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Currency risk protection offered

Volatile currencies can hurt your bottom line more than changes in commodity prices. That’s why the Keystone Agricultural Producers (KAP), in conjunction with Western Union Business Solutions, is introducing a new foreign exchange risk-management program.

“If it makes sense to a producer, we can provide a solution,” said Mark Kelly, Western Union Business Solutions’ senior business development executive for Manitoba. “If it doesn’t make sense to a producer, there’s no need for them to hedge it (currency risk).”

How many farmers will need or use the program is unknown. The demise of the Canadian Wheat Board’s sales monopoly Aug. 1 potentially could see more farmers bypassing Canadian grain companies and exporting themselves. However, observers predict most farmers will continue to sell to Canadian buyers. If they do, the companies will cover the currency risk, said Derek Brewin, an agricultural economist at the University of Manitoba.

A farmer is vulnerable when he or she sells products — grain or livestock — for future delivery to a buyer at a specific price in American dollars. If, by the time the farmer is paid, the loonie has appreciated relative to the U.S. greenback, the farmer receives fewer Canadian dollars.

Just as farmers can lock in a futures price to protect the value of their produce, futures contacts can also be used to hedge against fluctuations in the value of the Canadian dollar.

“KAP is open to new forms of risk management that helps producers to be more efficient,” said KAP president Doug Chorney. “This is just one more tool members can use.”

Chorney said he knows farmers who have already been delivering crops such as soybeans, oats, flax, forage and forage seed directly to buyers in the United States. Presumably such farmers will be interested in the program, he said.

It’s the same for cattle or hog farmers who ship south.

There’s a currency risk when farmers sell directly to American buyers or use U.S. futures markets, Brewin said. Canadian cull cow prices dropped from 60 to 30 cents a pound following the BSE outbreak in 2003, he said.

“That price drop is nowhere near as big as the price drop caused by exchange rate changes,” he said

“The exchange change between now and BSE in 2003 has been more important than the impact of BSE.”

The value of a nation’s currency usually reflects the demand for its exports, and that applies to Canada, particularly because of oil, said Brewin. So hedging currency risk makes sense for farmers trading American futures markets, Brewin said. But he warns farmers that selling a futures contract without owning the equivalent in physical grain is speculating.

“If you have canola in the bin and you sell a futures contract that’s decreasing your risk,” he said. “If you just go out and trade in the futures market with no physical product to offset the futures contract, you’re actually increasing your risk. You have to be careful.”

The new ICE wheat futures contract, which trades in Canadian dollars, and U.S. futures markets, are not designed for farmer hedging, Brewin said. The contracts, in addition to price discovery, are designed for grain companies to hedge their risk. Farmers can lock in prices through company programs that are possible by having access to futures markets.

KAP is a natural partner for Western Union Business Solutions because it represents most of Manitoba’s farmers, Kelly said. Western Union Business Solutions plans to provide KAP members information about currency hedging through webinars and KAP’s newsletter.

“My expectations are we’ll have to earn the right to get the business by having meetings and educating farmers and showing our value,” he said.

“Agribusiness needs a partner that’s going to sit down and analyze their operations and make sure they understand whether the currency is going to impact their bottom line.”

About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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