FOREX.......again

[lakenheath]

Talking to a lentil buyer out of Regina, SK yesterday. We were just chatting about what we thought would happen in the lentil market next year. Less acres, quality factor, etc. I mentioned to him the Canadian dollar potentially increasing is another factor. He disagreed. He thinks we can withstand a 10 cent increase to 95 cents without any price impact. Seemed like a smart guy, but was he blowing wind?

Is wheat a different creature when it comes to FOREX hedges than lentils? He said all other country's currency values and placed hedges are at the point right now that our lentil price is not impacted by the dollar. Find that difficult to believe.

Mind you, I am far from an expert in this area.

[nw9flynn]

You left this post very general.
What type of lentils was the buyer talking about? What time of the year was he refering to? It also really does depend on the market that the lentils are being shipped to.

Markets such as Columbia will buy the same amount of LGL whether the price is 0.20/lb or 0.07/lb.

Markets such as India are more price sensitive.

I would agree that the over supply of LGL has had a more neg affect on pricing that the rising CDN dollar if that is what the buyer was implying.

[chaffmeister]

General rule of thumb – foreign exchange risk exists when a trade is made in a currency other than the currency that the commodity’s value is truly determined. For Canadian farmers this means, foreign exchange risk exists on all commodities (crops) whose value is truly determined in another currency (I guess that means just about every crop). As the value of lentils are truly valued in offshore markets (not in Canada – even though Canada is the largest exporter in the world), and most of these markets are traded in USD, the price of lentils in CAD will be influenced by a change in the CAD/USD exchange rate, as well as (to a lesser degree) the exchange rate between the buying country’s currency and the USD.

I’m not sure why your Regina lentil buyer would say “we can withstand a 10 cent increase to 95 cents without any price impact”. Let’s assume everything remains exactly as it is right now – except the exchange rate moves to 95 cents. This also means all the currencies in the consuming markets – Turkish lira, Algerian dinars, Spanish pesetas, Sri Lankan rupees, Egyptian pounds, Indian rupees, and so on – are also static to the USD.

So, if the lentil price in the world market is 0.15 USD per lb, this is 0.176 CAD at 85 cents and 0.158 CAD at 95 cents.

Even if other price factors are moving around, it doesn’t change anything. The discussion here is not about what effect the exchange rate has on demand, rather just on price in Canada. For example, nw9flynn suggests that “Markets such as Columbia will buy the same amount of LGL whether the price is 0.20/lb or 0.07/lb.” Let’s assume these are USD prices; whether Columbia is buying or not at different prices does not change the fact that, if the USD weakens (CAD strengthens), the CAD price to Western Canadian farmers must go down - regardless of the actual buying price in Columbia.

I’m going to stick my neck out and suggest that your Regina buyer was really just talking about himself (as a buyer). In other words, if he gave you a price indication or bid, he’s saying he doesn’t have to change his bid to you even if the exchange rate moves by a dime. We should remember – this is early in the year, there is much to happen yet, and price indications are just that – indications. So a move in currency may not make him change his price indications at this time.

Unless I’m missing something...

[clancey]

Your lentil buyer is not thinking clearly . . . or (s)he has hedged enough dollars that a 10 cents increase will not affect their company . . . or as the previous poster notes, they thought you were asking if an increase in the value of the Canadian dollar would affect the price on the deferred delivery contract.

Of course, in a 10 cent grower market, the impact of currency is not as great as in a 25 cent market. But the impact is there.

I was told today the current track Vancouver market for No 2 Laird lentils is around US$12.

An 85 cent dollar yields $14.12 to pay you, transportation, cleaning and bagging. A 95 cent dollar yields $12.63 -- a decrease of $1.49.

That is too much of a change for the average grower bid for No 2 Lairds to be unaffected.

[Zaphod]

Also, don't look at just the Cdn/US exchange. The Canadian dollar has actually lost ground against the Indian rupee since mid-December and hasn't done much against the Chinese currency either. These are both key markets for our pulse crops.