“The Canada - U.S. exchange rate affects the prices of agricultural products and inputs,” explains Blue. “Much of world trade is priced in U.S. dollars. The U.S. is Canada’s largest trading partner, so changes in the Canadian dollar value relative to the U.S. directly affects profits of Canadian farmers.”
He notes that lately, the Canadian dollar has dropped significantly in value relative to the U.S. dollar.
“Of several factors that can move relative currency values, 2 major factors caused that recent decline. As the global C-virus pandemic intensified, money moved to so-called safe assets. One of those assets is the U.S. dollar, so the U.S. dollar increased in value.”
“Secondly, during early March, plans for increased crude oil production announced by major producers Saudi Arabia and Russia pushed crude oil prices lower. That sharp drop in crude oil prices quickly provided a reminder that the oil industry is a major driver of the Canadian economy as the Canadian dollar also plummeted.”
Figure 1: Canadian dollar versus WTI crude oil prices (in U.S. dollars)
“Although the weaker Canadian dollar implies a weaker economy relative to the U.S., our weaker currency tends to lower the cost for other countries to import Canadian products, including our crops and livestock. One reason for the recovery in the price of canola and milling wheat during mid-March has been the effect of the weaker Canadian dollar.”
He adds that the flipside is true, so importing fresh vegetables, farm inputs and equipment from the U.S. could become more expensive, depending on those coincidental prices in the U.S.
“In the short run, however, most producers would prefer the rebound in crop prices for some pricing.”
“In summary, an understanding of exchange rates and their influences is important because they have a direct impact on agricultural commodity prices and farmers' margins.”
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