3 minute read
Coping with the chaos of contracts
By H.M. Niebling Executive v.p. North American Wholesale Lumber Association
The punch line of an oft-told, offcolor, World War II joke involving amorous newlyweds on a crowded troop train aptly describes the current environment in rail transportation.
When the Staggers Rail Reform Act of 1980 was passed into law last year, it intensified small shipper concerns over contract rates. Since that time there have been many industry fears expressed that large rail shippers will enter into contracts with carriers that will result in a competitive advantage. Without doubt there are potential problems in this area of rail reform. What many lumbermen fail to realize is that contract rates have been available and possible in our industry ever since the 4-R Act some years prior to the 1980 Rail Reform Act. This availability has not led to any great activity in rail contract rates.
What is different under the Staggers Act? First, the government is advocating and encouraging contract rate activity to a degree that they never did under the prior 4-R Act. Next, the carriers are in the process of losing their anti-trust immunity to act as a group. Additional encouragement comes from management consulting firms, attorneys and others who have developed a "new industry" to assist shippers and carriers.
Up until the last few months rumors ran rampant in the forest products industry concerning contracts. A lumberman told me in November, 1980, that over 4O contracts had been filed with the ICC relating to forest products transportation. We have also been privy to all sorts of suggested contracts being negotiated. The aforementioned fears of contract rates resulting in a competitive advantage of one shipper over another is not unfounded, but it has been overblown.
There were no contracts in our industry in November, 1980, as a result of the Staggers legislation. The majority of contracts ln exrstence today, elther dating back to the 4-R Act or the 1980 Deregulation Bill, do not involve lower freight rates. Instead, they call for added services for a fee, or car supply, or refunds and costs, based upon performance by either shipper or carrier. Some of the existing 4-R era contracts are in trouble and are being litigated.
Nevertheless. we now have two contracts relating to our industry on file. By the time this article sees print, there will likely be others. It also seems that in our industry, there will be a number of contracts dealing with carrier refunds or allowances to shippers based on volume performance. In other words, a break in freight rates to a shipper if he can perform at a stated level of volume.
The first movements into contract rates by the carriers seem obviously aimed at recapturing traffic, either from volume lost to motor carriers or competing railroads. Secondly, initial contracts or contract discussions are heavily weighted to single line movement. Thirdly, the carriers are most interested in weight, i.e., green lumber and/or particleboard tied to minimum weight designations. They are also quite interested in prepaid freight by the shipper.
Beyond that, Kansas City has evidently been selected as a key destination point as carriers and shippers "dip their toe" into the contract rate environment. As time passes, there will certainly be other cities, but it is interesting to note
Story at a Glance
that this looks like the first "competitive arena" at least from the western producing regions.
A note of added complexitY: Current interpretation by the Interstate Commerce Commission of the Staggers Rail Reform Act is still to be finally determined. At the outset, the ICC has decided that full information on contracts should not be divulved even though the Act specifically states that there will be equal treatment of contract shippers. It is not going to be easy to learn "who is doing what to whom" in the coming months.
Existing contracts in other industries can be very complex, i.e., long term contracts containing escalation clauses, force majeure sections, even carriershipper "maintenance of track" agreements. So far, this does not seem to be occurring in the forest products industry.
How should the industry cope with this situation? We have a few suggestions: o Shippers should take every opportunity to converse (converse one-onone!) with carriers, i.e., the more you know about what is going on, the better you will be able to cope.
If you are judging a contract offered, be sure you take all facets of the contract into consideration. What does it require of you? If it involves prepaid freight, what does this do to your management of receivables? Are there penalties for non-performance?
Is there an escalation clause in the contract? What are the penalties to the carrier for his lack of performance, i.e., such as guaranteed car supply?
If you are looking at a contract, can you sell what you are shipping at the destination you are shipping it to?
For the near term, shippers should also keep themselves aware of any developments in regard to reload centers. If a number of carriers develop contracts for shipment to Kansas City by a number of shippers, will there be a reload center in that fair city? Such a facility would increase the opportunities for new
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