Hay and grain?

[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.

[farmers_son]

You mentioned you work in a financial institution. I would expect you to be quite familiar with currency fluctuations and their impact on agriculture.

You made the comment “within your own country”. Maybe that is where the confusion lies. Our commodity prices are not determined with our own country, they are determined in the U.S. And yes those prices rise and fall within the U.S. however our returns are also adjusted for the changing dollar.

Debt and cash in the bank are not adjusted for currency fluctuations like the value of our production and other assets are. If you have a dollar debt when the CND dollar is par with the U.S. dollar you still have a dollar debt if the value of the currency fell overnight to $0.625 U.S. It is the same with your dollar in a savings account. It is still a dollar even though the buying power of that dollar has decreased. However it is now easier to pay down that preexisting debt with the $.62 dollar assuming you are paying down the debt with returns from production which should have risen by 153%, not that dollar in the bank. The cost of that debt has decreased due to the drop in the dollar.

Currency fluctuations do have an impact on day to day operations. Adjustments for the changing dollar do not affect production versus inputs perfectly. The value of our production is adjusted downward on a daily basis according to the value of the currency but the price of our inputs may be slower to adjust and some expenses will not adjust at all or very little. Fixed costs are called fixed for a reason. They tend not to change, especially change downward, because of a stronger dollar.

Exporters like cattle producers did benefit when the dollar falls and likewise loose that competitive advantage when the dollar strengthens. If you were to say one balances off the other that ignores the speed of the dollars climb and the impact such a rapid negative change has on producers. Also it ignores how the lower dollar got built into the balance sheet. Whether we are considering our balance sheets, cash flow or debt servicing the stronger dollar is going to hurt.

Re my debt servicing capacity. I was using my actual numbers which I am not going to put up here. A decrease in the value of the dollar from .95 cents to .65 cents has a direct positive impact on my debt servicing capacity to the tune of 146% assuming perfectly symmetrical changes in both returns and inputs. Over the same period my interest rate dropped by 42%, partly because of the currency rate. The remainder could be attributed to revenues rising faster than expenses.

[kpb]

Cattleman2 I have to say I am surprised that the effect of a rising Cdn. dollar on what the rancher receives is such a mystery to you, given that you work in a financial institution. It kind of makes a body wonder about the level of understanding in our bankers, etc.

Given that, the explanation is quite simple. If fats in the U.S. are selling at, say $1 U.S. a pound and our dollar is at .80 to the U.S., those same fats will be selling in Canada at about $1.25. Why?--Because it would take $1.25 or 125% of .80 to make up $1 U.S. Now this figure would have to be adjusted because of the historic basis mentioned in previous post but for the sake of comparison assume no basis.

Now if our dollar were to go to par--that is it is worth the same as the U.S.--we would receive just $1 Cdn. per pound for a fat if that fat was selling for $1. U.S.. That represents a 20% decline ($1.25 C to $1 C) in the price received in Canada for a fat, just because the dollar appreciated in value.

Farmers_Son and BFW are quite right in their posts on this matter--any rise in the CDN dollar will adversely affect any exporters, just as a decline benefits exporters because you receive more Canadian dollars, as the buck declines, for the product you export.

Our cattle are priced off the U.S. minus a regional basis discussed earlier and any thoughts about getting a Canadian-made premium or special price are complete pipe dreams. In reality, any part of North America that has a temporary premium is immediatly bought back into line with the U.S. price through arbitrage between the two places that creates an efficient market throughout the continent. I used to be a trader and I can tell you that inefficiencies in any commodity market are seen as very short-term (as in an hour or two) profit opportunities that are quickly levelled off as the market returns to balance.

kpb

[kpb]

Along with the impact of the dollar farmers_son what impact do you think the increase in the US herd will have on cattle prices in Canada ? I am not sure exactly what sector of the herd in the US is increasing, whether its in the feedlots or the cow herd.

[farmers_son]

As I see it, the U.S. has a very large domestic market for beef. A strong domestic economy will stimulate local demand for beef which could easily absorb the ability of the U.S. herd to expand. So U.S. demand for beef could be more influential to market prices than herd size. BSE is expected to impact the United States ability to regain export markets. The weaker U.S. dollar is expected to stimulate exports of grains which will tend to limit cattle expansion. You might be interested in this link to a speech by Keith Collins, Chief Economist with the USDA.

See: http://www.usda.gov/oce/forum/speeches/collins.pdf

I think the overall strength of the economy is an issue of concern. The U.S debt exceeds 70% of GDP and the growth of the U.S debt shows no sign of slowing. Rebuilding New Orleans is not going to help, neither is the war in Iraq. The economy is still very shaky after 9/11 which even in Canada is considered to be one of the major economic events in our country’s history.

[cowman]

I would expect the US cattle rancher is going to decline in the future. With the new Australian trade deal and soon beef coming in from South America, the price for manufacturing price is likely to go down?
I would suggest very soon there really won't be much of an American market for our cull cows and I doubt in the next few years we will ever see decent cow prices, in Canada or the US?
As we move more into this "global market" thing I believe we are going to see more and more price pressure for our cattle, hogs and crops. I see more of the same in the way of industry concentration and squeezing the primary producer?
Just about every industry in the world is feeling the change right now as the big players finish off the small independents, so why would we expect any different?
There are always opportunities in any situation? The times are achanging and you need to be able to adapt and change with them? Humans have a marvelous ability to find a way to make a go of it!
You may have to find your own little niche and you may have to do that several times in your lifetime...if you intend to survive on the land!
There are a million ways to make money in this country. If you get bogged down with the idea that cows are the only way then you'd better get your thinking cap on because you'll need to keep one step ahead of the pack!