I follow the value of the US dollar every day. If you follow me on Twitter, I quote the value of the US greenback, just before the Canadian loonie. It is so important to the value of agricultural futures prices. It’s the whole enchilada. When it comes to price movement in our commodity markets, some analysts think the US dollar means everything.
It just so happens the US dollar has been on a tear since February 1st. On that day it got down to 78.915 on the US dollar Index, a measurement of the value of the greenback against a basket of the world’s currencies. Today, it got up to 83.180 before dropping back to 82.623 at the end of the day. That’s a huge ride over the last six weeks and its put real brakes on corn, wheat and soybean prices.
With the world’s commodities being traded in US dollars, as the value of the greenback goes up, it takes more foreign dollars to pay for those commodities, so demand goes down. On the contrary, when the value of the US dollar goes down, it’s the opposite, positive for commodities. Yes, its old news, I know, but from time to time its good to go over it.
At the same time, the Canadian Loonie has dropped down to.9665 on March 1st, settling into the 97-cent level over the last two weeks, closing today at .9779 US. For those of you buying new farm equipment, it is costing more, but your grain and livestock has a higher cash value to pay for it. When it comes to farming in Canada, it’s always a double-edged sword. A lower loonie helps, but that usually comes at the expense of a much higher US greenback.
It’s not like this is new to Canadian farmers. We live with it everyday. It just so happens the US dollar seems to be feeling its oats at an inopportune time for Canadian farmers looking to sell old crop grain. For instance in Ontario, a weak corn basis has Ontario corn the cheapest in North America. Futures prices are quite healthy, with our American friends talking about $7 and $8 corn. Meanwhile in Ontario, its $6.50 a bushel, and with a strengthened US dollar, its difficult to see that changing very soon. Add in the abundance of old crop corn in Ontario bins, and the situation is what it is.
The US dollar has been rising because the American economy is doing better. Employment numbers are rising, economic growth forecasts are better and even the housing market, long the drag on the US economy is getting better. Add in all that QE over the last year and they are seeing pay dirt. Investors look at Europe and gladly buy up the US greenback. The overheated record setting stock market doesn’t hurt either.
This currency gyration may surely challenge our marketing acumen this year is in the old crop new crop psychology mindset war. What you say? Well, I expect an acreage war between corn and soybeans across the greater Corn Belt, but there is also one going on in a lot of farmers’ minds. Many of us see $6.80 for old crop corn, and $4.90 for new crop corn. The psychological war in our minds justifying such a dichotomy is overwhelming for some. Add in the US dollar valued much higher than 6 weeks ago it makes it that much harder.
The reason being is because at some point, we have to sell grain. Accepting a lot lower new crop price especially in an environment of a lower loonie and higher greenback makes it so much more risky to accept. There are still dreamers out there thinking an 85-cent Canadian dollar. I can’t see that happening soon, but who knows, that oil patch isn’t what it used to be. Everything that used to glitter in the Canadian economy is starting to look jaded. The Alberta government actually tabled a budget last week forecasting a deficit. Crazy stuff, and the loonie will surely have to pay for that in the coming years.
So what to do? Do we hedge the currencies? I don’t think so; it just gets too complicated unless you are a very large producer who can hire that job out to somebody who has your back. It’s more important to strike when the griddle is hot. For most of us, that means daily market intelligence for both futures and basis. A large part of that should be a study of the US dollar and its poor sidekick the Canadian Loonie.
In essence, regardless of our love for the loonie, it’s a thinly traded currency, not that important to the world. On the other hand, the US dollar is the world’s default currency, wanted almost everywhere, always a welcome investment home in uneven times. It is what it is, but it also adds that extra layer into our grain marketing plans. How do we interpret these currency tendencies? It’s not easy, and it will surely challenge our marketing acumen as we move into the spring planting season.