We are entering what could be a very different time for Canadian agriculture. The urban media was lit up today with news that the Canadian dollar had once again reached par with its US counterpart. Essentially, we’ve been there before and not too long ago but some in the urban media like to think it continues to be a story. Despite that, I think as farmers we have been gearing up for this new “at par” world for quite some time now. Visit any farm coffee shop across southern Ontario and you’ll surely hear how that new “at par” world is affecting our grain prices.
For those of you who read this column regularly, you’ll know that I’m not a big believer in the loonie staying above par for any sustained period. The recent strength in the Canadian dollar has had everything to do with the US greenback being abandoned by the US Federal Reserve as our American friends go about monetizing their debt. It is interesting. In Canadian farm circles you often get American commentators making presentations on how the value of the Canadian dollar follows the price of oil. I disagree with that wholeheartedly. I believe the Canadian dollar is the inverse of the US dollar. So with the US greenback going all to heck, there is only one place for our dollar to go and that’s up.
It is leading to some interesting conversations regarding grain prices. For instance this morning I was in Darin Newsom’s webinar on corn markets. As you all know the price of corn is pushing the six dollar level on futures and the DTN national cash index is about $5/ bushel in the United States. Almost every day there is talk on DTN about how high corn is going to go and about these market testosterone induced days. Meanwhile, elevator prices for corn in southwestern Ontario are about $4.65/bushel, putting Ontario corn at about the cheapest of any in North America. It’s that way because of harvest glut but also because of the par loonie. Many corn producers in Ontario and Quebec are surely throwing their hands up and asking what all the fuss is about.
With the Canadian dollar higher it’s pretty obvious to me that we are much closer to $3 corn and then we are $5 corn. That would happen if we had a liquidation of the noncommercial interests in the corn market followed by a rising loonie. That would put us at $3.50 corn in a heartbeat. It makes managing our business much more challenging when we have a currency war happening in the background.
Let’s be clear about this. Sure, corn is a big story but probably the bigger story is how our American friends are letting the American greenback go. The US dollar is the straw that stirs the commodity drink. Its weakness is like throwing gas on the commodity fire. Add a supply scare into the mix like we have with corn and it makes it that much more explosive.
As I said earlier it also makes managing your own business somewhat more difficult. In Canada we have always measured “Canadian basis” against the futures price. Increasingly, that is changing because of the non-commercial interests in the grain market, which bear relation to nothing on a basis calculation. With the American dollar weakness equating with the loonie strength we are into a territory most of us have never managed before. You can almost multiply this across the whole Canadian agricultural landscape involving every commodity.
It is a bit of a wild time. I know that grain companies have been receiving calls from farmers to get out of grain purchasing contracts and they are willing to send the money to do that. They are that bullish. The loonie is at par. Our world is just getting a little bit crazy.
Of course imported goods into Canada will be cheaper and that means that there will be some tremendous deals on farm machinery this winter. I know that there are some tremendous opportunities available to both purchase and lease new equipment based solely on the value of the Canadian currency. This is an aside to higher commodity prices.
If I seem a bit cautious and jittery, I am. I’m that way because aside from the crash in 2008, I find these times we are in now to be a totally new slate. We’ve got a weak US dollar, zero interest rates, a par loonie and a tremendous position by noncommercial interests in the corn market. The risks simply are high and the pressure to make the right decisions, are even higher.
The pinch point for grains and basis in 2011 will surely come in April, May or June. If the 2011 crop gets in trouble at the starting line, all bets are off. Of course much will depend on that inverse relationship between the US greenback and our lovable loonie. Planning ahead, use a bit of caution. We’re going into some pretty rare air. How we manage it, will surely be a challenge.