rising dollar..

[nlcc]

Apparently the dollar rose today to over .90 cents U.S

any thoughts on this matter

[ruggb]

The effects of a rising dollar are fairly obvious to anyone selling things outside Canada such as farmers, factories etc. Many of our commodity prices would be higher with a lower dollar.
But having said that I have to admit there was something not right when our dollar was heading for 60 cents US.
Kind of made you feel like we were living in a 3rd world country. So I guess I am happy to see some rise in the dollar. How high it should go is another matter. As someone who likes to travel I am glad to see I have a little more spending power outside Canada.
It should be noted that our dollar is rising against the US dollar which is , as I understand it, tanking against other world currencies . Maybe something to do with the US government spending themselves into oblivion.
Point is, our dollar may not be rising against other countries money. But since the US is such a major trading partner the US/Canada dollar relationship is pretty important.
I think our dollar has been under valued for a long time.

[farmers_son]

You may be interested in this Bank of Canada site:

http://www.bankofcanada.ca/en/rates/exchform.html

This site provides historical information on the Canadian dollar versus a host of other currencies. For example the Canadian dollar has risen 6% when compared to the Euro since Jan 2000. Against the U.K. pound the C$ appreciated 16.4%. I am sure readers would be relieved to know our dollar has appreciated 18.84% against the Vietnamese Dong. During the same period of time the Canadian dollar appreciated 31% against the U.S. dollar and 42.8% since the C$ low in 2001. Our dollar is strengthening against world currencies at the same time as the U.S. dollar is weakening.

The dynamics of how this would affect Canadian agricultural producers is interesting. The falling U.S. dollar will increase their competitiveness globally although the U.S. is a net importer of beef and for that matter NAFTA is a net importer of beef. Still the price of live cattle in the U.S would be expected to rise against world markets. Yet we operate in a North American market (yea I know, tell the Americans that) and the weaker U.S dollar/stronger U.S. live cattle market will be beneficial to us.

The real pain of a rising Canadian dollar will be felt by those who had mortgages taken out when the dollar was weak. The benefit will go to those who had savings as the buying power of those savings should be increasing. I think we are going to see land going back to the lending institutions if not this year then next year as our dollar has increased in value 16-20% compared to world currencies, 43% against the U.S. dollar. That has to have an impact on our debt repayment capacity.

[kpb]

farmers_son, Because our feds and feeders are priced off the U.S. model, not an international standard (which I doubt exists) a rising Cdn. dollar can only decrease prices here. As our dollar reaches par with its U.S. counterpart, the advantage which is built into our prices because of a lower Cdn. dollar disappears.

As I have discussed before, if a U.S. buyer has $400 U.S. to spend on a steer based on prevailing U.S. prices, with a Cdn. dollar at .80 he can pay up to $500 Cdn. for that animal ($500 Cdn. times .80 equals $400 U.S.) If our dollar goes to par he can only pay $400 Cdn. for the same animal--the producer is going to see lower prices.

I also disagree that a higher Cdn. dollar will hurt those who had borrowed at lower dollar rates. The effect on buying power of a higher Cdn. dollar has always been ambiguous since many lower prices that should follow to imported goods are, in fact, absorbed by the importers and not passed on to the consumer. It is my contention that a higher dollar may result in lower interest rates since the Bank of Canada will not feel the impetus to support the dollar with higher interest rates and that may help people with variable rate mortgages.


kpb

[farmers_son]

There should be no doubt that a rising CND dollar vis a vis the U.S. dollar can only decrease prices here in relation to U.S. prices. However we need to keep in mind that U.S. commodity prices should be rising, all things being equal. Our U.S. friends tend to think their strong live cattle prices are a result of keeping out Canadian cattle which only amounted to 3% of their market at the best of times. I think the probability that their strong prices are a result of their weaker dollar cannot be discounted.

My comments regarding mortgages did assume a fixed interest rate. I have not seen where the Bank of Canada is looking to slow the climb of our dollar by lowering interest rates. However we should not overlook that whatever interest rate is being charged the principal needs to be repaid and it is one thing to take out a loan when we are looking at a 90 cent dollar and pay off the loan as the dollar decreases in value to 63 cents than to take out a loan at a 63 cent dollar and make those payments at a 90 cent or stronger dollar. I would point out that those of us who took out land loans in the early 80s would have been even further challenged to make our payments if the dollar had not fallen though out the period of the loan. We have not adjusted our thinking and perceptions to the reality of a dollar that is now stronger than at any time most of us have been farming and it just keeps on rising.

[kpb]

farmers_son, I think that any positive effect on U.S. cattle prices resulting from a declining U.S. dollar is more than offset by the current status of the cattle cycle in the U.S. I think there is no question that we will see lower cattle prices in the U.S. over the next few years which will result in lower prices here.

