A Much Higher Loonie: In This New QE World, It Looks Straight Ahead

   What does a $1.40 US Canadian loonie do for you?  Well, I guess if you are a Canadian livestock farmer you just fell off your chair.  There’s been no question over the last few weeks as the loonie has moved to $1.03 US, there’s been a lot of gnashing of teeth over our testosterone induced loonie.  Ditto for the rest of the Eastern Canadian economy.  A strong loonie is never good for an exporting nation and if it ever hit $1.40 US, we all have to head for the hills.  Canadian agriculture would have a hard time surviving in its present form.

I have thought about that a little bit this week as I dipped my combine header into what looks like a pretty good soybean crop.  The beans were dry but the sample had just too many green ones in it, so I’m waiting a little bit.  Needless to say, soybean prices have been so high lately and soybean basis is so contingent on the value of the loonie, sometimes I think they go together.  So in my musings about the loonie going to a $1.40 US, I was thinking about all the soybeans I have in my back pocket this fall.

Of course the soybean market has had a life of its own recently.  My recent tour for Farm credit Canada, with soybean prices at record levels, I would end each presentation by saying how vulnerable we are.  Of course now, with soybean prices having decreased about $1.70 per bushel since I gave that tour, maybe I should say we were vulnerable.  Our noncommercial friends have grown weary of soybean prices in the $18 range, which has led to the selloff.  No fresh news every day at these high price levels has this tendency to send things the other way. For whatever reason, it is what it is.  I said we were vulnerable and I think I nailed that one.

Okay, so saying we are vulnerable at record price levels isn’t rocket science.  We’ve also seen a softening of the basis for grains in Ontario as harvest has started and things will likely get messy for at least a few weeks.  I think basis levels especially for corn will be a bit wonky while as we sort out how much corn crosses the US border.  Needless to say, prices are still historically high.

So that takes me back to the loony reaching $1.40 US.  Are you calling me crazy?  I’ll take that designation if you want.  Our American friends have simply got me thinking about our bigger economy and how it may end up.  You will remember last week that I wrote about quantitative easing and its effect on Canadian agriculture.  I also watched a quite famous economist today say that he thought quantitative easing would absolutely do squat for the American economy.  So sometimes with all the money that’s being pumped into the American economy, I think it will only cause big inflation.  That will be combined with a much lower US dollar and a much higher Canadian loonie.  So as Canadian farmers, how are we supposed to adjust to that?

With a loonie at $1.40 US, I think we adjust poorly.  Interestingly enough, I was watching a market commentary tonight on Canadian television about how Canadian hog producers just couldn’t make it work at these high feed prices and high foreign-exchange values.  That is what it is and I will let them tell that story.  I have great respect for Canadian livestock farmers.  The question is will quantitative easing and the fiscal cliff south of the border send that loonie a lot higher than we ever imagined?

I think that is an interesting question.  You-all know that I often question Bank of Canada governor Mark Carney and his musings on the Canadian economy.  Mr. Carney has held the Bank of Canada interest rate at 1% for several months now, while scolding Canadians to stop spending money.  He hadn’t dared raise interest rates because that would put fire under the loonie, causing all kinds of unemployment and other angst.  Then we have our American friends with there QE.  What happens next?

Key will be if Mark Carney, our Bank of Canada governor actually does something.  Canadians are growing weary of the scolding with no solid action to raise interest rates.  Canadian farmers are much more interested in investing our money based on his actions versus his platitudes.  It’s almost like; he doesn’t know what happens next.

So will it be $1.40 US loonie?  Perish the thought.  However, it would no longer surprise me if we went significantly higher at some point in the next 2 years.  The dynamics of American quantitative easing along with the musings from the Bank of Canada and our finance minister is not giving me confidence. Maybe that loonie is still too cheap yet?  As I roll through my soybeans next week, that surely will be on my mind.