Here’s how a higher loonie lowers profitability
The Canadian dollar has been a major driver of profitability (revenues minus costs) in agriculture over the last couple of years.
It’s stayed relatively steady through the first half of 2017, averaging US$0.75. The Bank of Canada began raising its overnight rate in July 2017, which triggered a steady increase in the loonie. The Bank of Canada’s second interest rate hike on September 6th has pushed the Canadian dollar to its current value of US$0.82 an increase of $0.07 in a relatively short time frame.
Why the Canadian dollar matters?
A stronger loonie lowers the price Canadian producers receive for commodities that are initially priced in U.S. dollars. It also makes Canadian commodities less attractive to buyers relative to competitors. On the flip side, a rising Canadian dollar reduces usually makes farm inputs more affordable. But overall, profit margins for Canadian producers are inversely related to the dollar. Margins come down when our currency goes up.
What's the impact on producers' profitability?
For every movement of US$0.01 in the value of the U.S. dollar relative to the Canadian dollar, profitability is estimated to change on average by:
- $1 per head per finished hog marketed
- $13-$16 per head in the cow-calf and feedlot sectors
- $5 per acre of cash crops.
Changes in profitability identified above are unrealized losses or opportunities forgone assuming market conditions remain the same when the exchange rate moves by US$0.01.
Lots of assumptions go into computing the above numbers. What is the average cost of production per sector? What is the mix of crops, yields, or marketing weights of animals? What is the marketing strategy related to fixing prices between buyers and sellers? But they do give a rough approximation of the impact of the loonie.
What does a higher dollar mean?
A rising dollar will likely cause some softening of demand for Canadian commodities, but a stronger loonie is not necessarily a threat. The Canadian dollar still remains below its 5-year average of US $0.88. Canadian agriculture remains competitive with an exchange rate of US $0.80-$0.85: The demand for agriculture commodities is strong and the outlook remains positive.
The bottom line, keep an eye on the Canadian dollar and its drivers. Lately interest rates are driving the value of the Canadian dollar, so follow the commentary and decisions from the Bank of Canada.
Leigh joined FCC in 2015 as a Senior Agricultural Economist, specializing in monitoring and analyzing FCC’s portfolio, industry health, and providing industry risk analysis. Prior to FCC, he worked in the policy branch of the Saskatchewan Ministry of Agriculture. He holds a Master of Agricultural Economics degree from the University of Saskatchewan.