Agricultural and food production companies are seeing their costs rise, with imported food, farm equipment and fertilizer all becoming more expensive in recent months.Fred Lum/the Globe and Mail
As the Canadian dollar slumps to near five-month lows, exporters are getting a boost while importers such as food suppliers, already battling inflation, are facing more headwinds.
The Bank of Canada held its benchmark interest rate steady last week for the first time in a year, signalling its confidence that inflation is starting to retreat. As a result, the dollar fell to 72.50 US cents, as higher interest rates tend to attract investment. Meanwhile, the recent collapse of the Silicon Valley Bank has caused some analysts to suggest the U.S. Fed might pause its rate hikes for a month – Monday afternoon, Goldman Sachs said it was no longer projecting an increase of 25 basis points in March, but reiterated it continued to see those hikes in May, June and July.
The divergence in the two central banks’ policies means more pressure on the Canadian dollar is likely ahead. Export Development Canada principal economist Ross Prusakowski said the export credit agency is expecting “modest downward pressure” on the currency over the next four to eight months.
Typically, businesses that export goods and services to other countries benefit from a weaker Canadian dollar, as their offerings become cheaper for international buyers and commodities priced in U.S. dollars translate into higher revenues. Many of Canada’s oil and gas producers and mining companies, already enjoying strong profits with firm energy and metal prices, are getting an extra boost from the weaker loonie.
Over all, the Canadian dollar has been dropping since May, 2021, but has remained within the 70 to 80 US cent range, which is typical for the past six years, said Stephen Tapp, chief economist at the Canadian Chamber of Commerce. But further drops could start to weigh on bottom lines.
“Most businesses are able to deal with changes of a few cents here or there. When the dollar moves by 5 or 10 per cent in a short period of time, that’s very problematic,” Mr. Tapp said. Sweeping impacts can be expected if the dollar drops and stays around the high 60 US cent range, he cautioned.
Importers of goods that are restocked frequently, such as fruits and vegetables, are particularly vulnerable to immediate price increases, he said. Grocery prices have been climbing at their fastest pace in almost four decades – double the overall inflation rate. Meanwhile, grocery companies have been posting huge profits and have had to deny allegations that they are taking advantage of an inflationary environment, saying they are facing pricing pressure from their own suppliers.
Indeed, agricultural and food production companies are seeing their costs rise, with imported food, farm equipment and fertilizer all becoming more expensive in recent months, said Keith Currie, the president of the Canadian Federation of Agriculture.
Farmers are also seeing higher costs as a result of a supply chain that has yet to completely sort itself out, he said. But the lower Canadian dollar is also boosting their sales to the U.S., Canada’s largest food export market. “That has helped offset some of those increases in inputs,” Mr. Currie said.
The dollar’s decline could also mean that more of those costs are transferred to consumers. Royce Mendes, managing director at financial services firm Desjardins, said Canadians have become accustomed to rising prices for things such as groceries and clothing.
“After a period of high inflation, it is more difficult for consumers to discern which price increases are avoidable and which aren’t. The consumer tends to become more willing to accept higher prices,” Mr. Mendes said.
Some Canadian retailers have already said the weakened dollar could start to have moderate impacts on their bottom lines.
When speaking to analysts during a recent quarterly earnings conference, Dino Bianco, the chief executive officer of KP Tissue Inc., expressed concern about the relative price of pulp needed to make toilet paper. Tammy Nunez, the interim chief financial officer of Pet Valu Holdings Ltd., and Greg Hicks, the chief executive of Canadian Tire Corporation Ltd., both said foreign exchange is already having an effect on earnings.
For industries such as manufacturing, where companies import raw materials or unfinished goods and then export finished products, a lower dollar tends to even out to a slight gain. Mr. Tapp said the county’s manufacturing sector “was struggling in 2022” but in recent months has improved and is now “holding up better than people expected.”
The lower dollar could also be a boon for the travel industry, as international visitors take advantage going into the busy summer months and Canadians avoid more expensive travel outside the country, Bank of Montreal chief economist Doug Porter said. Retailers along the border could also benefit from U.S. shoppers seeking lower prices.
Over all, a lower dollar could help increase Canada’s gross domestic product, Mr. Prusakowski said. The Bank of Canada has estimated that every 1-per-cent drop in the dollar pushes GDP up 0.1 per cent in the short term.