Throughout most of the past four years, while the U.S. and European economies have wrestled with recession and sovereign debt issues, the Canadian economy has become a bit of a world leader in terms of our stable banking system and relatively solid economic results. However, with less than exceptional employment numbers recently released in Canada, and a surge in the recovery south of the border, the Canadian dollar has started to slip backward from its recent position of strength.
Reports over the past few days from the TD Bank, CIBC, HSBC, and Bloomberg all suggest that the Canadian dollar is likely to slip lower through the balance of 2013 and is expected to settle in the US$0.90 to $0.92 range towards the end of 2013 and the early portion of 2014. If these reports are correct, then we could see at 10% decline in the value of the loonie between the levels it was trading at on May 1 and where it might finish the year.
This development is actually great news for Ontario agriculture. We live in a region which exports half of its soybean production, half of its wheat production, and and in recent years an ever increasing portion of its corn. All of our grain is essentially valued in US dollars, and then converted to loonies in the last stages of the transaction. The less that our loonie is worth, the more loonies the farmer can expect to receive for his grain. In dreadfully simple terms, if the dollar drops by 10%, then we can expect prices to rally 10%, (assuming everything else remains equal).
The underlying reason for the impending devaluation of the Canadian dollar is the result of two factors. The first is lower than anticipated job creation numbers, and a weaker job market. The second contributing factor is a down turn in commodity values. Historically the Canadian dollar goes as the prices of oil and gold go, and at this point neither of those commodities are moving higher. Certainly a lower dollar makes the Canadian labour force more efficient relative to other economies, so a downward shift in the dollar might be exactly what the doctor ordered in terms of stimulating the Canadian economy.
In terms of grain prices, any decline in the value of the Canadian dollar will be reflected in the basis levels which will rally higher in proportion to the loonie’s decline. If you are inclined to sell grain on basis contracts, it would be advised to not use that marketing strategy until we get a sense of the accuracy of the banker’s recent predictions. (There is a possibility that the economists are as accurate as the weathermen). Assuming that the banker’s predictions are correct, we will see basis values improve through the balance of the year.
If the Canadian dollar can trend lower it will prove useful for the Ontario grain industry as it makes domestic grain values more attractive in the export markets. In the very near future, Ontario will begin to harvest one of the biggest soft red winter wheat crops ever produced here. To date there have been extremely few sales of 2013 Ontario wheat into the export market, so a lower dollar can only help in developing these opportunities.
A weaker Canadian dollar won’t solve all of our challenges. It does nothing to impact the production weather or the price levels in the US-based futures markets, but it is good for stimulating export demand, and for raising domestic cash basis, both of which should be useful for gross farm revenue. Just don’t plan on going south next winter . . . Besides, Winnipeg is beautiful in February.