Suppose your corrugated box supplier offers to guarantee your prices for a year. Should you accept the offer?
My first reaction if presented with such an offer would be, well, I guess this supplier expects box prices to go down in the next 12 months! This seems to be the logical conclusion: if the supplier thought corrugated prices would go up during the year, they wouldn’t offer to hold today’s price.
Or would they?
While it’s certainly possible the supplier expects prices to fall, there are many other reasons why a box supplier would offer a long-term price guarantee today:
- The supplier may want to lock-in production volume to avoid possible shutdowns or shift eliminations. If you are a high-volume customer with steady usage, you’re the ideal target for a price guarantee.
- The supplier may have negotiated price guarantees with their suppliers, thus reducing the risk of locking in your prices today.
- The supplier may have implemented new technologies to substantially reduce production costs, thereby offsetting the risk of locking in your prices today.
- The supplier may be trying to build volume rapidly and aggressively to make their business a more attractive acquisition or to quickly penetrate a new market.
The point is, if you’re presented with such an offer, find out why. If the supplier has a good business reason for offering to hold prices, they will usually be more than happy to tell you what it is — but you may have to ask.
Generally speaking, locking in corrugated prices for the long-term based solely or primarily on market expectations is risky business. Historically, corrugated box prices move up and down frequently and are affected by a number of variables — some of which are difficult to predict and/or completely out of the control of corrugated manufacturers.
To illustrate: Corrugated box prices, usually benchmarked with linerboard prices, are affected by supply and demand, raw material costs, production costs, fuel costs, transportation costs, labor costs, tariffs, tax law, and numerous other things. Trying to project the movement of all these complex and intertwined variables for a year involves a lot of guesswork.
Keep in mind, too, that we live in a global marketplace. Distant disruptions caused by war, natural disaster, booming or busting foreign economies, all have a ripple effect on the U.S. economy, even down to corrugated box prices.
On the other hand, the U.S. economy has experienced steady inflation (of varying degrees) for so many years that corrugated prices are likely to rise in the long run, regardless of up-and-down price movement over a 12-month period. With this in mind, you should negotiate a price guarantee in such a way that you can exit the contract based on certain extraordinary conditions, such as a drop in linerboard prices of over “x” percent.
Bottom line: Proceed carefully before locking in your corrugated box prices. There are better ways to manage corrugated pricing, which we will discuss in future posts.
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