With Our Respective Economies Changing, Foreign Exchange Gyrations Continue to Challenge

slide12 It was a bit of a strange scene.  I got a call from my banker the other day asking me if she could come out to my farm with the regional agriculture person and the credit writer. Knowing that it is good to go into the bank once in awhile and look nervous what could I say?  So as the anhydrous ammonia wafted through my tractor cab I got set to meet the bankers.  Of course I had that anhydrous ammonia ready if I needed it.

Meeting the banker now is a little bit different than it was last year at this time.  Of course what we had late last year was a major bank meltdown in the United States and that spooked a lot of people including me.  At the time I felt with these American banks failing, how much exposure were our Canadian banks going to have.  Needless to say  that financial meltdown last year changed my banking behavior and I think the bankers were wondering what was up?

Of course the question is, what is up?  When the bankers arrived I engage them in conversation regarding our current economic climate and how things have changed so much in eight months.  They didn’t have much to offer me with regard to the economy other than to tell me how tough the bank has got it with this whole “economic meltdown thing “.  I think you know the rest of the story.

As farmers it seems to me the “economy thing “is still maybe the number one issue we have, however we don’t think about it as much as maybe we should.  With our commodity prices currently going up substantially I guess we could be forgiven for that.  However, the increase in the value of the Canadian dollar up to $.92 US this past week should serve as a barometer of the strength within some facets of the Canadian economy.  That rise in the Canadian dollar even after losing 2.5 cents last Wednesday is taking a big bite out of our Canadian cash grain prices and ultimately our farm revenues.

I have found it to be quite alarming.  How does that happen so fast, the Canadian dollars is $.77 US on March 7, 2009 and then it reaches over $.92 US this past week?   At the same time the American dollar has been heading down and if you look at your DTN analysis we are looking at its next support level being 78 on the index.  In our Canadian cash grain world one giveth and one taketh away with regard to futures and basis.  However for our greater Canadian economy a boost in the loonies value has certainly sent shudders through the halls of both the Minister of Finance and the Bank of Canada.

This is what the Bank of Canada said in a news release last week and I quote.

“In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly,” the central bank said Thursday. “If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset those factors.” (Bank of Canada) in Thursday’s Globe and Mail.

In other words this surging Canadian dollar has the capacity to upset the whole turnip wagon.  At a time when the nonfarm economy in Canada is really hurting it is about the last thing a Harper government and the Bank of Canada needed. In essence the surging Canadian loonie is like pouring gasoline on a fire.

At the same time interest rates are at record lows.  In my career its unprecedented and it is especially unprecedented with the surging loonie.  Usually when interest rates go up the loonie goes with them.  Clearly though, it is completely obvious that our economies are changing.  Maybe the old rules don’t apply anymore.  Maybe the American economy is weaker than we think and maybe the Canadian economy reflected in our loonie is stronger than we give it credit for.  On the basketball courts I used to say, “the ball don’t lie “.  Maybe we could say the same for the respective value of the Canadian and US dollar.  Nobody is lying when they buy or sell our respective currencies.  At the end of the day it’s an indictment on the state of both economies.

You have to ask yourself how this is going to play out if and when inflation rears its ugly head and government and the Bank of Canada and the US Federal Reserve start to fight back.  In my mind at a certain point it means much higher interest rates on both sides of our border and a whole host of new economic problems.

It’s an uncertain time but for most of Canadian agriculture remarkably it is a good time. Other than the livestock sector there is no recession in Canadian farm country.  Sure there are problems but nobody is planning any farm rallies very soon.

You might say our greatest challenge is deciding in the next three weeks whether the historical seasonality in our commodity markets should make us lock in prices for 2009 and maybe 2010.  Simply put, I think so.  At the end of the day the bankers want their money and we do too.  The hard part right now continues to be just “what is up?”