If there's one thing cotton shippers desire even more than low ocean freight rates, it is predictability of rates.
Thus, a sudden decision by carriers to stop absorbing the trucking charge
from an off-dock consolidation station to the port, or an unexpected ancillary charge such as a terminal handling fee or congestion surcharge, sends cotton shippers into a tizzy."The carriers have to realize we're already selling well into 1996," said Yuleen Gifford, traffic manager at Jess Smith & Sons in Bakersfield, Calif. Unexpected surcharges reduce an exporter's profit margin and affect the competitiveness of U.S. cotton.
In the case of a trucking charge that was formerly part of the carrier's base rate, an additional $100 tacked on to a $1,500 ocean rate represents a significant percentage increase in the total transportation cost, Ms. Gifford added.
These are the types of arguments that typically occur as shippers and carriers negotiate freight rates for moving cotton across the Pacific - an annual exercise that tests the negotiating skills of shippers and carriers and inevitably leads to bruised feelings on both sides.
The annual negotiations this year took place Thursday in Memphis.
EXPORTS BOOM - FOR NOW
The current market for U.S. cotton exports is unusual, in that production is high, export volumes are at near record levels, and prices are unusually strong.
Nevertheless, the cotton business is extremely volatile. Projected U.S. production can fall considerably because of weather conditions, and the world supply of cotton can also change significantly because of political developments or an unexpected pest infestation in producing nations.
Since this volatility has been a part of the business ever since cotton emerged as a major U.S. export crop in the 19th century, shipping executives say cotton exporters by now should have a game plan to deal with surcharges.
"Cotton shippers must have a fudge factor in their prices. If I were a cotton guy, I would," said Ronald P. Schley, director of sales and marketing- North America at Hanjin Shipping Co. in Long Beach.
Ancillary fees like fuel surcharges, currency adjustment factors, terminal handling fees and congestion surcharges are just some of the factors involved in selling internationally, said Bob Magna, director of sales and marketing at Hyundai Merchant Marine in Gardena, Calif.
"We know it makes them uncomfortable, but nothing's new in this business. You have to expect the unexpected," he said.
The pricing and service factors involved in carrying cotton to export markets are affected by many events, some of which have nothing to do with the cotton market itself. The past two years provide a perfect example.
The surge in cotton exports that began in 1994 occurred at the same time that U.S. exports in general were especially buoyant. A soft dollar and recovering economies in Asia and Europe helped generate increased exports of many commodities.
In the Pacific, the result was tight space on ocean vessels. Some cotton shipments missed two or three voyages in a row because the ships were full. In this type of environment, carriers felt they could get away with higher freight rates, and they were right.
Cotton exporters expect rates to go up in such a market, but they have various ways of gauging the "fairness" of the increase. One shipper in Texas compares the proposed rate to what carriers charged historically when vessel capacity utilization factors were similar.
He also compares the proposed new rate with the one in effect the past year. "If we were paying $2,000 last year and we're hit with $2,400, that means it's gone up substantially," he said.
Shipping lines, especially those that set rates together in conferences like the Transpacific Westbound Rate Agreement, say cotton freight rates have traditionally been in the lower range for export cargoes when calculated as a percentage of landed cost.
Niels Erich, TWRA spokesman in San Francisco, said cotton is in the 4.5 percent range. Rates for a number of commodities are about 15 percent of landed cost, he said.
Cotton shippers don't agree with that type of thinking. They said that high-value commodities can run $1 million a containerload, but carriers don't charge $50,000, or 5 percent of value, for the move.
SHIP EXECUTIVES TOUT SERVICE
Shipping executives also point to the improved service that has come about with containerization. Deliveries are more predictable, frequency of service and transit times are better and the cargo almost always arrives at the destination without damage.
"What's the argument?" responded a cotton shipper. "That's they're job. They're doing what they're supposed to do."
With the U.S. Department of Agriculture projecting another near-record season for cotton exports, and westbound traffic volumes in the Pacific at least as strong as last year, the traditional gripes of shippers and carriers may take a back seat this year to profits.
"If all goes according to plan, everyone should have the opportunity to make money this year," said Mr. Magna of Hyundai.