By: D. Eadward Tree
Unless Congress stuns the world by doing something about the U.S. Postal Service other than naming more post offices, publishers on average will experience slightly lower postal rates in 2017 than this year.
In fact, for all of the “Three Ps” of print magazine publishing — Postage, Printing, and Paper — publishers should be more concerned about disruptions than price increases next year.
Now that postal officials seem to have backed away from backdoor rate increases related to the Flats Sequencing System, the most likely scenario for 2017 is a single, inflation-based rate increase of about 1% in January. The resulting rates will still be more than 3 percentage points below where we began this year, before the “exigent” surcharge expired in April.
The financially strapped USPS has gained support in Washington for reinstituting some or all of that surcharge, but good luck getting a postal bill through a divided, deadlocked Congress. After all, the Postal Service’s Board of Governors has now become the “Board of Governor,” as Congress has failed to fill vacancies for eight of the nine non-management seats.
The downside of inaction on Capitol Hill is that the Postal Service remains saddled with the same bizarre only-inside-the-Beltway accounting rules that drove it to the brink of insolvency a few years ago and that still hinder any long-term planning or investment. The USPS, for example, desperately needs to replace its inefficient and downright dangerous 25-year-old-plus fleet of delivery vehicles. But its inability to borrow money or float bonds means the fleet overhaul is proceeding at a snail’s pace.
The Postal Service’s precarious finances feed the political support for above-inflation-rate postage increases, which could hit the Periodicals class especially hard if Congress becomes less deadlocked. The budget woes can also lead to poor service, and sometimes, poor decisions.
In the midst of the last recession, for example, postal officials eager to rein in the costs of handling flat mail hurriedly rolled out the Flats Sequencing System (FSS) despite testing that showed it wasn’t ready for prime time. More than five years later, the huge machines are still not operating as intended.
The good news on FSS is that mailers and postal officials have apparently worked out a compromise on FSS pricing. Postal officials want to expand the areas served by the FSS machines, believing that they will run more efficiently with higher volumes of mail.
But mailers pushed back, noting that they generally pay more for FSS mail than for traditionally sorted mail that mostly ends up in carrier-route bundles. They threatened litigation, noting that shifting more mail to FSS would amount to a back-door price increase that would violate the law that limits rate increases to changes in inflation.
Postal officials recently revealed a plan to expand FSS coverage without affecting publishers’ postal bills: Mail packaged for the FSS machines will be priced as if it were going to non-FSS zones. (For you postal geeks, that means a return to the practice of virtual presorts to determine which copies would have been in carrier-route bundles, placed on SCF pallets, etc. — then an actual presort that will place the magazines in bundles and containers in a way that is optimal for the FSS operation.)
The move away from FSS postal rates should be favorable for printers that use practices like co-mailing to reduce publishers’ mailing costs. Co-mail deals usually call for the printer and the publisher to share the postal savings. The current FSS pricing structure is not as friendly to co-mail as is the non-FSS structure, so the shift to FSS pricing has squeezed printers and caused some to pass along FSS surcharges to their customers.
With such FSS risk apparently off the table, and demand for publication printing continuing to decline, 2017 could be a good year to renegotiate printing contracts.
But that declining demand also makes it likely that some printing plants or even entire companies will shut down, which can saddle their customers with unexpected costs and transition issues.
Publishers have enjoyed gradually declining prices for paper this year. But the paper companies are in such bad shape that any further price reductions will lead to mill closures and tighten the market.
In fact, RISI, a paper-market analytics firm, assumes more capacity reductions are imminent and predicts that prices for magazine-quality paper will rise 1-3% early next year.
Publishers should also be aware that significant moves in the currency markets, which are rarely foreseen in advance, could be especially disruptive for U.S. buyers of magazine-quality paper: A sudden weakening of the U.S. dollar against other currencies could force some Canadian mills to close and would tamp down supply from overseas, which would lead to shortages and price spikes.
Author: D. Eadward Tree