Is it the night before the big USDA surprise? Well, I dunno. I had a farmer call me today and said that he and his wife got in their Dodge pickup and took a tour of the American Midwest, stopping in Kentucky then through Missouri up through Iowa and then back through Illinois and Indiana to Southwest Ontario. According to that unscientific survey there is going to be one heck of a surprise tomorrow. And of course they want to know who Lanworth is.

By the time you read this it will be all over. My deadline with DTN always falls on a Thursday night so I will leave it to the prognosticators to come up with the reasons why things rolled out as they did Friday morning. What I’m finding particularly difficult in this wet southwestern Ontario fall is getting a grasp on foreign exchange. It seems our Canadian loonie and our friends with the US greenback are doing jumping jacks trying to make the news. The only problem is when the US greenback gets sick, the loonie feels its oats and Canadian cash prices go down. Trying to handle that inherent volatility in the Canadian grain markets is a challenge for everybody.

Our Canadian dollar seems so unsettled. In 2001 the Canadian dollar was hovering under 65 cents US. After that it rebounded and gained value until a point on November 7th, 2007 when it topped out at $1.10 US. Since that time the Canadian dollar plummeted to .7749 US on March 12th 2009 only to rebound in 10 weeks to .9265 US on June 1st. It then fell back to .8577 US by July 8th and then turned around again topping out at .9370 US on August 3rd. Today it closed at 94.13 cents US. This type of currency gyrations send the Ontario soybean basis reeling up and down like a yoyo.

Soybeans are particularly sensitive to the goings-on of the Canadian dollar. However you can magnify that across the Canadian farm landscape with our export related agricultural commodities. There has been a lot of talk lately about the difficulties in the Canadian hog sector. However, if I suddenly wave my magic wand and gave us all a $.75 dollar how do you think those porkers would feel? I think you know what I mean. For many years since 2000 the Canadian agricultural sector grew because we can export with a tremendous advantage simply based on foreign exchange. However when the Canadian dollar gets stronger and moves toward parity with the US dollar everybody has to compete a little harder to maintain those export markets. For almost everybody in the Canadian agricultural sector, that’s a pretty tall order.

On my speaking tours in the past I usually use one line that captures a Canadian audience. Usually my talks have a foreign exchange component to them because simply put that is so important to any part of Canadian agriculture. The line I often use is our American friends don’t really think about foreign exchange. If you asked an American farmer about the value of the US dollar, they would turn to you and say what you mean a dollar is a dollar? On the other hand Canadian farmers think about the value of foreign exchange every day. The loonie’s temperature is measured across every coffee shop throughout Canadian farm country.

Of course the great navel gazing in Canada always has to do with looking to the south and either wanting to do it their way or trying to avoid it altogether. So it is with the value of the Canadian dollar. We can talk about what determines the value of the Canadian dollar all we want but the biggest influence on the Canadian dollar is the inverse relationship it has with the US greenback. When the US greenback goes down the Canadian dollar goes up and vice versa. Now that the US greenback has been falling below the 76 level on the US index, the loonie is feeling its oats. So much for the cash value grain in Canada.

Of course the question is what is going to happen to the respective values of both these currencies and how will that affect Canadian agriculture? Well let me tell you. You don’t take your Dodge truck and drive through American farm country to get a feel for what those currency values are going to do. It’s up to currency traders to determine that value along with the Federal Reserve and the Bank of Canada. With Australia raising interest rates last week, you can bet if Canada does that you’ll see the loonie go over the par level with the US dollar in an instant. It’s my bet that that doesn’t happen and that the Bank of Canada maintains their interest-rate policy to keep that loonie below the US dollar. Even though our Canadian economy is in a relatively stronger position than our American friends, the strong loonie has the capacity to take that down.

I also want to say that doomsayers of the US greenback are being way too premature. You can talk all you want about other countries replacing the US greenback as the world’s default currency but I don’t believe that. The Chinese are not going to sell their American dollar reserves. Go anywhere in this world and you’ll find US dollars are still King. However what you might find is with the relative weakness of the US economy continuing. There may be a movement among some countries to use more regional currencies like the Euro and others. That would be negative for grain futures prices but at least at this time I still think that is a long ways away. Understanding the US dollar though is very important for all Canadian farmers.

At the end of the day, “its all about the money.” I cannot see the American dollar continuing its free fall. Sure the US economy is still very soft, but the last time the US greenback got low in April 2008, it rose from 72 to 88 over the following eight months. If that happens this time around, the loonie is set for some big trouble. Did somebody say 84 cents US?

So whatever happens with that October USDA crop report, remember, its only part of the story for Canadian farmers. Foreign exchange affects us deeply in Canadian farm country. Ignore it at your peril.