Currencies and commodities

UNDERSTANDING THE INTERACTION BETWEEN GRAIN PRICES AND FOREIGN EXCHANGE

everyday in currency markets around the world traders measure the value of different currencies against each other. The action is heated as different economic factors come together to make one currency rise and the other fall. In Ontario, these currency fluctuations manifest themselves in the cash prices received by producers. The challenge of course is understanding exactly how  these currency fluctuations affect commodity prices.

Of course one of the most watched currency in Ontario farm country is the Canadian dollar. Growing up Canadian there has always been a fixation throughout our history on events to the south. As a foreign currency benchmark, most of us are aware of the value of the Canadian dollar as determined in US dollars. It is almost ubiquitous in our society. “What did the loonie do today?” is a common question often heard in coffee-shop and grain elevator conversations about corn, soybean and wheat prices across Ontario.

However, foreign exchange influences on cash prices are much greater than the relationship between the Canadian and US dollar. For instance, it can be argued that foreign exchange relationships between specific currencies have a huge effect on world production patterns and commodity prices. Take for instance the effect of foreign exchange on world soybean production. In Brazil a 2:1 relationship between the Brazilian Real and the US dollar is seen as very positive for Brazilian soybean production. Anything less is seen as negative, essentially depressing Brazilian cash prices which do not spur production.

trading currencies: the basics
Think of it this way, the US dollar is the world’s default currency. There have been public musings by foreign leaders to change that, but the US currency has always represented stability backed by the world’s biggest economy and the world’s biggest military establishment. It remains the currency with which the world’s commodities are priced on, such as gold, silver, oil and grain. How the US dollar moves in relationship to   currencies around the world not only affects cash prices for those commodities in various countries, but it also affects production patterns.

There are many economic factors, which affect a currency’s value. For instance simple supply and demand for the currency is how that value is determined.  Factors which sway that value can be things like interest rates, the regulated money supplies from agencies like the Bank of Canada and the US Federal Reserve, fiscal policy and general economic stability. But, not all of the world’s currencies are convertible. In other words, not all currencies can be easily bought and sold such as those in developing countries. However, for large agricultural nations, for the most part this is not the case. All countries reserve the right to manage their currencies the way they choose, China is one example of a highly regulated currency maintained at a fixed value.

impact on grain prices
The big picture is currencies trading in a fluid environment affected by all kinds of factors. For Ontario farmers, the key to any marketing decision is to understand how these major currencies interact with commodity prices. To understand the interaction it’s important to start with the world’s default currency, the US dollar. As the value of the US dollar goes up, it becomes more expensive in non-US currencies and there will be a negative affect on demand, sending futures prices in that commodity down. It is also true for the inverse, when the US dollar goes down there’s a positive effect for the demand of that commodity in non-US currencies, generally sending futures prices for that commodity up.

For Ontario producers this is a bit of a double-edged sword. When the US dollar goes up, generally futures prices go down but the Canadian dollar has an inverse relationship with the US dollar sending it down. As the value of the Canadian dollar goes down in concert with the rising US dollar our cash basis levels expand giving us higher cash prices. These cash movements can be substantial based on foreign exchange and Ontario farmers’ need to be very aware of their movements.

It would be prudent to have a ‘rule of thumb’ for foreign exchange fluctuations and Ontario cash grain prices. However, it’s very difficult to be specific because it would depend on the specific level of futures prices. That’s one reason to measure these values intuitively. When the Canadian dollar moves along with the US dollar, Ontario cash prices are on the move. As marketers of grain, it is important farmers keep abreast of these currency movements. •