Plunging home values. Soaring gas prices. Inflation threats. Slowing indicators in everything from consumer confidence to manufacturing orders and construction starts. With so many ominous signs of an economic downturn, it’s enough to give the most seasoned businessperson a bad case of the “what’s-next-jitters.”
For the Kentucky economy, however, help is coming from a very unexpected place – the falling dollar. The value of the dollar has fallen anywhere from 5 to 30 percent against foreign currencies in the last two years, meaning that goods and labor in Kentucky are now available at bargain basement prices to other countries.
“There are two primary factors that affect trade,” said Richard DeKaser, the Washington, D.C.-based chief economist for National City Bank, which has the largest market share of deposits in Kentucky. “One is relative growth rates, or the rate at which foreign economies are growing. And today, we see tremendous growth in many emerging economies like China and India. Even the European Union has not seen major downturns.
“The second factor,” DeKaser said, “is exchange rates. The falling dollar has made our goods more competitively priced. This gives us a smaller trade deficit, and as manufacturers cater to overseas sales, we see better sales results overall.”
This scenario is already playing out in Kentucky, a state that ranks ninth nationally per capita for exporting, according to the Kentucky World Trade Center. While it may be difficult for companies selling imported goods in the United States, Kentucky companies that export are seeing record sales overseas … and new opportunities to invest in cheaper stateside operations. According to the U.S. Census Bureau, since 2003 exports from Kentucky rose 83 percent to $19.6 billion. More than 17 percent of all manufacturing workers in Kentucky depend on exports for their jobs.
DeKaser, who has been named one of the top five “most accurate economists” by USA Today every year since 2003, published a recent report about the falling dollar. Between 1999 and 2005, he noted that the high value of the dollar contributed to growing trade deficits, which directly translated into an average drag on the nation’s economic growth of about 0.5 percentage points each year.
The converse effect of the falling dollar has been even larger and more positive, though. Last year, DeKaser noted, foreign trade added nearly a full percentage point to the nation’s economic growth – almost completely offsetting the drag caused by the housing sector’s woes.
“At this point, I’m not predicting a recession,” DeKaser said. “Our economic indicators – namely income, employment, industrial production and manufacturing and wholesale sales – have not dipped low enough yet. And we have offsetting factors, like the value of the dollar, which is helping the economy,” he added. While he doesn’t expect the housing market to bottom out until the end of this year, he said the mortgage crisis has brought two good long-term trends: more affordable homes and a lending community that’s much more judicious about sub-prime and jumbo loans.
Kentucky World Trade Center: Picking up Speed
Times are busy at the Kentucky World Trade Center, a non-profit, membership-based institution dedicated to helping Kentucky businesses trade overseas. Last year the group launched 500 new trade deals and initiatives through the group’s offices in Louisville, Lexington and Murray, Ky.
Ying Juan Rodgers, vice president at the center, said Kentucky has emerged as a real leader in exporting. “Overseas, our products are very well regarded. Usually the Kentucky name is associated with quality, with our good farmland, food industry and natural resources. I’m so encouraged to see more Kentucky companies getting into exporting. There are great opportunities to sell today, and they need to take advantage of them,” Rodgers said.
Rodgers said that Kentucky companies export more to Canada than any other country, mainly because our currency is now valued 30 percent less than the Canadian dollar, and we have little to no duty tax because of the North American Free Trade Agreement.
Not surprisingly, Rodgers says bourbon is one of the state’s most highly regarded products, with sales very strong everywhere, but growing fast in areas such as Eastern Europe, where it is just coming onto the scene. Trade in automotive parts is also high, especially due to Toyota’s international involvements. And the wood industry in southern Kentucky is currently working on securing new deals with China for selling the state’s lumber.
One of the biggest growth areas for the state, Rodgers said, is coal and clean-coal technologies.
“China is into coal mining, but their coal quality is not very good. In Kentucky, we have some of the best coal quality in the world, and that’s a big opportunity for us,” Rodgers said. She noted that researchers at the University of Kentucky are currently working with China to help it clean up its heavily polluted environment with clean-coal technology. Not only does this help the world’s environment, but it opens up the door to sell both Kentucky coal and the machinery and technology needed to operate a clean mine. And other countries, namely Australia and India, may soon follow suit.
