Canadian farmers have a very clear sense of the impact of the exchange rate on the prices which we receive for our crops. In Canadian dollar contracts the basis portion of the price moves up and down in order to account for variations in the exchange rate, but when the U.S. dollar gains strength, does that have an impact on commodity prices?
The answer of course is yes. As the United States harvests one of the biggest grain crops of all time this fall, an important component of the use of this massive crop is export demand. As the U.S. dollar rises in value, the cash price in American currency has to drop in order for the American production to remain competitively priced in the world market. Where we see this in our cash prices is in an offset between the rise in the U.S. dollar and the decline in CBOT commodity futures.
The chart below shows the fluctuation in the value of the U.S. dollar over the past five years. The most important piece for us to notice is the sharp rise in the value of the U.S. dollar in the third quarter of 2014. In the past three months, the U.S. dollar has risen almost 70 basis points from 80 in June to nearly 87 at the end of September. This 9% increase in the value of American currency is essentially offset by a 9% decline in the value of commodities measured in U.S. dollars.
Theoretically, if CBOT soybean futures were worth $10.00 when the U.S. dollar index was at 80, and they are worth $9.13 when the U.S. dollar index is at 87, then the real value of soybeans did not change. The 9% increase in the currency value was offset by a 9% decline in the US cash value. Simply put, the price of soybeans would not have changed if you were buying them in Euros.
Certainly the record size of North America’s 2014 has had a far more negative impact on grain futures than the strength in the U.S. dollar has, but unlike trying to manage the size of the continent’s grain supplies as part of our market program, we have some capacity to take advantage of shifts in currency values as part of our crop marketing strategy.
There are really two core trends to keep in mind as you contemplate ways to market grain this fall. The first is that as the U.S. dollar rallies, the Canadian dollar tends to weaken in relative value, and this means that our Canadian dollar basis rallies in order to offset the impact of the rising American dollar on U.S. futures prices. If you have old basis contracts, the current strength in the U.S. dollar is a problem because it pushes futures lower, and since the basis is already locked in, you have no ability to recover that hit in capturing an improving Canadian basis. Flat cash transactions effectively “currency correct” themselves, but any sort of basis sale carries with it an implied exchange rate risk. If you can time the sale perfectly in terms of hitting the low in the Canadian dollar and the high in the U.S. dollar, then it could be a great marketing decision, but you are assuming some risk in order to be in position to capitalize on the benefit.
The Americans need to export a lot of grain in the 2014-2015 crop year, which means that they need to stay competitively priced in the world’s other currencies. A recovery in CBOT futures values will struggle until we see a retracement in the strength of the U.S. dollar. Make certain that you do not ignore the relative value of the U.S. dollar index when considering the direction of the futures market.