly two entirely different commodities, but they travel together like a couple of kids in a three-legged race.
There’s no cause to hurry in pricing grain before we are certain that the dollar is about to recover, but as we move into the fourth month of a slide, it’s apparent that the pendulum has swung so far that it simply needs to reverse. Speculative funds who make their money buying the lows will be quick to move in once they believe that the prices have bottomed. As grain marketers, we don’t have to be precise about hitting the exact bottom of the Canadian dollar’s trading range. We just don’t want to miss the low altogether.
Farmers who are looking to optimize the exchange rate advantage on grain sales are going to get the best results contracting into the delivery slots where the underlying U.S. basis is relatively firm. For both corn and soybeans, the strongest basis bids currently available are through the summer months (May through September), where a combination of carry and export potential holding domestic bidders competitive create the firmest prices. If the Canadian dollar starts to firm in late January or early February, that’s the time to be making July and August sales.
Concerns over the impact of low oil prices on the economy prevented the Bank of Canada from raising interest rates in December, which at 1.75 % is a full half per cent below the U.S. Federal Reserve’s 2.25 % rate. However, with oil prices down 40 % over the past few months, it’s widely held that the Bank of Canada isn’t inclined to adjust interest rates upwards in their early January policy announcement. We really need to be dialed in on oil prices, looking for a sign that the loonie is about to rise from mid-January forward. The value of the Canadian dollar has a huge impact on Ontario grain prices. We can’t afford to not pay attention to the current dip.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