In regards to the effect of a rising Cdn. dollar on the ability to pay back debt: While it is true that principle needs to be repaid, by far the largest portion of any payment is in interest. And that interest, unless locked-in which I do not suggest, is dependent upto interest rates. Although the Bank of Canada has not recently said it would cut interest rates to slow the rise of the Cdn. dollar I would anticipate that this would, in fact, happen if the dollar continues to rise towards parity. As the Bank and politicians are aware, we are an exporting country and, as such, our economy is highly dependent upon a dollar that is lower than the U.S.'s. We did not stay long at par the last time we were there and I don't think parity would be a good thing for Canada.

Finally, I am not sure I understand your point about repaying debt in .90 dollars as compared to .70. Unlike cattle and other export-driven markets which are priced in U.S. dollars, repaying Canadian debt in Cdn. dollars should be a net wash. In fact, because a higher Cdn. dollar can be viewed as inflationary (more purchasing power internationally because our dollar can purchase more foreign goods) it might be said that a higher dollar results in higher land prices (for example) so that land purchased with a lower dollar is now worth more with a higher dollar. In any event I'm not sure that paying back those dollars to a Cdn bank results in problems for the Cdn. debtor.

kpb

[farmers_son]

Actually interest is not the biggest part of a mortgage. Assuming a 20 year term and a tax rate of 20% the total after tax cost of the interest will be less than the principal if the interest rate is 9.75% or less.

You see interest rates falling. I hope you are right. I think that is very optimistic given we are at all time lows for interest and it is reasonable to assume interest rates will rise to long term normals, around 9%. One thing supporting lower interest rates is the Canadian government debt which is being paid down however the U.S. debt is rising fast. The Bank of Canada may use higher interest rates to slow inflation.

A rising dollar has a dramatic impact on our ability to pay down existing debt. Loans I took out in 1982 when the dollar was 81 cents were paid off with monopoly money worth as low as 63 cents. This year I have to make my payment with a dollar that is worth 90 cents and it is not just my imagination that this is the hardest payment I have ever made.

The payments are fixed no matter what the dollar is. Given $40,000 annual payments when the loan was made in 1982 (82 cent dollar) the effect of a changing dollar would be like the payment in 2001 being $31,111.11 and this years payment $44,938.27, a difference of $13,827.16 between 2001 and today which is not available to cash flow the rest of the farm. As and if the dollar rises to par I am going to find that payment ever harder and harder to make.

It is general knowledge that a weak dollar was good for exporters and agriculture in Canada is export oriented. Therefore there should be no surprise if a stronger dollar is negative for exporters and we will find it is pretty darn soon if we have not already got the message.

[kpb]

farmers_son, I believe you are mistaken when it comes to interest rates and where we have come from. In fact, the current Bank of Canada overnight rate of 4% includes six increases and is therefore not at historic low levels. In fact, just over a year ago, in January of 2005 the overnight rate was at 2.5%.

On a historic basis, rates today are near normal. From 1935 to 1956, rates were never over 3% and from 1944 to 1951 rates were 1.5%. In fact, the long-term average for rates is nowhere near 9%--only during a few spurts in the early 1980's and again in 1991 were rates even at 9%. Since 1991 the rate has not reached 9%.

Although the risk of inflation is certainly there and a reason for rates to rise, I think it is far more likely that the B of C will lower rates eventually in order to pressure our dollar, given that we are an exporting country. There is lots of room to lower, we could certainly go down 1.5 points which is what we have come up over the past year.

As long as our dollar continues to appreciate, our cattle prices will decline. This will definitely affect cash flow. However the dollar appreciating, in itself, does not affect the amount of money in your pocket availiable to make debt repayments. A .60 dollar payable to a Cdn. lender is the same as a .80 dollar payable to a Cdn. lender. You may say that that dollar has more or less foreign purchasing power or that you have less dollars around because your U.S. denominated steers are worth less but the value of that single dollar does not affect your debt payment structure.


kpb

[farmers_son]

See: http://www.bankofcanada.ca/pdf/annual_page48.pdf

I can only offer this factual information backed up by the Bank of Canada. Between 1973 and 1995 5 year bank mortgages were seldom below 9%. If you want to gamble the farm that longer term mortgage interest rates are going to remain at 5% or less than you will have live with the consequences if you are wrong. I hope you are right.

As long as our dollar appreciates our cattle prices will decline. Correct assuming a flat U.S. cattle market. However as their dollar declines their cattle prices should rise. At least some of the strength we have seen in U.S. cattle prices has to be credited to their weaker dollar. As their prices rise, so will ours assuming our dollar remains constant with theirs.

