Hay and grain?

[cswilson]

I think deep down you posted to show us old fellers how much smarter you were-if you read your post I'll think you'll see what I mean. You don't have to bother doing that farmer's son we all know you got the bases covered. Your point is taken on the exchange rate-but like I said I'll worry bout things I can control-maybe a team of Belgians is mundane to you but if I replace 300 hours of tractor rent by using them that's 10,000 plus into my coffers-if I shave a dime a day off feed costs on 500 head that's another 10,000-maybe pennies to you but dollars to me. I'm curious what is your strategy to overcome the exchange rate armageddon.

[farmers_son]

I mentioned exchange rates because I was interested in what people thought. There has not been much discussion of exchange rates.

Belgians are not mundane at all and may offer a way to cash flow your way through what I see is a big problem in the next few years. Much smarter than a shiny new tractor and loader. You are right to focus on things you can control. I would say you can control how the stronger dollar impacts your operation. As for the dollar I hope I am wrong but better safe than sorry.

$10,000 is dollars to me too. I am concerned the stronger dollar has the potential to impact my operation to the tune of $100,000. Your operation is bigger than mine.

[cowman]

Farmers son: Obviously you have a good grasp on this money thing. Personally I just don't get it although I have often pondered the whole situation. I guess I just have a mental block or something when it comes to this whole currency thing.
I do feel that sometimes the currency thing is just used to rip the people off? By the exchange today we should be worth a lot more than last year...and yet our money doesn't buy anymore things...probably less!
I do appreciate your bringing out your insights on the currency thing, even though I still don't get it completely!

[cattleman2]

I am slightly confused about the dollar affecting us as well, and I am an individual that is working in the finance industry, to support the cows...

We pay in CDN dollars for our inputs, we recieve CDN dollars for our output, how does the exchange rate factor in to the equation at all???

One might have said in the past that the US created a floor price for our feeder and fat cattle, so with a stronger CDN dollar (weaker US dollar) the floor price will be lower everything else remaining equal.

This doesn't preclude the canadian producers or the US producers from paying more (or less) to buy the calves, but I don't believe that it will really affect each and every farm in the magnitude of 33% as I believe was stated above.

Please explain if I have it wrong?

[farmers_son]

What was stated above was a reduction in gross revenues of 33%. Everyone that sells calves or cows would experience this kind of decrease in revenue assuming a constant U.S. market.

The comparison was between the dollars low January 2002 at .625 and an assumed dollar in the near future of .93 cents resulting in a 33% decrease in our revenues. If the dollar continues to climb at the same rate as in the recent past it will reach 93 cents within a year. Does this explain it for you?

The dollar closed at 85.63 today, almost a full cent above Friday and the highest since November 1980.

[cattleman2]

Why does everyone have to recieve this reduction??? This would be a reduction in the "floor price" but does not mean that we are all going to recieve the floor price. I kind of think that since the dates you are quoting I have recieved MORE $$$$ per calf.

We can't get so wrapped up in the aspect that the CDN $ has gone up so we are going to recieve less...IT has happended in the past when we have had currency fluctutations and guess what, the Americians had to come up with more $$/cwt in US dollars or they didn't own the cattle, they stayed in Canada and were put on feed here.

[FarmRanger]

Cattleman2 has a valid point, our dollar in relation to the US dollar is only one aspect to look at. Even though a large portion of our trade is with the US we are not in a vacuum. The Americans will find that they will have to pay more for everything else as their dollar drops in value, why not cattle?

[cswilson]

There was some fairly well off cowboys when our dollar traded at a premium to the U'S' dollar. I'm getting more like my old neighbor across the swamp-a very wealthy outfit but you'd never know by looking at it. Anyway a management guru crnered himone day and pointed out all the ways he could maximize his operation etc. etc. My old neighbor kinda scratched his head and said-'You know sometimes I just like to buy some shells and go hunt moose.' It was priceless-the management guy just deflated like a balloon lol.

[farmers_son]

Cswilson: I have a lot of respect for those old fellows. They learned a lot by surviving the 30s although they had some very good times after WWII. I am thinking the management guru should have gone hunting moose with your neighbour. There is time for fun and time for looking after business.

Cattleman2: Sure, prices rise and fall. Lets hope prices go through the roof. My grandfather said hope for the best but prepare for the worst. The changing dollar is going to have a negative impact on prices. I stay with my comments that if the dollar reaches 93 cents that the impact will be a 33% reduction in gross returns assuming (note I said assuming) the U.S. price of live cattle remains constant. That is not a market prediction, it is simply math.

[BFW]

FS your assessment of the situation is bang on. The rising dollar will have a huge impact on the profitability of those businesses selling commodities in which prices are largely determined in US dollars. For example if I expect to sell finished calves this spring for $90.00/cwt and the dollar rises from its current level of .8565 to .93 then, everything else being equal I can expect to receive somewhere in the vicinity of $83.00/cwt. That's a 90 dollar plus reduction on the price of a finished steer and will apply equally to the price of feeders as well.

