In November 2015, the U.S. Energy Information Administration reported crude reserves to be 39.9 billion barrels. This is roughly equal to total U.S. crude production in 2015. So with the largest production year since the 1970s, the U.S. has been able to stockpile the equivalent of one year’s worth of oil production. It should be no surprise then that U.S. oil prices have dropped more than 70 per cent in the past 18 months, dipping below $30 a barrel for the first time in 12 years. While economists may debate to what degree energy prices impact the so-called Canadian ‘petrodollar,’ the loonie has trended downward alongside oil in this latest slide, plunging to 14-year lows.
Oil companies are preparing for a prolonged downturn as analysts say there’s potential for further declines. The U.S. removed export tariffs the end of December. In addition, the end of sanctions against Iran could bring thousands of additional barrels of oil to an already oversupplied market and drive prices down further. Major producing countries are in a fight for market share as countries try to offset lower prices with larger volumes. The glut of oil on the global market may get worse before it gets better putting further pressure on the Canadian dollar in 2016.
While the Canadian dollar has slipped to 14-year lows, analysts note that it may need to fall even further to reflect economic activity. Analysts differ on how far the Canadian dollar could potentially drop, ranging between US$0.65 and US$0.59, before conditions stabilize. But recovery is only expected at or after mid-year.
What does the lower dollar mean for the beef industry?
Higher Beef & Cattle Prices - The exchange rate always impacts Canadian beef and cattle prices. The ability to arbitrage means that prices are determined in an open North American market. The depreciating dollar supported live cattle and beef prices in 2015. Research has shown that a one per cent depreciation in the exchange rate increases beef and cattle prices by one per cent.
Packer Competitiveness - A lower dollar decreases Canadian packer costs compared to U.S. competitors in U.S. dollars. So the labour cost disadvantage is muted, enabling Canadian packers to be more aggressive and keep more cattle in Canada.
Source: Meatbusiness