US and Canadian Currency Interaction Define Our Marketing Opportunities

We live in trying times for sure. I’m sure everybody is very tired of Covid19, but that doesn’t mean you should respect it any less. Social distancing and working together has helped Ontario tame the infection rate down, while keeping the virus at bay. We aren’t out of the woods yet, in fact, won’t be until there is a vaccine. Moving ahead, we can only hope it gets easier. Life this way is limiting and dangerous. It certainly hasn’t been good for our economy either.

Today we learned just how bad the Covid 19 shutdown affected the United States in the second quarter of 2020. The US economy contracted by a third on an annualized rate in the last quarter. That is huge, the deepest dive since the great depression and one which the Americans are still trying to reverse. However, things are actually getting worse in parts of the American south.

The Americans have their own unique circumstances, which has made the response to the pandemic worse than almost anywhere in the world. A large segment of the population looks at the pandemic in a political way and this has polarized much of the response. Add in the ideal of individual liberty in the US and it wasn’t too difficult to imagine at the onset of the pandemic the Americans would have a hard time with it. With a drop of 33% in their GDP the last quarter it just shows how costly the pandemic has been to the American economy. We can only hope they get around it somehow leading to a much better recovery.

Within this economic environment the US dollar has continued to be the rock of Gibraltar of world currencies. That is until the last few weeks when it declined steadily as it was partially reflecting the increase in Covid infections in the United States and a possible economic slowdown coming from that. In Mid-May of 2020 the US dollar had an index value of approximately 100 and in the weeks hence has declined currently in the 93 range. Of course, it’s a double-edged sword, as a weaker US dollar is usually good for agricultural commodity futures prices, but also an indicator of an American economy going into troubled waters.

On the Canadian side of the border a strong US dollar usually means a weak Canadian dollar and vice versa. That’s exactly what we’ve seen if you look at both charts. There is much that goes into the value of the Canadian dollar, which is a thinly traded currency. However, my rule of thumb is the value of the Canadian dollar usually moves in an inverse fashion to the US dollar. That’s one reason why this week we almost saw the Canadian dollar break over the 75 cent US mark. The noon rate on Thursday for the loonie was .7440 US.

Of course, all of these currency gyrations have an effect on our Ontario and Quebec soybean and wheat prices with a lesser extent corn. Generally speaking, a .7440 Canadian dollar is something that Canadian farmers can live with. It gives the general price optical illusion that we are doing better than our American friends on price. Over time, this gets ingrained in the Canadian agricultural psyche as we learn to live with those optics.

It seems obvious now but contracting grain for flat prices when the Canadian dollar was briefly under 70 cents on March 20th would have been a good thing. Selling cash SRW wheat on that day was crazy lucky. However, it was all based on the Canadian dollar tanking on US dollar strength based on hysteria over Covid 19. You can make an argument the Brazilian currency works inversely to the American dollar too. Simply put, currency fluctuations have big effects on Ontario and Quebec cash prices. Farmers need to have those cash grain marketing orders poised to hit.

I really enjoy the economics behind currency fluctuations. Needless to say, most farmers don’t, as cover crops will forever be far sexier that marketing and economics. Needless to say, it’s always good to muse about it. What would an 80 cents US Canadian dollar make Ontario and Quebec grain prices look like? How would an 85 cent US Canadian dollar change that equation. How can you mitigate the cash price risk in between?

That’s the difficult part for Canadian farmers. I’ve thought it about it my whole career and the best I can come up with is sell for flat prices and have those standing marketing orders ready. Immerse yourself with credible grain fundamental sources, while you try to gauge basis possibilities in places like Coburg Ontario or Ste Ange Quebec. Pulling the sales trigger can always be difficult, but when you do it, never look back. It’s a complex agricultural economic environment out there. Risk management will never grow old. However, its constantly fluid as well. Covid19 reminded us of that. Putting that to bed has surely been a challenge.