Bring Back the 75 Cent Loonie! Canadian Agriculture Gets Set To Adjust

Let’s be honest.  The loonie at par is really hurting Canadian agriculture.  The only way it isn’t hurting you is if you are member of the public service or in the American import business.  It’s not rocket science.  From a low of just under 85 cents in January of 2007 to par today and that isn’t good for anybody.

You would have thought the national media had declared Canada Day in September when the loonie reached parity.  It wasn’t anything to celebrate as far as I’m concerned.  Anybody can figure out what economic carnage a par loonie causes in Canadian agriculture.  That whooshing sound you hear is farm gate prices evaporating.  It would seem as Canadians we have a lot more to celebrate than simply having a thinly traded currency reach par with our American friends.

It might be insecurity run wild.  Or it might have been a slow news day.  Seeing Canadians on CBC’s “The National” in Detroit telling Americans their money was now worth the same as the greenback shows just how insecure some Canadians can be.  Most farmers shuddered at the news.  Everybody knows a 75-cent dollar would do most of us fine.

If you read the Agridome over 20 years, you’ll know I’ve always made points about the affect of the loonie’s value on farmer’s bottom lines.  That fact alone had me thinking this past week.  It is one thing to comment on our agricultural economy when the dollar moves fro m 65 to 70 or 75 to 80 or even 85 to 90.  However, what do I do know?  Do I talk about the loonie going to $1.05, or Lord help us $1.10?  I don’t know.  Simply put the loonie from my perspective is in some pretty rare air.  It’s dangerously high for the good of the Canadian agriculture.

Case in point is southwestern Ontario agriculture where I’m from.  It is one of the richest agricultural areas in Canada. The cash prices local farmers receive for their commodities is all based on US replacement prices.  Over time we’ve become used to high positive basis for grains.  However, now, that’s like days of yore.  It’s almost nostalgic to think about it.  A dollar at par gives large negative basis no matter how you compute it.

Simply put you can multiply this across Canadian farm country.  The livestock industry is being impacted across Canada.  Huge adjustments are going on.  In some ways for me it’s like agricultural economic science fiction.  I used to write about how Canadian farmers are simply taking advantage of a 62-cent dollar versus becoming more competitive.  Now that we are at par that whole debate is mute.  Dreaming about the loonie going down as fast as it went up is a pipe dream.

To add insult to injury the par dollar is now doubling back with more American agricultural commodities coming north undercutting local farmers.  When the Americans open the border to Canadian beef over 30 months in November, we won’t be celebrating on this side.  Yes, it’s been a long haul, but now the demand has all but dried up.

So does the law of gravity apply here?  In other words does “what goes up must come down” apply to the loonie.  I think so.  However, I wasn’t one of those high priced economists who thought the dollar was going up, up, up.  That to me was going to be our economic nightmare and here we are living it.

One of the reasons we’re here is because the American dollar has tanked badly in 2007.  Last week one American greenback was worth .71 Euros.  Five years ago the Euro and an American greenback were worth about the same.  It’s been a bonanza for the grain futures market.  I’ve often maintained many American grain analysts miss that.  However, as the greenback has declined it’s been a boon to foreign buyers of grain.

For Canadian farmers there is a bit of navel gazing going on here.  When we think price we automatically think basis and futures.  However, now futures represent hope and basis represents reality.  We’ve got $10 plus November soybean futures and almost a $1 negative basis.  Five years ago I never would have guessed it.

Where do we go from here?  Clues might lie with the Bank of Canada and the US Federal Reserve.  However, don’t expect the Bank of Canada to cut interest rates.  Why would they?  With inflation down to 1.7% and the federal government running a massive $14 billion surplus the non farm economy is humming like never before. That means the loonie for the immediate future looks to stay strong.  The key for those on Canadian farms is to stay strong too.  However, this new foreign exchange environment will be very difficult to adjust to.