Canadian Vending

Features Coffee Service
Coffee Trends: Spring 2015

Canadian exposure


May 11, 2015
By Brian Martell

Topics

“America sneezes and we catch a cold” is an oft heard cliché that metaphorically explains why small changes in the United States carry huge consequences north of the 49th parallel. 

“America sneezes and we catch a cold” is an oft heard cliché that metaphorically explains why small changes in the United States carry huge consequences north of the 49th parallel. 

A policy change regarding imports into the U.S., the Federal Reserve System’s (Fed’s) prime lending rate, job statistics and even foreign policy far away from North American soil all impact Canada due to our close economic and political ties with our neighbour. Laws like the Food Safety Modernization Act have started to impact Canadian producer-exporters who now must have third-party auditing of their food safety processes to be allowed to export to the U.S. The use of “pursuing policy by other means” (warfare) has had an effect on Canadian commodity prices, particularly oil. But perhaps the most profound impact Canada is feeling is the value of the loonie. The dominant currency worldwide is the U.S. dollar (USD), and while the value of our currency may not be weakening independently, how it stacks up against the greenback is the only measure that counts. U.S. job rates and a continued global perception that the USD is a safe haven have caused the value of their currency to rise compared to all others. From a federal policy point of view, there is not much Parliament can do to mitigate the significant gains the USD has made on our currency. Since 2013, the Canadian dollar (CAD) has lost close to 30 per cent of its value, thus driving up the price of imports, most notably those that come from the U.S.

The significance of the rising USD is keenly felt by those of us in the coffee market. Not only is the “C” price (the price of Arabica coffee on the futures exchange) quoted in U.S. dollars, but differentials and freight out from the port of New York City are as well. Offsetting the rise in the foreign exchange is the relative drop in value of green coffee on the Intercontinental Exchange (ICE). Since October 2014, the market has declined from its $2.20 high down to the current price of the mid $1.30s. In part, the reason for the drop in price on the ICE has to do with the gains made by the USD against all other currencies. The largest coffee-producing nation, Brazil, has seen the value of the Brazilian real drop considerably, making the value of their coffee exports higher based on the medium of exchange (USD). In other words, Brazilian coffee exporters and growers are not that put out by a declining “C” price as long as the converted value back into reals is kept high. In the past 52 weeks, the real has gone from $0.53 to $0.31, which is a decline of about 40 per cent of their currency.

Advertisment

The value of the USD (or any currency for that matter) is driven by several factors. The most important of these are balance of trade, increase or decrease in gross domestic product (GPD), employment stats, federal interest rates, inflation rates and, perhaps the most important, the perception of economic strength. The U.S. typically has a negative balance of trade, posting a $41.7-billion deficit for the month of January alone. This drives down demand for USDs and should have the effect of driving down the value of the USD.

Let’s look at another indicator since balance of trade is not affecting the USD’s value: GDP. The most recent stats indicate that the GDP grew by 2.2 per cent in the last quarter of 2014, down from five per cent in the previous quarter. Although the growth rate is trending down, the USD continued to rise in the same period. The U.S. posted a decline in the unemployment rate to 5.5 per cent in February with a single-month job gain of 295,000. If nothing else, this could be fuelling the fires that keep the USD floating above all others in spite of the fact that the U.S. participation rate (those actually working, defined as percentage of the total population) is the lowest since the Carter administration. Indeed, the unemployment rate is the catalyst that drives the perception of a strong U.S. economy, making the Federal Reserve consider increasing their Federal Funds Rate (which is between 0 and 0.25 per cent). With U.S. inflation at 1.3 to 1.4 per cent (due largely to cheaper fuel), Janet Yellen, the chair of the Fed, feels confident that an increase could moderate the economy. What does this mean for Canada and all other countries? An increase in the Fed rate would propel USD value even higher over that of other currencies. 

It has been suggested that this increase could take place mid-2015, making the cost of even buying green coffee that much more expensive. As in all political matters, perception matters more than reality, and if the prevailing perception is that the American economy is humming along at a good clip then there is little likelihood of seeing parity between our two dollars anytime soon. When the next correction happens, the USD may still be seen as the safe haven (as was the case in October 2008), meaning that if the U.S. economy slows down or even shrinks, the CAD will not necessarily gain strength in comparison.

Canadian coffee buyers will continue to see a relatively higher price for the foreseeable future due not to what we always regarded as the key indicator (the green coffee market), but to the declining strength of our dollar against the American.


Brian Martell works at Heritage Coffee as vice-president of sales and has 21 years of industry experience. Brian has also been the recipient of three prestigious awards: the Don Storey, Stuart Daw, and the Albert DeNovelus Customer Service awards. Questions, comments, feedback, start a dialogue? Email him at
brian@heritage-coffee.com.


Print this page

Related



Leave a Reply

Your email address will not be published. Required fields are marked *

*