Considering the Bank of Canada’s Choices: Our Farm Future Lies In the Balance

I’m sure many of you are suffering from “loonie fatigue.” I’ve even heard one Canadian farmer say now we can buy cheaper tractors down south.  It is true.  With our loonie reaching parity against the US greenback, the long national wait for superiority has ended.

It’s so silly.  I was reminded many years ago from an American farmer in Hillsdale Kansas.  After writing a particularly smarmy column about those hated Americans, he wrote back and said I was showing my insecurity.  In fact he’d visited Canada many times and he didn’t think Canadians held the hallowed high ground over the Americans.

Clearly, he was right.  As Canadians we cheapen ourselves when the only thing we have to offer is why we’re not like the Americans.  Having the loonie hit parity is just like that.  The US greenback has been in a free fall lately.  The Canadian dollar against other currencies is not as impressive.  However, as Canadian farmers navel gaze it usually means a quick look across the border.

Needless to say there are far more important issues regarding our currency than buying that quintessential American tractor or combine south of the border.  It cannot be ignored that the high loonie is destroying some long held myths about the Canadian agricultural economy.  Not only is it destroying some myths, its certainly taking out parts of the larger Canadian manufacturing and agriculture and food economic sectors.

Of course the biggest watch dogs of the Canadian economy are Prime Minister Stephen Harper and Finance minister Jim Flaherty.  Their economic fiscal policy constantly buttresses the economy.  However, it’s Bank of Canada governor David Dodge who gets to stir the ship from day to day.  His monetary policy surely will have to be re-jigged with a 16% increase in the loonie since January.  I don’t think ay honest person saw that coming.

This is what David Dodge had to say in his recent speech at the Vancouver Board of Trade.

“We need to assess the effect of movements in the exchange rate on the balance of aggregate demand and supply in the Canadian economy.” (Bank of Canada Governor David Dodge)

Translation.  Whoa Nellie, the sudden rise in the loonie is hitting the fan!  I’d better re-think what the Bank of Canada was going to do!  Well, it might not have been quite like that, but I think you get what I mean.  Watch for future measurements of economic growth as we go forward.  There should be clues of what’s happening in our economy.  Expect the October 16th Bank of Canada interest rate announcement to be neutral.  Or should I surmise that we might even see an interest cut?  We’ll see.

Intrinsic in this debate is whether our economy will react like it always has.  For instance in the past interest rates, unemployment rates, the money supply, inflation numbers all interrelate with each other to impact the Canadian economy.  Oil prices have surely aided in the road to parity for the loonie.  The question is are we headed to $1.05 or even higher.  What factors might come into play to forge that change.  Are there any structural differences within our economy in 2007, which will facilitate that change quicker?  How will this affect Canadian agriculture going forward.

Take oil for instance.  An $80 oil prices has been testosterone for our loonie.  How about if oil prices spike toward $90 or even $100/barrel?  If that happens invariably the loonie will go with it.  I’m pretty sure oil doesn’t have that in it, but we’re just one hurricane or terrorist strike away from it.  Combine this with the Canadian government’s penchant for budget surpluses and you’ve got a formula to keep that loonie skyward.

I know some of you might be groaning over those budget surpluses.  Yes, the federal government is projecting to run a $14 billion dollar surplus for this year.  Of course so far they don’t have money to invest in an agricultural safety net which works.  However currency traders look at the former.  Compared to our American friends with their problems in Iraq, our greater non-farm economy is fairing much better.  Getting some of that for the Canadian agricultural sector during this time will be important.

Key in this debate might be looking at changes within our global economy.  For instance will the US greenback have less and less influence as a reserve currency on world affairs as time goes by?  What will Chinese economic influence be going forward?  You don’t have to put money into China.  Heck, you can invest in Chinese companies working there in North America.  The world is growing smaller with information technology changing that paradigm every day.

For David Dodge all of this is a huge challenge.  An American tractor or combine might be cheaper now, but there is much more to the story.  Keeping your farm viable along with maintaining some semblance of a strong Canadian agricultural economy in this foreign exchange world is surely the rest of the story.