THE MARKETS: Weak loonie boosted crop prices, also inflation – but what do we make of now strengthening loonie?
If you ever have a city person ask you what you do on your farm, tell them that you’re a currency trader.
First of all, that reply generally creates some interesting responses, and more importantly; it’s true. One of the biggest variables in both our farm business’s expense and revenues is fluctuation in the value of the Canadian dollar, and in the summer and fall of 2023, it’s actually been the biggest variable driving grain and oilseed prices.
In the late summer and fall of 2023 the Canadian dollar has performed very poorly relative to other world currencies. Back in early November 2021, the loonie was trading at US $0.80, in the first days of November this year, it was just over US $0.722. Most of that notable drop in the value of the Canadian dollar has happened since the start of August this year, and translates directly to our commodity prices. Back in mid-September at the start of soybean harvest, a farmer could book soybeans into the Hamilton terminals for December delivery at $13.20US, (or $17.60 Canadian), and by mid-November, soybeans delivered into Hamilton for December had crept up to $13.50US, but because of the sliding loonie, that price was up to $18.62 Canadian. Although the real price of soybeans only went up $0.30 per bushel in US currency, Canadian growers saw a full $1.00/bu price increase thanks to our declining dollar.
This weakening in the Canadian dollar is also one of the drivers of inflation because everything that Canadians need to import suddenly costs more. Take for example a really simple case in the grocery market. If a store needed to bring in $1,000 worth of US oranges back on August 1, when the loonie was worth US $0.766, those oranges would cost CDN $1,305. For that same market to bring in the same US $1,000 of oranges on November 1, when the Canadian dollar was trading at US $0.733 would cost CDN $1,385. The $80 increase in the same US $1,000 of oranges is 8% inflation to the consumer trying to buy fresh fruit.
It is somewhat astonishing to me that central banks seem to regard interest rate adjustments as their only tool in managing inflation. Certainly, if we could take steps to strengthen our currency it would be very helpful in slowing or stalling inflation.
In agriculture, we are creators of commodities, so the inflation caused by a declining dollar is actually a raise in our farm gate receipts, so the challenge for farmers is how to we manage our business in order to manipulate currency swings to optimize profits? It is obviously a lot easier to say that we’re going to sell our production when the dollar is low and purchase our inputs when the dollar is high, than it is to actually pull it off, but it is still the goal. I’ve been in the grain business for a little more than three decades, and I find that it’s a lot easier to anticipate the grain futures markets than the currency markets simply due to the complexity of the market structure, but there are a few “light house markers” that we can use to help guide the way even if it seems a little foggy.
The Canadian dollar follows the price of oil. Canada is essentially a resource economy, so if the price of oil is strong, then demand for the Canadian dollar is strong. Crude oil values peaked at about $90 per barrel in early September and have since slipped down as low as US $72, and the downward curve in oil prices nearly perfectly correlates to the downward move in the Canadian dollar. As we see oil values strengthen, the Canadian loonie will track right along, so if you’re a farmer looking for a chance to market grain and oil prices are heading higher, it’s time to get on the phone and talk to some grain buyers.
The bottom end of where the Canadian dollar traded in early November, (US $0.722), was a multi-year low. The thing about multi-year lows is that statistically you’re more likely to start heading back up, than it is to go even lower. There is no science in this strategy at all, just math, and the funniest thing about math is that you can’t ever argue with it. Barring some calamity or “black swan” event, the Canadian dollar should be firmer going forward.
Because commodities trade in a global marketplace, their value is usually expressed in American dollars and the last part of the transaction with an Ontario grower is converting the price into Canadian funds. Through most of this year’s wheat, soybean, and corn harvest, we farmers have been reluctant to make sales because it feels like prices are too low. While I think that there are a lot of reasons for commodity futures to rally in the months ahead, we need to be mindful that we’re likely waiting for that in the midst of a strengthening Canadian dollar, and that could soften the gains that the Chicago futures make.
Steve Kell is a Simcoe County crop farmer and handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.