By John DePutter & Dave Milne – March 6, 2018
The Canadian dollar dipped below 77 cents US on Monday, its lowest level since last July as fears of a trade war cast a gloomy shadow on the Canadian economy’s prospects.
– CBC, Mar. 5, 2018
What it means:
Regardless of what it may reveal about the broader Canadian economy, the weaker loonie is providing a secondary boost for Canadian farmers.
Thanks to ongoing dry weather in portions of Argentina and the U.S. southern Plains, corn, wheat and soybean futures have already been marching higher for much of 2018 and the decline in the Canadian dollar is putting more icing on the cake for farmers in the form of stronger basis levels.
In Ontario, the combination of higher futures and the lower dollar pushed plenty of old-crop corn prices to their highest in seven months on Monday (March 5), and an elevator basis of $2.25 to $2.30 had 2017-crop soybean prices in the province over the C$13/bu mark. On the Prairies, old-crop canola cash prices have pushed well past the $11/bu mark.
As was noted in the 2018 economic outlooks released by Farm Credit Canada this week, a decline of 5 cents US in the Canada-U.S. exchange rate can raise canola profit margins by as much as 25%.
Remember too, that it has been the weaker Canadian dollar that has supported Canadian farm income over the past few years of generally weak commodity prices – a time when U.S. farm income has tanked from the 2012-13 highs.
As shown on the chart here, the loonie has now lost about 4 cents since hitting its most recent high around 81.5 cents US in early February. It bounced higher Tuesday morning but only by enough to retrace one day’s loss.
For this year, Farm Credit Canada is projecting a 3.1% increase in overall Canadian farm cash receipts, (assuming the Canadian dollar averages around 78 cents US for the entire year). That compares to the south of the border, where the USDA has forecast that farm profits will drop 6.7% this year to $59.5 billion, the lowest since 2006 and down 52% from a record $123.8 billion in 2013.
Where to from here?
So, where might the Canadian go from here, given its importance in terms of Canadian farm income?
No solid low in our currency is yet seen, but rather than offering any predictions about the loonie’s future direction we might instead suggest producers keep watch on a few important factors.
Obviously, the fallout from the U.S. government’s proposal for tariffs on steel and aluminum imports – including the possibility of a larger trade war – remains a significant factor, along with the ultimate fate of the ongoing North American Free Trade Agreement renegotiations.
Movements by the US Dollar Index can factor into the US/Cdn exchange rate. Price trends for crude oil and other raw materials can sometimes be leading indicators for our currency.
Plus, Central bank interest rate decisions could play an important role, with many analysts expecting US interest rate advances to outpace those in Canada.
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