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B.C. Home » Agriculture » Business Management

The Role of Exchange Rates in Managing Your Farm Business

The Canadian dollar has done some amazing things over the past 10 years-relative to other currencies-resulting in positive returns for some farm managers and variable results for others. This factsheet provides an overview of the role of exchange rates, examples of exchange rate fluctuations to specific farm businesses, examples of strategies and a list of web resources for the farm manager.

A Quick Overview of Exchange Rates

The exchange rate is the ratio at which the currency of one country can be exchanged for the currency of another country. Exchange rates are required to facilitate international trade including purchasing goods, services or capital from a country using that country's currency.

The exchange rate is based upon the demand and supply for a currency. For example, a high demand for Canadian goods allows the price that others countries must pay for the Canadian dollar to increase or sets the exchange rate higher.

Exchange Rates and the Farm Business Manager

Even though you may not consider yourself a direct exporter or importer, it is likely the buyer or seller of your products is exporting or importing the product in some form. Therefore, indirectly, the demand for your product or supply of your farm inputs can be positively and negatively affected by the exchange rate. There is no doubt the individual producer cannot affect the exchange rate, unless you are of a sufficient size to buy and sell a large percentage of the currency of a country. However, awareness of the role of exchange rates and the need to find and use the correct information in terms of your own business is important. The following examples illustrate this role and importance.

Example 1: US Exchange Rate and Canadian Prices. Anticipating possible increases or decreases and understanding the role of the US exchange to the price of products & equipment is important for the Canadian producer as it can affect debt load, interest charges, financial risk, depreciation and indirect expenses for the farm business. A decrease in the exchange rate for the Canadian dollar may mean that the farm manager will pay more for US manufactured equipment. There may be a strong effect on the farm profits and cash flow based upon the level of capital purchases required in that year. Another illustration of the effect of the US to Canada exchange rate deals with product sales in process. If for example you are selling hogs to the United States and have signed a contract based in US dollars you may be open to exchange rate risk. If the Canadian dollar strengthens shortly after the contract has been signed you will realize a net loss as you will obtain a lower amount of Canadian dollars for your product. Of course, the opposite scenario will result if the Canadian dollar weakens relative to the US dollar as this will have positive effect on your cash flow as you will receive more for your product.

Example 2: Importing of Goods to Process and Sell in Canada.

An increase in the exchange rate of the main input to a processing operation can significantly decrease the processing firm's profit margin. For example, if you are purchasing goods from Australia to process and expect the Australian exchange rate to decrease over the next few months, you can take advantage of the weaker Australian dollar to buy more goods at that time. The weaker Australian dollar translates into greater buying power with your Canadian dollar and a greater margin for your processing plant.

Example 3 Apples to Japan

In some cases a lower Canadian exchange rate can increase sales of a product as the Canadian exports appear less expensive to international buyers. For example, if a Canadian apple grower ships apples to Japan along with a competitor from Washington USA and the Canadian dollar weakens against the Japanese Yen, this may result in the Japanese buyer choosing the Canadian product over the product from the US. The reason being that the Japanese buyer would get less product per dollar buying the US rather than the Canadian apples. A weaker dollar may result in a benefit in product volume sales

Exchange Rate Strategies

A relatively small change in the exchange rate can have a large effect on the price of product and supplies and on the final profit margin of a farm business depending upon the percentage of the business (direct or indirect) conducted with a specific country. Thus depending upon your business, market, suppliers and product you should consider the following list of strategies:

• Research the exchange rates and anticipate highs, lows and trends to provide data for making business decisions .
• Pre-buy or pre-sell product or foreign currency to ensure you are guaranteed of a certain margin.
• Conduct breakeven & sensitivity analysis using a range of optimistic, pessimistic and most-likely exchange rates and prices for inputs and products to define a set of values that you know will result in your farm business having a positive margin.
• Set up different currency accounts resulting in an offsetting effect of exchange rate increases and decreases between your accounts (e.g., gain in one and lose in the other account).
• Hedging: Look at the potential to hedge your dollar currency, product or supply on the futures or options market. However, be aware that there are specific minimal amount & costs associated with hedging and these may not exactly match your own requirements.
• Define the dollar value of contracts for the purchase or sale of product /service in specific local currency to allow the risk of the exchange rate to be shared with others and not solely the risk born by your farm business.

Resources for Exchange Rate Information

Agri-Food Trade Centre: Agriculture & Agri-Food Canada
http://ats.agr.ca/general/home-e.htm

Agriculture Exchange Rate Database
http://www.ers.usda.gov/data/exchangerates/

Bank of Canada
http://www.bankofcanada.ca/en/

Canada/BC Business Service Centre
http://www.sb.gov.bc.ca

Canadian Department of Foreign Affairs & International Trade http://www.dfait-maeci.gc.ca/menu-e.asp

Canadian Trade Commission: Export Source
http://exportsource.gc.ca/dindex2_e.html

Exchange Rates and Canada
http://www.afpc.tamu.edu/pubs/0/373/wp-2002-02.pdf

Industry Canada Strategis
http://strategis.ic.gc.ca