Farmers Watch the Loonie and Assess the May 2nd Federal Budget

Last month we got a softwood lumber deal with the United States and a loonie reaching over 90 cents US. One farmer asked me last week whether corn was dealt away for softwood lumber. I told him I didn’t think so. In the murky world of Canada US relations how would you know? For corn farmers currently watching those blinking monitors its been a tough last two weeks.

As I write this the Canadian International Trade Tribunal is releasing its reasons for not enacting the countervail duties. The day before May 2nd was an even more important day for farmers. That’s when finance minister Jim Flaherty brought down the first Conservative budget since the early 1990’s. They’ve promised an agricultural safety net. With many farmers parking their loyalty with the Conservatives, they feel their time is coming.

What they got in the federal budget was a $2 billion commitment for two years. Farmers got a $500 million annual commitment and an extra $1 billion dollar commitment for this fiscal year. After standing up at five different farm rallies this past winter, I thought maybe we’d made head way. The next few weeks and months will tell. Provincial commitments will surely follow. Yes, the devil is in the details. Not all farmers have reacted positively.

Making it all so difficult is the value of our Canadian loonie. US Federal Reserve Chairman Ben Bernanke is musing that the US central bank is done with interest rate increases. The only problem is Bank of Canada governor David Dodge isn’t taking the same tack. With the non-farm economy exploding with growth, Dodge is set to continue the upward surge in interest rates. That’s keeping the loonie in good stead with the smart money looking for a place to invest.

So the loonie goes up. The 90.34 US figure is the highest since the fall of 1978. Of course there are some who are saying the dollar will hit 95 and 96 cents next year. That’s all based on Canada’s loonie being a “petro-currency.” I cannot see that, but we are less than a cent from 90 cents now. It is no longer just a theory.

For Canadian agriculture it is a nightmare. Grain is one thing but hogs and other livestock suffer greatly from a higher dollar. US demand for our agricultural commodities plummets when the loonie spikes. Going over the 91 cent level will only exasperate that process.

So if we ever needed a rally in the grain market its now. Farmers in Canada aren’t used to negative basis. What you say? Lets put it this way. If the dollar continues on the path over 90 we’ll have negative basis for just about everything. It’s very close to that now. That new crop soybean number will get closer to $5.50. That old crop soybean number could go even lower. Ditto, for corn, wheat and all western grains.

That’s not the greatest outlook. It’ll mean massive negative numbers for Canadian farm income. So if that forecast does come true what does Stephen Harper do? The federal budget’s commitment to agriculture might be a forerunner of things to come.

Massive amounts of money are needed under such a scenario for the Canadian farm sector. In 2006 it just so happens the federal government has the money. The projected surplus, which will for the fiscal year ending March 31, 2007 is projected to be $3.6 billion. There are some analysts who say it will be much higher.

If only the commodity market could bail us out. Take corn for example. The $3 gas price in the United States and the $1 litre gas price in Canada is making ethanol look like a can’t miss project. Ethanol demand on the corn market is growing. In fact demand for corn is huge, so much so that a premium is already worked into December futures. Anything less that another 11 billion bushel US corn crop will send price upwards.

Let’s hope that happens. We’re due. In the meantime Canadian producers need to pause this week and consider our market environment. Yes, the loonie is killing us. However the May 2nd was our true litmus test. Was it a budget, which gives Canadian agriculture a preliminary blueprint for the future? I don’t know. It’s still too early. The challenge for farmers will be to find their way despite of it all.