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Market Update: Itís Time for Change in Pallet Prices East of the Rockies
Market analyst, Jeff McBee, explains why pallet prices must go up for some regions for companies to remain viable and to respond to upward lumber price pressure.

By Jeff McBee
Date Posted: 7/1/2014

                When this column last appeared, I talked about pallet prices. It was a brief paragraph addressing an important aspect of the market. This time, I want to take a more in-depth look at the condition of pallet prices in relation to profitability and being able to set your company in a position to make solid business decisions going forward.

                This is always a tough discussion. Raising pallet prices from where I sit and where the pallet salesman sits are two very different views. I’ve heard presentations that encourage raising pallet prices that sound like pep rally speeches. That is not where I am coming from.

                The only area of the country that seems to have a handle on pallet pricing is in the West. The area has a distinct advantage in that softwood pricing tends to move up and down in cycles – often unpredictable cycles – but cycles nonetheless. The consistent raw material movement keeps prices in flux and pallet buyers are therefore accustomed to pallet price movements.

                Raw material price moves east of the Rockies are typically modest. This is especially true in hardwood. The cycles typically produce modest raw material price moves that often correct when the market balances. Every once in a while, the hardwood market goes through fundamental shifts that change the market in a bigger way.

                The hardwood market east of the Rockies is currently in the middle of a once in a lifetime type of shift. The Pallet Profile Weekly has detailed this on a weekly basis as well as producing a white paper/report on the state of low-grade hardwood supplies and what can be expected in low-grade hardwood markets going forward.

                These shifts in raw material availability and subsequent price increases have and continue to force pallet prices upward. Some companies were late to begin moving their price and remain dangerously behind the price curve.

                The timidity in the market is partially understandable. Pallet suppliers are often faced with dealing with new purchasing agents every few years, if not more.

                Pallet demand began to shrink when the economy turned downward in 2007. When the economy folded in 2008, overcapacity was rampant throughout the pallet industry. Pallet suppliers were compelled to trim any and all fat from their operation. Pallet prices left profit margins razor thin. The trend lingered for far too long.

                The pallet industry endured the short end of the negotiations for over six years. The trend created a fleet of purchasing agents who had always been in the driver’s seat. All they had to do was say no to increases, regardless of how needed the increase was. If merely saying no wasn’t enough, they could put their business out for bid and get the desired result.

                The shift in low-grade hardwood supplies and prices has changed all of that. Yet the timidity cultivated though the long, deep trough recession remained in place. Some companies continued to lag behind raw material increases, which is a very dangerous tactic. This has been especially true of the small to medium sized shops, whose survival can often hinge on one large customer. There is a fine line to be walked between that business concentration risk and solid business decisions.

                The current market dictates that pallet buyers cannot go shopping as supplies and prices have the industry near its capacity for raw material concerns.

                Looking at it from a purchasing agent’s view provides several interesting angles. If a company has 100 cases on a pallet and the pallet price goes up a dollar, it’s only a penny per case. That’s not a big deal, right? It isn’t at that level. But when they are buying a truck a week and it becomes a $30,000 addition on that line item, it does become a big deal. It isn’t in their budget. But when the pallet supplier is able to justify that increase, then the pallet buyer is able to understand that the increase is unavoidable.

                An even larger view looks at the cost a manufacturer incurs if they have to shut down production for lack of pallets. That may sound like hyperbole, but it is not. There were two instances this spring of manufacturers shutting down from a lack of pallets. In both cases, it was pallet customers being stubborn about price. The cost associated with idling their production was huge compared to the small money involved with higher pallet prices. In one of those instances, it cost a controller his job.

                Customers – as always – are resistant to upward moves, but price resistance is pointless considering current conditions. Pallet suppliers who are continuing to fight price resistance are dealing with a mindset that is recipe for disaster.

                Pallet lumber buyers are struggling to keep enough wood on the yard for daily operation. You shouldn’t have to fight to make sure your pallet prices are where they need to be. The key for the pallet industry to be able to navigate the current rise in raw material pricing and any future moves is to stay informed and to ensure that customers are equally aware of the market’s moves.

                Raising pallet prices is never easy, but if you don’t have them in line with costs in this market, your costs could eat you alive.

                Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call (800) 805-0263 and ask for Jeff.)

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