I personally would never grant or offer an adjustment to a buyer; then again I most likely would have few to no customers! You, however, want to retain customers; therefore, there will obviously be times when you will need to consider offering your customer an adjustment or allowance on a shipment of produce. One of those times is when your product arrives at contract destination, is inspected and fails to meet contract specifications i.e. “Good Arrival Guidelines” or “Good Delivery”. With the understanding that there were no transit related issues, this is the time when you would need to consider negotiating an allowance with your buyer. The old adage “your first loss is your best loss”, is so very true in the produce industry.
As always, at the time of granting an adjustment, immediately document it by confirming it in written communication. If the sales contract is to a wholesaler or a customer at a destination market in a major metropolitan location, it is important to know your terminal market USDA, Federal State Market News quotes at destination. Knowing how strong or weak the market is can give you some leverage in negotiating a fair allowance with your customer. In a weak market it may be difficult negotiating a settlement prior to your customer selling the product. If that is the case you can base your adjustment or allowance on claimed damages, as long as the original sales contract continues in effect. Claimed or provable damages are all based on what your customer should have received for selling the product you shipped, versus what your customer actually sold the product for in a prompt and proper manner.
Therefore, if you cannot reach a meeting of the minds on an agreeable adjustment at time of arrival following the inspection, certainly do not allow your customer to take their own adjustment when paying your invoice. Advise your customer the original sales contract is still enforce and that you will consider an adjustment after your buyer sales are finalized in order to determine if your customer was actually damaged.
In a previous blog, “How to Calculate Provable Damage” I provided two examples how to calculate the appropriate adjustment based on damages, here are two more examples:
The best method would be to obtain the representative prices for the commodity on date of arrival and in the city or location where the contract destination is located. If available, utilize the USDA Federal State Market News Service for the closest location where the product will be sold. Looking at the price quote ranges, you would use the average price (high to low quotes) for the produce in question. When you are presented with a detailed accounting from your customer, it will reflect the average actual sales price. That actual sales price on the accounting in comparison to the average Federal State Market News price will allow you to ascertain the damages (if any) per carton. It is important to note, you will want to review only the gross sales prices prior to expense items such as freight and other expenses.
Example: Federal State Market News for your commodity is $18-$21.00 per carton (average $19.50). Your customer’s average sales price is $15.75. $19.50 – $15.75 = $3.75 of damages. Therefore your customer would be allowed a $3.75 per carton adjustment from the original sales contract price. Let’s say you’re original sale price was $12.00 per carton FOB, you would subtract the $3.75 of damages from the original sales price of $12.00 FOB per carton which gives you a return back to the shipper of $8.25 FOB per carton.
If no Federal State Market News prices are available for the area to which the product is shipped, a delivered price can be substituted in lieu of the Federal State Market News quotes.
In the event your customer does not supply you with a detailed accounting to determine his average actual sales price, what is your course of action? In such a situation, you would take the amount of total condition defects (exclude permanent defects) shown on the USDA inspection and then utilize the Federal State Market News quote, if available, or the delivered price and use the percentage condition defects to determine damages.
Example: Total condition defects reflected on the USDA inspection certificate are 22% condition defects. The delivered price (FOB plus freight) was $19.50, and at 22% condition x $19.50 = $4.29 damages. Therefore your customer will be allowed a $4.29 per carton adjustment from the original sales contract price. Let’s say you’re original sale price was $12.00 per carton FOB, you would subtract the $4.29 of damages from the original sales price of $12.00 FOB per carton which gives you a return back to the shipper of $7.71 FOB per carton.
By learning these methods and calculating damages you can determine what a fair adjustment or allowance would be for your customer. These are some of the same methods the PACA would use to determine a fair market return if the seller and buyer cannot agree to an appropriate adjustment when your product fails to meet “Good Arrival Guidelines”.
I encourage Western Growers members when determining an appropriate adjustment on a breach of contract, such as failing to meet “Good Arrival” to contact me to discuss all possibilities to resolve the situation. It is important to have those conversations real time when the issue is happening, not weeks or months later.
As always, I am available to answer any questions you might have. You may contact me at 949.885.2269 or email me at TommyO@wga.com.