Here’s a question from a farmer in southwest Saskatchewan:
Just what magnitude does the value of the Canadian dollar have on the prices we see?
Dan Hawkins, grain marketing advisor in Swift Current, illustrates his answer with our old friend corn.
Currently, the December 2020 contract is trading at USD $3.41/bu. To do the calculation, you need the Exchange Rate.
The Canadian dollar is worth $0.738 USD. This is not the exchange rate – this is what economists refer to as the external value of the currency. In other words, what a currency is worth expressed in another country’s currency.
To get the exchange rate, you take the inverse of the external value of the currency. In this case 1/0.738 = 1.355 or a 35.5% exchange rate. $3.41 USD * 1.355 = $4.62 CDN/bu
Now, what happens if the Canadian dollar goes to $0.77 USD. What is the impact?
1/0.77 = 1.30 (30% exchange rate). $3.41 USD * 1.30 = $4.43 CDN/bu which means that the December 2020 corn futures contract must add $0.19/bu ($4.62-$4.43) to where it is today to just make up the Canadian-currency appreciation.
The bigger takeaway is that this is a percentage-difference calculation. In other words, the more valuable the commodity the more pronounced the price difference.
Neil Townsend, FarmLink’s chief market analyst, explains how Canola futures trade in Canadian dollars.
The foreign exchange rate is incorporated in the futures price by the market. Let us look at what happens when the foreign exchange rate changes and how it impacts farmgate returns.
We will use the same exchange rate change, from $0.738 to $0.77 USD. Assume that the fob Vancouver price is $370 USD/MT. That is equivalent to $501 CDN/MT. The back off to central Saskatchewan is about $10 CDN/bu.
Now if the dollar rises to $0.77 USD and the value of the canola remains $370 USD/MT. That is equivalent to $480CDN/MT. The back off to central Saskatchewan drops to $9.50 CDN/bu. That is a loss of $0.50/bu simply from an appreciating Canadian dollar. Canadian farmers must pay attention to a lot of bingo balls. The foreign exchange risk/reward is always a contribution to overall volatility.
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