Dealing with currency volatility
As the world's economy continues to emerge from the recession, fears of a currency war are starting to threaten the still fragile recovery. In Canada, the dollar continues to flirt with parity, causing anticipation amongst eager consumers heading into the busy Christmas shopping season and uncertainty for anyone in export-dependent industries and sectors.
What the Canadian dollar will do is the big question - and one that Canada's heavily export-based agriculture and agri-food sectors are watching closely. The experts at Canada's major banks have varying outlooks when it comes to forecasting the future of Canada's currency.
Economists at RBC, the nation's largest bank, are predicting that the Canadian dollar will close out the year in the $0.93 U.S. range, but that it will rise again towards parity by mid-2011. TD Canada Trust has forecast a similar short term scenario, with the dollar remaining above $0.90 to the end of the year, but is estimating the dollar will close in on parity within the next 12 to 18 months. CIBC's experts are predicting a $0.96 U.S. dollar to the end of 2010 with a drop to $0.93 U.S. by mid-2011, while the economists at BMO are estimating the dollar near parity throughout 2011. Scotiabank, too, is forecasting a continued strengthening of the Canadian dollar.
Regardless of who ends up correctly predicting the loonie's path, currency volatility is a new reality and Canada's agri-food sector needs to be prepared to address it, says a consultant with Synthesis Agri-Food Network.
"We can't control the fluctuations in the global currency markets and their resulting impacts on the Canadian dollar," says economist Mary Lou McCutcheon. "But as an industry that relies heavily on exports, managing that currency risk is necessary if we hope to remain competitive."
The gradual rise of the Canadian dollar over the last number of years has eroded the protective buffer that the exchange rate had historically provided businesses. Even if productivity of a business or sector wasn't optimum, for example, the low Canadian dollar meant that it was still possible to be profitable.
"Canadian export businesses were very competitive in international markets when the dollar was at $0.65 U.S. It was easier to be competitive because of the very favourable exchange rate and with superior management or productivity, there was opportunity for increased profits," says McCutcheon. "Now that this buffer is gone, we have to look closely at our business practices to see where and how improvements can be made that will help keep Canada productive and competitive in the global market."
There are different tools available to manage currency risk, such as futures contracts, forward contracts or buying currency options, each offering varying forms of protection. Other strategies include building exchange rate management into export contracts and improving business productivity. Whether you are an exporter or not, exchange rates are a factor in your business. Many inputs such as machinery and equipment are priced based on U.S. currency. Each business should utilize tools and strategies that work best for them to address their level of risk tolerance.
Insights - What you should know about managing currency risk
Adjust to the new reality - Considerable growth in the agri-food sector was built on the scenario of a Canadian dollar at less than $0.70 U.S. a decade ago. Regardless of currency market volatility, the Canadian dollar is unlikely to be going back to those levels any time soon, so it's important for farms and agri-food businesses to adjust their plans and forecasts to reflect the reality of a higher Canadian dollar.
Exchange rates impact everyone - Much ofCanada's agri-food sector is heavily dependent on global export markets. This means exchange rate volatility has broad-reaching effects and everyone in the food supply chain, whether you are an exporter or not, should monitor and manage that currency risk.
There is no magic bullet - No single currency strategy or risk management tool will work for everyone. Farms and agri-food businesses are very diverse and should determine their level of risk based on input costs, markets and capital requirements. Businesses can then develop a strategy to manage risk for long term stability.
Economic info links:
http://www.rbc.com/economics/market/pdf/fcst.pdf
http://www.td.com/economics/qef/qefsep10_can.pdf
http://research.cibcwm.com/economic_public/download/rates.pdf
http://www.bmonesbittburns.com/economics/current/summary.pdf
http://www.scotiacapital.com/English/bns_econ/fxout.pdf
