While you were busy growing crops and raising livestock this summer, a rising dollar has been taking aim at your profits.
The growing season started with the loonie trading under the 75 U.S. cents mark — and many analysts sticking to the theory it would stay low as long as oil prices remained in the doldrums. But after two hikes in the Bank of Canada prime rate, talk of the dollar as a ‘petro currency’ is all but forgotten. Now the focus is whether the loonie, which pushed into 82-cent territory in the first half of the month, will hit 85 U.S. cents.
If it does, you’ll feel it.
“I know given current pricing in the marketplace — and that’s across all sectors: grains, oilseeds, livestock — that a dollar at 85 cents is really a threshold or a point we’re starting to see margins getting a little bit of pressure,” said J.P. Gervais, Farm Credit Canada’s chief agricultural economist.
Canadian farmers have been shielded from lower commodity prices suffered by American farmers largely because the favourable exchange rate made selling exports based in U.S. dollars more profitable, he said.
But if you’re in the market for new farm equipment, a higher dollar is good news.
“As the Canadian dollar drops or the U.S. dollar rises in value, it has direct correlation to what customers pay,” said John Schmeiser, chief executive officer with the Western Equipment Dealers Association, North America’s largest regional equipment dealers’ association.
The vast majority of farm equipment sold here — brands such as John Deere, Case IH, and New Holland — is manufactured in the U.S., and their input costs and components are purchased in American dollars, too.
So while a strong loonie will impact both revenue and purchases of imported machinery and inputs, it’s still a “good news story” overall, said FCC’s principal agricultural economist.
“Although it’s going to have an impact on that revenue side of things, it also encourages our purchasing power because a lot of the (production) inputs are coming from the States as well,” said Craig Klemmer.
The most recent rise in the Bank of Canada’s prime rate (now at 1.0 per cent) reflects the positive outlook for this country, he said.
“That’s a signal to the world that the Canadian economy is doing quite well,” said Klemmer. “As a result, we’re seeing more demand for Canadian dollars and the value of the Canadian dollar is increasing.”
Farm equipment dealers had a good long run after commodity prices spiked following the 2008 financial crisis. The commodity boom also pushed up the value of the Canadian dollar, giving farmers further encouragement to invest heavily in new equipment and the latest technology.
That situation has been reversed the past few years because of the decline in both grain prices and the dollar. But even before its rise, the loonie had stabilized and that encouraged sales.
“We’re starting to see some investments in equipment,” said Klemmer, noting total tractor sales are up 22 per cent from 2016 so far this year, while combine sales are up 30 per cent.
“What we’re seeing is people doing some reinvestment — a combination of strong farm revenue over the last couple of years, and I think some comfort with the dollar and the feeling that we’re ready to start making some investments into equipment again.”
Producers are being prudent when buying equipment, whether it’s new or used, Klemmer added.
“I think people are being strategic in their investment, based on the position they are at financially, and responding to what the market signals have been and what they feel has been appropriate,” he said.
There was an incredible run in sales from 2000 to 2014, said Schmeiser. Things slowed down considerably after that and in areas of Western Canada hit by drought this summer, farmers remain very cautious.
However, since many are finding their harvests aren’t as bad as feared, Schmeiser expects sales in many drought-hit areas to perk up.
“We anticipate that some activity will pick up this fall after harvest because things were better than initially thought,” he said.
But in the end, crop revenues will always be the biggest driver of equipment sales, he added.
“If customers are getting good returns for the commodities that they are growing, they will reinvest in their equipment.”