Lowering of $ Serves as 'Double Whammy'

by 5m Editor
25 October 2008, at 6:28am

CANADA - The falling value of the Canadian dollar is providing some welcome relief to Canadian farmers, especially those who produce the most export dependent commodities.

Canadian Dollar Slides on Lower Commodity Prices

“Over the past year the Canadian dollar has averaged roughly par with the U.S. dollar,” recalls Saskatchewan Pork Development Board policy analyst Mark Ferguson. He notes, about a year ago it got up to $1.10. However most recently it has even dipped below 80 cents.

“Many experts have suggested the dollar is following commodity prices,” Ferguson points out. “The shift in the dollar definitely seems to be related to the financial crisis around the world. People are apparently buying U.S. dollars because this has traditionally been one of the safest investments.”

“October has certainly not been kind to the Canadian dollar,” observes Informa Economics vice president Dave Reimann. “In the last two weeks or so the Canadian dollar has lost about six and a half cents. Actually the greatest portion happened within just the last week.”

Reimann finds it hard to believe that within just a month, the last week of September, the Canadian dollar was trading at around 96 cents as opposed to bottoming out at just under 78 cents Friday (October 24).

Lower Dollar Eases Anticipated Grain Price Reductions

The Canadian Wheat Board released its October Pool Return Outlook for 2008-2009 Thursday (October 23). Price projections for milling wheat declined $24 per tonne from the September PRO, while expected returns for milling durum fell $37. Although the anticipated returns for designated barley held steady, the PRO for feed barley slid $5 per tonne.

“It’s a double whammy,” observes Canadian Wheat Board market analyst David Boyes.

On one hand, with the completion of the harvest in the Northern Hemisphere, we’ve got a record world wheat crop, 680 million tonnes. There’s also a big durum wheat crop and a big barley crop. The numbers are very big and they’re bearish.

“You combine that fundamental supply bearishness with the overall economic meltdown that’s happening, particularly in the United States but also globally, that’s affecting the demand side. You’ve got burdensome supply, slack demand and the two things are a perfect storm in terms of combining to give us lower prices.”

Boyes admits, “Probably the only thing that’s really helping this month is the weakness in the Canadian dollar. The Canadian dollar has become almost like a petro-dollar now. With crude oil prices crashing down below $70 a barrel this month from highs around $150 this summer, we are seeing lower demand for the Canadian dollar and we’ve see the Canadian dollar plunge to its lowest values in about four years.”

He believes the PRO is not down as much as it might have been had it not been for the weakness of the Canadian dollar.

Pork Industry Welcomes Lower Dollar

The lower dollar comes as particularly welcome news for Canada’s pork industry.

Ferguson is convinced the dollar’s decline will provide much needed relief for the entire agriculture industry given it is export based, but in particular the pork industry.

“The exchange rate touches every Canadian producer every day,” Ferguson observes. “Primarily because hog prices are determined in the U.S. and adjusted on a daily basis by the exchange rate to arrive at a Canadian price. At today’s prices and a par dollar, hog prices would be approximately $107 per hog. With today’s 80 cent dollar that price becomes $133 per hog. So the change in currency has resulted in a price increase of $25 per hog.”

Ferguson acknowledges, over time a lower dollar will result in higher feed costs which will partially offset the benefit of higher hog prices. None the less he is convinced, all things considered, producers obtain a benefit from the lower Canadian dollar.

He stresses, “We basically spent the entire past year working with a par exchange rate. That’s been a struggle for producers because seemingly what was a competitive cost structure for our business was thrown out the window.”

Ferguson believes an 80 cent or 85 cent dollar will also do wonders for the meat packing industry and any manufacturing business. “We’re not the only industry breathing a sigh of relief over this,” he says.

Improved Trade Prospects Expected in Specific Markets

Because the Canadian dollar has lost so much ground to its U.S. counterpart, Reimann expects the prospects for moving Canadian products into the United States to improve. He foresees increased movements of meats, canola oil and canola meal and other products that generally move into the U.S.

He also expects lower Canadian dollar to limit imports of U.S. corn and distillers dried grains which will force a greater reliance on Canadian products, primarily feed barley or feed wheat.

Reimann also foresees improved prospects for moving meat products, barley, wheat and canola into Japan because of the ground the yen has gained against the Canadian dollar. And, because the Chinese yuan has remained tied to the U.S. dollar, China’s purchasing power has also been going up. Reimann hopes that will result in sales into China that might not otherwise have been seen.

At the same time, however, several other currencies have also taken a beating.

“In general October has not been kind to many currencies,” says Reimann.

The euro, the Australian dollar, the Brazilian real have taken quite a beating, which means Canadian products going into those markets or competing with products from those countries will not gain an advantage from the changing exchange rates.

In terms of grain supply, Boyes is confident the completion of harvest means we shouldn’t see the big forecasters like the United States Department of Agriculture increase their supply projections anymore.

“We know now how big the crop is so most of the bearish news is in in terms of the supply side. The big question mark remains, what’s going to happen with world demand; how big is this global recession going to be; how is the behaviour of buyers going to be affected by a potential slow down in demand?”

Speculators Blamed for Sudden Crash

Reimann believes much of the previous rally was fuelled by unreasonable speculation so he is glad to see some of the sell off that has been happening.

“Now that we can shake out some of the speculative money, I think we can start to get down to a level where we discover true demand again and get back on that growth curve.”

Reimann remains convinced, “We’re still going to see some measured growth in countries like China and India where much of the base for the bullishness in commodities has been coming from all along.” He believes the pace of the rally simply got ahead of itself and it died by choking off demand with higher prices.

“In the long run I still think there’s a bright picture for commodities, just hopefully a little more measured pace and a careful rally as opposed to what we’ve seen in the past year.”

5m Editor