American Agriculture’s Poisonous Foreign Exchange Problem

Black Swan US Agriculture
Over a writing career of almost 30 years and a farming career of even longer, I have heard many guest speakers.  Of course many of those presentations have been on so many different topics over the years.  Back in the 1980s I listened as analysts talked about grain surpluses and 20% interest rates.  As the years clicked by topics included farm financial relief and eventually biofuels.  What I enjoyed the best was when the big-name American analysts would come to Ontario to talk about grain prices.  They seemed to be from a different world.

Of course, as I’ve said many times we love our American friends.  I have listened to a multitude of American analysts in Canada talk about grain futures prices and the vagaries of world grain markets.  It’s all great stuff, except there is always one glaring omission.  Most American analysts don’t talk about currency fluctuations in Canada when they come to speak.  So many times we are left wondering not necessarily about grain futures but how we handle the Canadian dollar volatility.  In 2015 and 2016, it remains one of the biggest challenges for Canadian grain farmers.

This is not a knock on my American friends who speak about grain prices.  They are all great people with great knowledge about our grain price situation.  It is simply an acknowledgment that as Canadians foreign exchange is something we think about almost from the womb.  On the contrary American farmers really don’t have it in their DNA.  The specter of any type of foreign exchange fluctuation with grain prices and how it affects the fundamentals is not top drawer.  However, in 2016 that seems to be changing.

The US dollar rose significantly in 2014 and 2015.  We know that.  It had a major impact on commodity prices over that period of time and especially in the last few months.  As a Canadian, I am benefiting because of the precipitous drop in the Canadian dollar versus the US dollar.  Similarly, as Todd Hultman pointed out in his column this past week, the Euro was down 10%, the Russian Ruble down 19%, the Ukrainian currency down 34% and the Brazil Real down 33% vs. the US Dollar in 2015.

What that means is that the American farmer is left holding the bag.  Grain futures prices may have retreated over the last couple of years, but the Russian farmer is receiving more Rubles that he received last year.  Ditto for me as well as the Ukrainian farmer and the Brazilian farmer.  So our incentive is to plant fencerow to fencerow in 2016.  With our American friends having the strong currency, it means they have the lowest prices and they are taking the brunt of the pain.  The question is how will they react to the pain or does the pain just get worse in 2016 and 2017?

The classical agricultural economist would say if the economic pain through lower prices and revenues gets too great it would eventually decrease US grain production.  I don’t know if I see that in 2016 yet.  Needless to say, its happening and because of the world currency situation it means that US grain competitors have the exact opposite incentive.  They are not feeling pain; in fact they are feeling profits, which will have the effect of making the world grain glut even bigger.  You might say it’s all about the currencies, but from an American farmers perspective I might be tempted to call it poisonous.

What we need is some fresh news.  What we need is a black swan event.  What we need is oil back at $100.  The American farmer might be in a poisonous situation now, but eventually we will probably get one of those three things.  The tables will change; I’m just wondering about how much pain they will have to endure.

Of course, from a Canadian perspective there should be no smugness.  If the situation reverted back to 2012 a par loonie would put us back to 1981 without the interest rates.  I’d be getting calls to go back to Ottawa to pound my fist on the table for that agricultural safety net funding we still don’t have.

I say that in an economic environment were some Canadian economists of actually talked about a $.59 loonie in 2016.  At the same time the loonie has gained about three cents in the last two weeks.  With that as a backdrop, I hope my American friends who are grain analysts continue to come to Canada.  I hope they continue to tell us about their grain world.  In 2016 it’s about currencies right now and they surely know that.  American farmers are in the cross hairs.  The great rationalization is zeroing in on them.  They are not numb to the pain like we are.  They are feeling it and that black swan can’t come soon enough.