On a routine basis I receive many calls from our members concerning problems on transactions on happening on a real-time basis, or after the problem has occurred and the member is endeavoring to arrive at a resolution. On many occasions the caller tells me that an inspection was secured and he/she granted the buyer protection. I always immediately ask the caller what protection means to them. Needless to say, I receive many different explanations. Therefore, I want to break down for you the two common types of Protection even though neither one is defined by the PACA regulations. I always encourage sellers to stay away from undefined terms under the PACA, and Protection is a major one to avoid using.
Below is my attempt to explain the most commonly used Protection language and what it can mean:
Although the term “Protection” is not defined in the PACA Regulations, the term is often used in the industry in one of two ways:
1. “Market protection” or “price protection”
This term protects the buyer against any market decline that might occur between the date of the sale and the date the product is received. The parties should agree before the sale whether the decline is to be based on the shipping point market or the destination market. If granting market decline adjustments is part of the shipper’s practice, there must be a reservation of authority to grant such adjustments in the contract with its growers. Sales agents should preserve records or other evidence that “protection” was discussed and agreed to prior to shipment. Market decline adjustments should not be used to justify a customer’s short pay sixty (60) days after shipment.
2. “Protection,” “Full Protection,” “Protection Against Loss”
These terms should be distinguished from “market,” or “price protection.” A protection agreement is a modification of the original sales contract that leaves the original sales price as the baseline price for determining whether the buyer makes a profit, or is entitled to protection. When a buyer with protection fails to resell at favorable prices and experiences a loss, the protection should only compensate the loss, and should not include a profit in the form of commission or handling fee. If the gross proceeds of the buyer’s resale exceed the F.O.B. contract price, plus freight, then the buyer gets to keep the excess as profit. If gross proceeds of the re-sale are less than the buyer’s cost (F.O.B. plus price plus freight, delivered cost), the buyer deducts its freight cost from the gross proceeds, thus suffering no out of pocket loss. If gross proceeds are not enough to cover freight, then the seller who grants its buyer full protection must pay the remainder of the freight cost. In these instances the seller is not always entitled to have access to the account of sales.
If the above mentioned explanation seems challenging to understand, then strongly consider never using the term Protection when attempting to arrive at a disposition of a load with your customer. Either grant an adjustment (allowance) or allow your customer to handle the product on a consignment basis (where you will be given a detailed account of sale).
As always should any Western Growers regular member have any questions or need for assistance, please contact me by calling me at 949 885-2269 or email me at TommyO@wga.com.