Hard Currency and Our Grains, Its Complex

Throughout my life I’ve had the opportunity to travel to many far-off lands. Some of it was easy flying to English speaking countries in my youth, where I could communicate very easily and exchange money almost everywhere. What was more difficult was going to so called third world countries, which were poor, didn’t speak the same language that I did and certainly didn’t offer the same security which I had become used to growing up in southwestern Ontario.

Years ago, I was lined up at an airport in Trinidad and Tobago and I was approached by somebody who wanted to buy American dollars from me. In my naivety I asks why and mumbled out something to this person couldn’t they tell I was Canadian. Well, that certainly wasn’t fair, needless to say that person moved on. However, I wondered why this person was using me for their personal foreign exchange agent. That’s how green I was back in the day travelling the world as a young man.

What I didn’t understand then, but I’ve come to understand later is that not everybody had the same opportunities as me. There are such things as hard currencies like the US and Canadian dollar, the Euro and others which are backed by big rich economies and central banks. Then there are countries that are not rich and have no means to create real wealth unless they can tie it to hard currencies. In order to get hard currencies, they need to get them in exchange for goods produced in that said country. Third world countries don’t always have numerous ways of getting that. It means that in places like Trinidad where I was traveling a large informal market existed for foreign currency. Ditto for many other small relatively poor nations. That’s one of the reasons I was approached on the street, so the individual could get hard currency the easiest way possible.

The ramifications for agriculture are tremendous. For countries that produce agricultural commodities or need them, they have to have a means of foreign exchange to pay for them. That’s one reason why in our corn and soybean agricultural economy we hear so much about Argentina. That is one country I’ve never been to, but as we all know, they grow a lot of soybeans and corn and are the number one exporter of soybean meal to the world. Generally speaking, they have always had export taxes on soybeans. There are a few reasons for this, but the chief reason are soybeans are a desired good on the world exchanges which are paid for with US dollars. By taxing soybeans, the Argentinian government has the ability to link tax revenue to some real hard currency.

This past week we saw more evidence of that as the Argentinian government announced a law that exporters of soybeans, soy by-products, corn, wheat and other agricultural commodities had to sell their hard currency in 15 days converting it to Argentinian Pesos. This Peso has weakened approximately 26% so far this year. The government needs the currency supported as there is recession, accentuated by Covid 19. At the end of the day, it’s an example of a nation highly dependent on agriculture, which isn’t a rich country. Its government is doing what it must, to latch onto some real value to trade with the rest of the world.

Of course, the US dollar is the hardest currency of all, and it is king. Go anywhere in the world and you generally can trade in dollars. I’ve only been in one place where I couldn’t buy them and that was in rural Bangladesh. However, looking back its obvious why. They had nothing of value to offer for US dollars at the time. That’s all changed now. Needless to say, even though the US dollar is king, its value is traded on exchanges every day.

In her agricultural column earlier this month, “Grains and the Dollar: An Imperfect but Negative Relationship”, my colleague Elaine Kub tells us the US Dollar has fallen in value 11% since its March high of 102.8 on the US dollar index. During this time, Chicago SRW wheat futures rose 6%, corn futures rose 20% and soybean futures rose 30%. We know it’s not all because the US dollar declined, but that fact is always is positive grain futures. It lubricates demand from all over the world, including Canada. In fact, as of today, the US dollar is at its lowest level in two and a half years.

As Canadian farmers, none of this is really news. Our Canadian dollar, that thinly traded currency which is our darling moves in opposite directions of the US dollar. With the US dollar declining, the Canadian dollar has been gaining. That means an erosion of Ontario and Quebec basis levels, which none of us like. However, we’ll take those higher futures prices, but it doesn’t always happen this way. The key is catching the right balancing act between the gyrations of the US and Canadian dollar.

That delicate balance between foreign exchange and our Canadian grain prices will continue to challenge. However, when you think about it, think about that person asking me to sell US dollar in Trinidad many years ago, or that place in rural Bangladesh that couldn’t do it. Think about the Argentina farmers who chafe under currency restrictions. Think about how you as a Canadian farmer think of the changing value of the Canadian dollar. Simply put, foreign exchange makes our modern agricultural world go around.

Making it easier for the foreign exchange have nots in this world, will ultimately increase global agricultural demand significantly. Think of Africa and parts of Asia. Needless to say, that will be a post Covid19 challenge. Making as seamless as possible will surely help that foreign exchange paradigm.