Someone mentioned earlier that they are actually receiving more for their cattle despite this rise in the dollar. This is true but should provide little comfort going forward. These high prices are a direct result of the near record prices being received for live cattle in the US. The picture isn't nearly so rosey when you use more traditional US prices of say $75.00/cwt(US) for fats and $85.00/cwt for feeders. Not trying to paint a picture of gloom and doom but as FS says it's just math and a reality Canadian agriculture will have to face.

[kpb]

farmers son and BFW are exactly right. I'm not sure that I understand what Cattleman2 is saying--it is simple math that as the Canadian dollar moves closer to parity with the U.S., the amount of Canadian dollars we will receive will lessen. Our calves are priced off the U.S. calves, that's what the basis is all about. Cattleman2 seems to think that the U.S. will pay more for our calves but this is not the case--historically the basis between Alberta and the U.S. has been very constant and reflects transportation expenses, etc.

As our dollar rises, our feeder prices will fall, as BFW has correctly pointed out, this is not a market prediction but simple math. To say that the U.S. will lessen the basis by paying more for our calves in this scenario is wishful thinking and will not happen.

Last year at this time, as cowman can attest, I suggested that people buy as many feeders as they could handle, thinking that the border would open and everyone would get a big boost. The past nine months has been very good for feeders, grassers, etc for this reason. Right now I would suggest that everyone sell the calves they have this fall and not buy backgrounders. I see no way that expensive feeders bought this fall can make money in the next year.

kpb

[cowman]

kpb: I suspect your advice might be right...again. Of course quite often things are a little more complicated?
Tax problems, the abundant amount of cheap feed around, the general move to later calving and smaller cattle etc. etc.
Barley prices are sort of in the tank and probably still on the way down? I would assume this high Canadian dollar might make it more difficult to sell grain into the USA and might even prompt some American corn to cross the border?
I find it ironic with our "strong" Canadian dollar that I am paying more for parts from a US supplier? Shouldn't I be paying less?
I wonder if anyone could give an example of what they are paying less for, from America? If it works one way across the border shouldn't it work the other way?
So say for example: If I could buy one unit of an American product for a Canadian dollar when it was worth 63 cents...shouldn't I be able to buy 1.33 units now for my 85 cent Canadian dollar? Personally I don't see that happening but maybe I'm not buying the right stuff or something?

[kpb]

Cowman, I agree with you that buying feeders or not buying them is not a simple decision--there are various crosswinds in effect as you have pointed out. But, bottom line, I don't think backgrounders will make money this year.

Insofar as imports are concerned, you are correct again when you say that imported goods into Canada should be less expensive with a higher Canadian dollar. This should be reflected in lower inflation rates but I don't think this is the case. My gut feeling on this is that the middlemen/importers do not pass the increased buying power they have with a stronger Canadian dollar on to the consumer. I could be wrong about this but that's what I think happens and that is why the end user (consumer) does not get a break when, with basic economics, he should.

kpb

[farmers_son]

Some commodity inputs like grain will reflect the dollar very quickly. Kpb is right to suggest that when the suppliers of our inputs have enough market power they will tend to not pass along cost reductions in the form of lower prices to us. Many of our inputs are priced not according to cost but what the market will bear. Eventually market forces will force down those inputs too but there could be a time delay of several years.

I think where the stronger dollar will have a dramatic impact is our ability to repay debt. I have repaid a lot of debt over the years but looking back it was all paid for with inflated dollars. It is one thing to take out a loan when the dollar is 95 cents Canadian and pay it back with 65 cent dollars. The lower dollar had the effect of increasing my debt servicing capacity especially in my case where most of the loans were taken out when the dollar was stronger with few capital purchases made in the last decade.

It is a completely different story to take out loans when the dollar is 65 cents and have to pay those loans back with a 90 cent or stronger dollar. The effect of the dollar falling was a doubling or even tripling of my ability to repay preexisting debt. The rising dollar has the opposite effect. Given that it was struggle to pay off debt in the last 25 years even with a falling dollar, I am very concerned the effect the rising dollar will have on the cattle industry’s ability to pay down debt.

[cattleman2]

Still raising the question: Are you paying in CDN dollars or US dollars?? What currency are you selling your product in: CDN or US dollars.

If the answer to the above 2 questions is the same, the currency fluctuations have little impact on your day to day operations. Yes, I agree that your "buying power" in relation to the other currency has gone up or down, but within your own country, you are still paying with the same dollar, that last time I checked didn't change the amount on the face of the Loonie, no matter what the USD is at.

Don't understand where your Debt servicing capacity was so increased due to the $63 CDN vs USD? Please explain.

I am not just being a devil's advocate here, I really would like the explaination.