You are correct to say that a 60 cent dollar pays off a loan payment like a 80 cent dollar. However when the dollar is 60 cents you have more of those dollars than when the dollar is 80 cents or when the dollar is at par. That is the problem, fewer dollars to pay off the same loan payment. I believe you pointed out “that you have less dollars around because your U.S. denominated steers are worth less…” A stronger dollar certainly does affect my ability to repay preexisting debt.

[kpb]

farmers_son, I think, again, we're going to have to agree to disagree on this issue. The interest rates that I quoted to you were from the Bank of Canada site and were the overnight bank rates, considered to be the benchmark interest rate in the country and the rate that other interest rates are priced off of. Those rates clearly show that we are not at a historic trough in interest rates, as you stated earlier and that we do have room to move lower.

The last time we were at par we did not stay there long and I doubt we will this time. A long stretch of parity would destroy our exporting economy and bring down the government. Do you see this happening--I sure don't. The only viable, proven, positive way to lower a currency on the international stage is to lower interest rates, thereby making it less attractive to own that currency. I think we will see that here if our currency continues to rise against our largest trading partner.

Finally, I believe it was in your earlier posts that you stated that a rising Cdn. dollar, in itself, would make debt repayment more difficult. This is not correct as long as the creditor and the debtor are both negotiating in Cdn. dollars. While it may be true that a declining calf price will result in less cash flow as I said earlier and, therefore, could impact debt repayment, a rising dollar, by itself will not affect debt repayment in Canada.

You think that the U.S. calf price will remain steady or trend higher because a lower U.S. dollar will make cattle exports from that country more attractive. While I see this point of view I think the expansion in the U.S. herd, combined with my view of where we are in the cattle cycle after several years of very high prices, will more than offset the positive effect south of the border of a lower U.S. dollar.

farmers_son, I respect your point of view on these issues and enjoy discussing them with you. Sometimes I agree with you, other times not. In my old business we used to say if you asked 10 economists their views on anything you'd get 10 different viewpoints. Trying to get a handle on the economy or interest rate directions is an art, not a science and certainly not something that anyone can make a definite, final statement on. These things are fluid and do change, day to day.

In appreciation of your discussion and in the interest of keeping you posting I'll make you a bet. I bet that two years from today, fed prices in Canada will be at least .10 lower than today. The loser to pay for a steak dinner for the winner and his wife at a steakhouse of the winner's choice in Calgary. You on?

kpb

[farmers_son]

Whether the price of fed cattle will be 10 cents lower in Canada in two years is really not the point of this thread. The point is the effect a rising or for that matter a falling dollar would have.

“The last time we were at par we did not stay there long…” History does not necessarily repeat itself, at least in a predictable manner. Things change. You need to keep in mind that the dollar used to be pegged to the gold standard. That has changed. Since 1974 the U.S. dollar has no longer been backed by gold or silver or a combination of the two. Your quotes of interest rates in the 1920s would therefore be somewhat questionable as applying to today’s situation. Did you know that in 1963 the words “Will Pay to the Bearer on Demand” were removed from U.S. bills? The dollar today is only worth the intrinsic value people place upon it.

The title of this thread is rising dollar but has anyone considered that the dollar is falling, not rising? When we consider the value of the dollar in terms of the value of gold upon which the currency used to be based, the value of all our dollars has decreased even more.

Consider this if you will…In another thread I pasted a quote about Betting on Agriculture. If you pay attention to how much the value of world currencies have decreased against standards like gold then why not consider the possibility that cattle have quite a bit of upside potential, no matter what a cattle cycle or other tea leaf readers might say.

The price of gold bottomed at about the same time as our dollar in 2001. Since then the price of gold has gone from $264 to $600 U.S. dollars while our dollar has appreciated 42% against the U.S. dollar. The reality is both currencies have lost a great deal of value against gold.

As always, I enjoy bouncing ideas of the Agri-ville crew but duty calls and we are getting busy with field work. This will be my last post for a while. If I might leave a message it is that there is more upside potential in cattle than one might think and the future might be bright after all.

[kpb]

I think it's pretty bizarre to label people, like myself, who believe in economic cycles as "tea leaf readers" while at the same time putting forward some wacko ideas about the gold standard and tying the greenback to gold. It's pretty much economic fundamentals to believe in the cyclical nature of most commodities. Whereas putting yourself in the camp of the goldbugs who want to tie us to some 1935 relationship between gold and the dollar is pretty far out of any sort of reasoned economic approach. Do you believe in all these silver conspiracy theories too?--they seem to go hand-in-hand for the goldbugs. And then there's UFO's...

Hey, I guess you didn't like my bet?


kpb