At the time this post is written, a tentative agreement was reached between the Greek government and its creditors. The deal requires the Greek parliament to enact laws by July 15 2015, and to restructure its economy: broadening the tax base to boost revenue, reforming pensions, liberalizing the labour market and privatizing assets. In return, a loan package from the European Stability Mechanism (the Euro zone bailout fund) would shore up the Greek banking system and allow the government to meet part of its debt obligations. However, the possibility of seeing Greece exit from the European monetary union is still alive as questions emerge around the financial stability of the economy under the proposed rescue package.
There are some important matters for us to monitor beyond the future of the Euro and the economic health of the Greek and European economies. We’ve emphasized numerous times on this blog that agricultural markets are truly global. While Greece is a small economy and a small market for Canadian agri-food exports, the current Greek crisis is connected to Canadian agriculture.
The resurgence of the debt crisis has generated volatility. Uncertainty leads investors to move capital to safer financial assets denominated in US dollars. It lowers the value of the Euro relative to the U.S. dollar, further strengthening the latter as the world’s reserve currency. Overall, this is elevating the USD against all currencies, including the Canadian dollar.
The EU is a global leader in agriculture and agri-food imports and exports, with combined imports and exports of over $300 billion (in 2013). As the Euro devalues, two things are expected to occur: European imports become more expensive. Second, a change in the value of the Euro has the potential to improve the competitiveness of European exporters.
Canada exports on average $2.5 billion of agriculture products to Europe annually. Let’s narrow the field to focus on pork exports. Canadian exporters sold a combined $390 million of pork meat to the EU in 2014. A declining Euro raises the price of Canadian pork for European importers.
But this is not the end of the story. Remember, the depreciation of the Euro also occurs relative to the US dollar – which makes US products more expensive to European buyers.
Putting aside concerns that European buyers’ purchasing power may decline, the main driver of Canadian meat exports to Europe is the relative value of the Canadian dollar to the US dollar. And in the current case, our exports become more competitive than US agricultural products. Indeed the Euro has declined 18 per cent against the USD year-over-year versus a two per cent decline in the Euro’s value to the Canadian dollar.
European businesses compete against Canadian exporters in other exports markets, not only within Europe. Consider Canadian pork exports to Japan – the 2nd most significant export market of Canadian pork packers. The Euro lost value against the yen since the beginning of 2015, but so has the Canadian dollar. Canadian pork exports are currently 14% lower than in 2014, year-to-date. Conversely, European pork exports are trending at the same pace as last year. Europeans have been aggressive targeting the Japanese market since the Russian market was shut down to European pork in the middle of 2014. This is a reminder that not all exports are driven by currency values.
In the long-run the EU market presents a huge opportunity for Canadian agriculture through implementation of the Comprehensive Economic Trade Agreement because exports of grains and oilseeds and meat will gain more access to a market with half a billion people.
In the short-term, the European debt crisis will keep the value of the Euro depressed against the US dollar. Our currency is also projected to remain below the $0.80 US threshold given the latest rate cut of the Bank of Canada and the likelihood to see the US Federal Reserve raise its key benchmark interest rate before the end of the year.
The bottom line is that currencies are the channel through which the European debt crisis will impact Canadian agriculture. And livestock and commodity prices paid to Canadian producers benefit from the higher US dollar.
Leigh Anderson, Senior agricultural economist