But of all the products sold overseas, Rodgers said the most in demand are its food products: high-quality corn, beef, Papa John’s pizza and especially Kentucky Fried Chicken.
“In other countries, especially in Asia and Latin America, Kentucky Fried Chicken is not considered fast food… It’s upscale dining. People love it so much, sometimes I have a hard time convincing even very well educated people that the entire state of Kentucky is not Kentucky Fried Chicken. They can’t separate the two in their minds,” she laughed.
Exporting has Broad Impact
For the Kentucky beef industry, the falling dollar has allowed it to get back into the global exporting game and win. At 1.3 million cattle sold each year, the state is now the eighth-largest exporter of beef nationally, and the largest beef state east of the Mississippi. According to Lee Meyer, extension professor of agricultural economics and marketing at the University of Kentucky, exports of Kentucky beef have increased from 4 to 6 percent annually in the last few years, mainly because of the 10 percent cost benefit provided by the falling dollar.
“Demand for American beef took a hit in general with the Mad Cow scare (in 2003-04), but the falling dollar has allowed Kentucky producers to compete against other producers like Canada,” Meyer said. “It’s getting easier to sell our beef through to Asia now. We’ve been able to promote the quality of Kentucky beef,and compare favorably against our competitors in other big beef states like Kansas and Iowa.” More favorable pricing for American beef also means farmers have a better cushion for profits, he added.
Bourbon is one of Kentucky’s most recognizable exports. But for producers like Heaven Hill Distilleries, business flows both ways internationally. While they produce and export such flagship brands as Elijah Craig and Evan Williams, they also import a variety of international brands, including a pair of increasingly popular French products – Hpnotiq (pronounced “hypnotic”), a fruity blue, vodka-spiked cognac; and Dubbonet, a fortified, sweetened wine with a touch of quinine.
Export-import businesses like this should be seeing both good and bad from the falling dollar, but Heaven Hill President Max Shapira says that isn’t the case.
“The exchange rate has been great for us selling overseas. We’ve seen double-digit sales increases for the last two or three years on our flagship brands, and the demand outstrips the supply,” Shapira said. “Now when it comes to the international brands we’re selling here, the currency situation has meant we’ve had to raise prices by two or three dollars a bottle. But we’re fortunate in this respect. We sell high-end products, and that market isn’t so price driven. Our sales across the board have been very good.”
Shapira said the drop in price for their Kentucky-made products has helped the retailers who sell their products invest more in promotions and events and expand bourbon’s reputation as the fast-growing “in drink” in countries where it isn’t as well known. In fact, demand is so good for Kentucky spirits that Heaven Hill will soon open an expansion to its distillery that will increase production by 40 percent.
For D.D. William-son, a Louisville-based producer of caramel food coloring and other food additives, the currency picture is far more complex. While it has its headquarters and a manufacturing plant in Kentucky, the company operates seven caramel plants on five continents, which together employ 160 people. Caramel coloring from D.D. William-son enhances everything from European dark beers to brown gravies, soft drinks, even pet food – for a total of 1.5 billion servings worldwide every day and a 50 percent global market share.
“For instance, in 2004 we bought a plant in Manchester, England. Since then, the pound sterling has appreciated 10 percent against the American dollar. So now, my plant there is worth 10 percent more, and our earnings get a little 10 percent kick,” said Ted Nixon, CEO of D.D. Williamson.
The now lower cost of doing business at home has led the company to consider whether to bring some international manufacturing back home to Kentucky, Nixon said, though it hasn’t made a decision about that yet. While the falling dollar has helped, other inflation pressures remain for their key ingredients, such as corn, which has doubled in price, and wheat, which has tripled.
“Doing in business in Kentucky has many logistical advantages,” said Campbell Barnum, president of D.D. Williamson in Brazil and Swaziland, who’s based in Louisville. “We have the UPS hub here with one-day service. We have abundant rivers and a central location. We have a good talent to choose from, access to the arts, short commutes and a great cost of living. The falling dollar helps level the playing field economically, and I think the time is coming when we see a much more balanced trade situation worldwide. That will be a great thing for Kentucky,” he said.