All Things Considered: July 2007

Blame It on the Loonie.  For the Canadian poultry industry, the drop in the U.S. dollar could be a problem

The last time the Canadian dollar was close to this high versus the U.S. dollar cross border shopping became all the rage.
Consumers beat a steady path over border crossings, through customs and into U.S. stores. I was living in Saskatchewan at the time and was regaled every Monday with co-workers’ tales of their weekend jaunts to Minot, North Dakota.

The so-called “Magic City” seemed a bastion of bargains. No one thought twice about the four-hour drive, settling into one of the newly built hotels at the north end of North Dakota’s third largest city and shopping ’ til they dropped in a recently opened mall whose parking lot was filled with Saskatchewan licence plates.

Talking to friends and family in Niagara the story was much the same. Day trips to Buffalo or Niagara Falls, N.Y., were beyond routine. No one seemed to shop west of the Niagara River anymore.

With the Canadian loonie again ascendant I expected a repeat performance. I expected to hear of shoppers heading across the border in droves for everything from gasoline to eggs and maybe they will.

But when I asked friends in border communities if they had resumed their trek the response surprised me. In virtual harmony they all said: “Not so much.”

Gasoline wasn’t much cheaper in the U.S. Groceries were about the same as up here. The only real bargain was beer, but the cost of discount brands has always been much lower in the U.S. But even the beer wasn’t that much of an attraction because it is American beer and it tastes like it.

But it is still early days for the latest revival of the Canadian dollar.

In theory, a rising currency should make it easier and more attractive to import goods into Canada and make Canadian goods more expensive on world markets and more difficult to export.

It should make it more attractive for Canadian companies to buy foreign companies and more expensive for companies based in the U.S. and elsewhere to buy Canadian companies. It should also mean that investors, given the choice, would want to hold Canadian dollar assets as opposed to U.S. assets.

From a Canadian investor’s perspective there are few things worse than having a U.S. dollar asset and watching all of their supposed gains wiped out by the continuing decline in the U.S. dollar.

For the Canadian poultry industry the drop in the U.S. dollar could be a problem. Right off the top, it makes U.S. chicken, turkey and eggs less expensive in Canadian terms. If the U.S. industry cranks up production and ends up with an oversupply there will be an incentive to start dumping on world markets.

Unfortunately for Canada, there is nowhere else closer than we are and a surge in U.S. production combined with a rising Canadian dollar could make our tariff walls vulnerable.

Meanwhile on the grain side, the U.S. ethanol push and generally tight supplies for all grains has certainly driven prices much higher than they have been. As a result U.S. corn acreage has jumped, as has corn planting in Ontario, and given “normal” weather record harvests could result. This has taken the top off some of the price surge seen last winter.

But the USDA is still forecasting tight grain supplies for the foreseeable future. The rising Canadian dollar also factors into grain prices. World corn prices are set in the U.S. The rise in the Canadian dollar has taken some of the sting out of the price increases. This doesn’t mean corn will be cheap, it does mean it will hurt less up here than down there.

The same applies to soybean meal and everything else that is either imported or has prices set in U.S. dollars.

The other thing about changes in currency values is that it’s not the absolute value that hurts, it’s the change itself or, in other words, the volatility. If the Canadian currency was stable it could be worth 70 cents or two dollars in terms of U.S. dollars. It would be irrelevant because everything – wages, costs, prices – would adjust to reflect the exchange rate.

But adjustment takes time. Wages and prices tend to be a little sticky and hard to move. When the dollar makes a sudden shift up or down it takes wages and prices time to react. But given time they will.

So while a shopping exodus to the U.S. doesn’t seem to have happened yet it still might. The Minot malls don’t yet have their parking lots full of green and white licence plates and cars with Riders pennants dangling from their antennas, but they might.

And no one seems to be writing headlines about cheap U.S. cheese and chicken yet, but they might.  If they do, you can blame it on the loonie. n