I feel both pleasure and responsibility every time that I sit down to write one of my letters. I just came from what I would characterize as a very successful Richmond Show where I had the pleasure of talking with a steady stream of pallet and sawmill industry veterans. I am happy to report that the mood was the most upbeat that I have experienced in several years. While not everybody is feeling the economic recovery evenly, there is no doubt that our industry sees the light at the end of the tunnel. It is time for us to recover from the slow conditions and general negative attitude that had been so common.

            The fact is that the U.S. economy is improving, the overall pallet business is good, and attendees at the Richmond Show exhibited an enthusiasm not seen for a long time in our industry. It is also true that low-grade hardwood lumber is still in tight supply heading into the summer, with lumber prices still high and not showing much indication of softening in the short term future. And used pallet core supplies are extremely tight. While business is better, the potential for difficult supply conditions lingers on.

            I have a real love for our industry, and it is certainly not my intent to put down any of our readers. But let’s face the truth. Some of the owners and managers in the industry do not adequately understand the impact of overhead inflation and raw material price changes.

            To make a profit, a company must first cover both its variable and fixed costs. But when margins deteriorate enough, there may not be enough money to cover all costs and have some profit to splash over. Sure, it was difficult to raise prices and to even hold margins steady for a number of years. But now hardwood lumber and pallet cores are in tight supply, often very difficult to find. Low-grade hardwood prices have gone dramatically higher in the last two years, and core prices are reaching for higher levels as well.

            At one time pallet manufactures almost looked forward to higher lumber prices because it took higher lumber costs to pressure pallet suppliers into raising pallet prices. No matter how diligently one argues that you should raise prices to cover inflationary cost pressures, the pallet markets are so competitive that pallet suppliers have been afraid to pressure customers for price increases. In recent times, corporate philosophies have been unwilling to entertain price increases.

            How does someone raise prices in the face of this stubborn resistance? Well, first of all you have to educate your customers about the higher lumber and nail prices. They are more willing to consider shifting their way of thinking if they have good reasons to shift them. Realize that many buyers lack the historical understanding of the lumber markets to be able to grasp the dire situation existing today. Most of them are not prepared to think outside of the corporate "no higher prices" mindset.

            Second, you have to be willing to take a chance that you might lose a customer, at least for a while. I have heard success story after success story about raising a pallet price, losing the customer, and then seeing the customer return again after experiencing unacceptable supply problems. Raising prices successfully may rest heavily on your past performance. A customer is less likely to walk away from a supplier providing better quality and more service than what is offered by the competition. One thing is certain. Customers are not likely to volunteer unsolicited price increases, so pallet suppliers have to be confident enough to stare down the risks associated with trying to raise prices.

            The good news is that many pallet manufacturers and a growing number of recyclers have successfully raised pallet prices to cover at least a portion of higher costs. In the past, pallet companies often raised prices enough in these limited windows of higher lumber costs to both cover raw material increases and raise margins a little. It does no good to wait. Business is good, and higher prices are becoming much more common today. If you can’t raise prices and recover lost margins in this market, will you ever have the ability to do so?