Overall, Canadian agriculture produces more than what is purchased in the country. This means we rely on export markets. We arguedthat a weaker Canadian dollar relative to the United States dollar is positive because Canadian exports become cheaper relative to the U.S. Hence, it follows that a lower dollar must be good for agriculture.
When you look at aggregate farm data, the opposite seems true. Between 1971 and 2012, a higher Canadian dollar against the U.S. currency generally implied higher net farm income. The relationship is not perfect, but the figure below suggests that on average, an appreciation of the loonie is accompanied by greater farm income. So what is the answer? Is a higher loonie good or bad for agriculture?
The relationship between farm income and the dollar may appear counterintuitive. Yet, it is based on economic fundamentals. Canada has a commodity-driven currency. As the world demand for commodities increases, the Canadian dollar also appreciates relative to the U.S. dollar.
As such, the loonie is a barometer of the strength of the world economy in the commodity sectors. Strong demand for commodities, including agricultural commodities, translates into a higher Canadian currency. More importantly for net farm income, a robust world economy and a solid demand for agricultural goods imply higher prices and sales. The latter is the main driver of net farm income.
The above analysis is based on aggregate data and therefore the positive relationship between income and our currency could be different across sectors. But in the aggregate, a higher Canadian dollar seems positive for agriculture.
Over the next few days I will evaluate the relationship between the Canadian dollar and prices for specific agricultural sectors.
Craig Klemmer, Agricultural Economist