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Keep your eyes on the dollar

Prairie farmers should care about the current state of world currencies in the world market

The past two years have seen some major political and economic shifts around the world.

The Russia/Ukraine standoff in the Crimean region resulted in economic embargoes and sanctions against Russia. This threw a major kink into trade in that region, causing serious economic hardships. It caused internal inflationary pressures to build, devaluing the Russian ruble dramatically.

The Chinese economy slowed after years of accelerated and unsustainable growth, sending a ripple across the global economy. As Chinese stock markets faltered, the government tried to fix it by devaluing the Chinese currency (the yuan). This caused a ripple effect as other countries that compete with China in exporting consumable goods were forced to do the same to remain competitive.

The U.S. economy has struggled for the past several years but has been showing signs of a modest recovery in the past 18 months. The American dollar has strengthened over the past year as world investors have moved away from risky foreign investments and back to the U.S. dollar, still considered the world currency of trade and a safe haven.

World oil prices collapsed over the past 15 months, which has had a major impact on countries that rely on oil as a main export commodity.

In Canada we are struggling through a recession due to lower oil prices and a Canadian dollar trading at $0.75 to the U.S. dollar. Two years ago the Canadian dollar was trading at $0.95/U.S. dollar. A year ago it was trading at $0.90.

How will these factors influence world trade? How might that affect your farm?

World grain sales and supply

Let’s focus on world grain sales. The most obvious factor is a reduction in Chinese demand. Some will argue that the Chinese need food so they won’t reduce the amount they purchase. But now that they are paying with a devalued currency, the Chinese may be forced to reduce either the amount or quality of food they can buy.

Russia is being hit with inflation and currency devaluation and trying to keep its economy afloat during the sanctions and embargos that have been imposed. Russia can sell grain to China at reasonable prices because the devalued ruble is attractive to the Chinese with their devalued yuan. This forces other countries trying to sell to China to reduce their prices.

In North America the spring planting and summer growing seasons have been very dramatic, weather-wise — either too dry or too wet. This pushed domestic prices above world market prices for most of the summer.

Now that production looks better than earlier estimated, domestic prices are falling and will continue to fall until they reach levels that will make us competitive to sell into world markets against cheap grains out of places like Russia.

The saving grace for us in Canada is our devalued dollar. It’s helping us to be a little more competitive in the world grain export markets compared to the U.S. But we are pricing our wheat off of the U.S. futures, which are above world values, so you know those futures prices are going to have to fall lower to be competitive.

Where farmers will notice the currency difference between the U.S. and the Canadian dollar is in the record high basis levels being offered for wheat classes across the Prairies.

Wheat prices are traded and quoted in U.S. dollars per bushel, so when prices at Canadian elevators are calculated the currency conversion is reflected in the basis. Our low dollar is why basis levels are at historically high levels.

Canadian competitiveness

If either wheat futures or the Canadian dollar start to climb higher, basis levels will fall lower. Watch for these things to happen and react before they do to lock in some basis or pricing contracts — if that fits your marketing plan.

Another factor helping to keep Canadian grain competitive in world markets is the cost of ocean freight. In years when freight costs are high we are at a market disadvantage when we sell our grain into places like China because of the distance we must ship grain, compared to countries like Russia who are a lot closer.

Right now a lot of vessels are sitting doing nothing and world oil prices are at historically low values. Ocean freight bids are cheap which helps keep Canadian grain more competitive.

When the Canadian dollar starts to climb it will improve your ability to purchase equipment and fertilizer produced and imported from the U.S. or other countries. But will that gain be enough to offset the loss of income from lower grain prices due to the rising dollar? That will depend on the supply and demand of the products you’re buying or selling.

World currencies are just one more factor in today’s global market economy that can adversely affect your input and commodity prices. Being aware of how currencies can impact your business and being prepared to mitigate that risk is just one more job to add to your farm manager responsibilities.

About the author

Columnist

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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