In my previous blog post I asked the question “Is a weaker dollar good for agriculture?” I highlighted the positive relationship between net farm income and the value of the Canadian dollar relative to the U.S. dollar. But I also suggested that this relationship may not hold true across all sectors.
One of the constraints in investigating in a sector in greater details is the availability of the data. Giving a more detailed look to the crop sector requires analyzing farm cash receipts, instead of a broader profitability measure.
So does a weaker Canadian dollar good lead to higher farm cash receipts for grain and oilseed producers?
There are many factors to consider:
1. A strong loonie usually implies a strong demand for commodities
2. Grains and oilseeds are generally priced in U.S. dollars.
3. A majority of Canadian grain and oilseed exports go to countries other than the U.S.
I argued in our previous blog post that a higher loonie generally implies a strong demand for commodities, and hence this should result in higher prices. But there are other factors at play.
Grains and oilseeds are priced in U.S. dollars – Canadian producers are simply price takers. Hence an appreciation of the Canadian dollar will lower the price paid to Canadian producers when converted back into Canadian dollars.
Market other than the U.S. market accounted for approximately 75% of the value of Canadian grain and oilseed exports. A stronger dollar will mean a loss of competitiveness against U.S. producers and will result in lower export sales.
Hence, we have conflicting effects. A higher dollar indicates strong demand and should result in higher prices and cash receipts. Conversely, it also lowers the price received by Canadian producers and potentially leads to a reduction in sales in the U.S. market.
While the U.S. market accounts for roughly 25% of grain and oilseed exports, its overall weight is not that significant. As a result one would expect the value of the loonie and grain and oilseed farm cash receipts to trend together. So when the Canadian dollar weakens such as over the last few months, farm cash receipts for grains and oilseeds in Canada should trend lower.
Yes, a stronger Canadian dollar is good for the grain and oilseed sector. Because the U.S. dollar is the primary currency for many international transactions, the positive correlation between farm cash receipts and the Canadian dollar is not very strong. The relative importance of a weaker or stronger Canadian dollar has to do with the importance of exports to the U.S. economy.
Craig Klemmer, Agricultural Economist