The Soaring Loonie: Farming in Our New 93 Cent World

It has been a very intriguing spring if you are a Canadian dollar.  Last week the dollar broke threw the 92 cents US mark, a far cry from the 84 cents and change it was fluttering around as the year dawned.  It would seem $1/litre gas prices go together with a loonie over 92 cents.

Remember that.  As much as I try to ignore it, our dollar loves the price of oil.  It seems destined to stay being a “petro-currency”.  With a world hungry for energy resources, investing in a currency backed by solid energy reserves seems to be a no brainer.  Figuring out what that means for the rest of us will be the challenge.  Currency traders aside, I don’t think there are too many of us who sit on the edge of our seats watching the loonie.

For the record the loonie topped out at 91.05 cents last June.  So lets not get too excited.  After that it dipped down to 84 and now it’s over 92 cents.  What’s it mean?  Let’s just say this.  As long as the loonie is a petro-dollar I can’t see it falling off the chart.  I don’t think its got much more in it.  $1/ litre gas prices won’t last forever.  At least let’s hope so.

Of course it begs the question what does the Bank of Canada think about this.  They have held the bank rate at 4.25% for the last year.  Yes, that’s stability for you, but surely inflation is going to rear its ugly head.  Ditto for some economic slowdown with this high dollar.  What you say?  I know it’s complicated.  That’s why we have a Bank of Canada monitoring these things all the time.

The hammer is always interest rates.   The balance that has to be maintained is inflation, versus economic growth, versus unemployment, versus currency fluctuations.  If the balance gets out of whack strange things happen to the economy.  Having an interest rate at 4.25% over the last year is a reflection on how stable the economy really is.

By cutting interest rates that acts as a stimulus to the economy.  It makes the cost of money cheaper.  If money were like oil, a cut in interest rates would be akin to heating up oil.  It would get looser and run all over the place.  At the same time if interest rates are hiked money gets colder, doesn’t run as much because it grows thicker.

At the same time interest rates affect currency fluctuations.  Usually the central bank will try and control the loonie by adjusting the central bank interest rates.  An interest rate cut will usually be negative for the dollar; an increase is like more testosterone among young men, the dollar taking off.  Having the loonie surge to 92 cents over a period of four months with no interest rate increase shows us how strong the Canadian currency currently is.

The problem with a high dollar is the agricultural sector starts to slow down.  Cash prices for grain get lower as basis levels turn negative.  Exports out of Canadea to the US cost more which only makes things worse.  You can bet that Bank of Canada’s David Dodge is keying on this.  With the dollar feelings its oats, keep an eye on those jobs numbers especially in Ontario.  They’ll be key to a Bank of Canada rate adjustment in our future.

Sitting here in Ontario, you don’t see the white-hot economy is places like Alberta.  They say in Northern Alberta if you have a pulse, you have a job.  That kind of economic stimulus is overbearing and especially tough to deal in such a big country.  Finding somebody to work on a farm in Alberta is darn near impoosible.  When David Dodge and the Bank of Canada makes decisions all the different regions of Canada are factored in.

Of course it all begs the question, what’s the dollar going to do next and what does that mean to me.  It’s kind of funny, when the dollar hit 91 cents in June 2006, most of the big name economists said it was going to 95 cents.  Then after it went to 84 cents in January 2007 many were saying it was going to 81.  Now it’s at 92.  Simply put nobody knows.  What happens on some unexpected Tuesday factors in too.

It would seem the difference now is oil.  Has that put a relatively “high” bottom on the Canadian dollar?  It would seem so.  I mean it’s hard to imagine going back to a 75-cent dollar with oil being the world’s vice.  The next question is how long will oil stay that way?  Whatever the answer is, one thing is clear.  Oil and our loonie have come to love each other.  Knowing how long the romance will last is key to our short term agricultural profitability.