Minnesota's export growth wiped out by dollar's strength

MGS Machine, a Maple Grove maker of high-dollar equipment that packages pharmaceuticals and medical devices, won exporter of the year in Minnesota in 2013, when foreign sales accounted for nearly a quarter of the firm's revenue.

Since then exports have plunged. Competitors in Germany and Italy, powerhouses in the packaging industry, have gained an edge over firms like MGS Machine in the past two years: the strength of the dollar.

The dollar has risen about 25 percent against the euro since the end of 2013, which means American products are suddenly 25 percent more expensive than European goods for many global customers.

"A lot of our systems are over a million dollars apiece. That's real money," said Richard Bahr, president of the company, whose machines are installed in 27 countries. "When you're talking $200,000, $300,000, $400,000, that raises some eyebrows. You've got to explain yourself."

That equation has delivered a punishing blow to American exporters. International sales fell 7 percent last year in both Minnesota and the United States, dropping to 2010 levels and creating a drag on economic growth.

The dollar's rise stems partly from steady domestic U.S. economic growth. Another factor is tightening monetary policy at the Federal Reserve, which last year ended a bond purchasing program and took a first step to lift interest rates from ultralow levels. This contrasts with other central banks — including those in Japan and the European Union — that have kept interest rates lower or even dropped them into negative territory.

The dollar has fallen slightly as the Fed has delayed raising rates, offering some hope of relief, but the export decline is a case study in state government's limits in the face of hard-to-predict global shifts. In 2012, Gov. Mark Dayton announced an initiative to double Twin Cities exports by 2017. State exports have declined since 2012.

"The bulk of that is just translating foreign currencies to U.S. dollars, and that's just a result of the fact we publish our results in U.S. dollars even though we operate in local currencies," said Jim Stoffel, Tennant's treasurer. "That's just the translational impact of running a global organization."

Demand for Tennant's products overseas hinges on the health of local economies more than currency fluctuations, Stoffel said, because the firm manufactures all over the world. Broadly speaking, the same is true of 3M, said Matt Arnold, an analyst with Edward Jones.

Businesses with large chunks of dollar-denominated sales in other countries are taking huge hits on demand, including Deere & Co. and Caterpillar, firms with supply chains that spread across Iowa, Wisconsin and Minnesota.

"It's impacting 3M far less than the lion's share of the firms I track that are multinationals," Arnold said. "Cat's the crown example. A company like Boeing or Deere — those are the ones that face that to a large extent."

Deere's profits fell from $3.2 billion in 2014 to $1.9 billion in 2015. Caterpillar's fell from $3.7 billion to $2.1 billion.

"This is no surprise to anybody that's involved that we're in this market right now," de Ruyter said.

Caterpillar's weakness trickles to Donaldson Co., the Bloomington-based maker of filters and exhaust systems for heavy equipment. The firm's fourth-quarter profit fell 21 percent, to $38 million. Demand for Donaldson filters is probably affected by the strength of the dollar, said Brad Pogalz, director of investor relations for the company, but that's difficult to tease out.

"Everybody's talking about exchange rates right now," Pogalz said. "So it's something affecting the top line when we bring the dollars back, but that's as far as we've gone in precisely quantifying it."