Consider the following dismal statistics:
- Since the beginning of the year, truckload spot rates have plummeted by about one-third, but truckload contract rates have climbed.
- The difference in truckload spot and contract pricing is at an all-time high.
- Spot prices are always three months ahead of contract rates.
- Shippers (businesses that acquire transportation capacity from trucking companies) buy the majority of their capacity in the truckload contract market, hence freight prices have not yet decreased.
- Truckload contract rates appear to have peaked (gathered through a combination of surveys, channel checks, and index models).
- Truckload contract rates could be reduced by $0.35 per mile.
- Because diesel prices have more than doubled, it will necessitate contract rates to be lowered by more than 12.5 percent before shippers notice a reduction in freight expenses compared to the beginning of the year.
Bank of America shipper survey
According to a bi-monthly poll of shippers conducted by Bank of America (BoA), trucking freight costs are projected to fall much further. This is bad news for transportation companies, but it is fantastic news for inflation.
FreightWaves has extensively reported the decline in transportation spot prices, although contract rates have remained stable thus far. According to the results of a shipper survey conducted by the second-largest bank in the United States, this is about to change.
The Bank of America shipper survey seeks to collect forward sentiment from 1,300 shippers by quantifying their perspectives on demand, capacity, and pricing. Consumer-related shippers (retail and CPG) account for 53% of the survey, while industrial, manufacturing, materials, and healthcare shippers make up the remainder. The survey findings are averaged every other week and have proven to be a very accurate prediction of the future direction of the indicators measured by the survey.
The survey results began to reflect progressively negative opinions on-demand and rates in late February. This corresponds to freight market statistics that FreightWaves has been publishing for the previous two months.
The indicators are given as a diffusion index, which reflects whether participants expect the indicators to rise or fall. When it comes to rates, anything above a 50 suggests that shippers anticipate an increase in charges. Anything less than 50 suggests that shippers believe rates will fall.
According to Bank of America analysts, “the Rate Indicator, which reflects shippers’ thoughts on truck rates, fell further from April’s collapse, falling again to 38.0 from 38.8 in the previous survey, its lowest level since May 2020.”
Because most shoppers buy all or most of their capacity at contracted rates, we can fairly infer that shippers’ forward views on rates are mostly determined by their contract rate expectations.
Spot rates will fall in 2022.
According to the National Truckload Index – Linehaul (NTIL.USA), which gauges the underlying van spot rate net of fuel, truckload van spot rates peaked on January 14, 2022, and have plummeted 30 percent subsequently. The index peaked at $3.01/mile and is now at $2.09/mile.
Contract rates, on the other hand, have risen by 3% during the same time period, to $2.90/mile.
During the same time period, highway retail diesel costs, as reported by the U.S. Department of Energy’s weekly survey (DOE.USA), increased by 54%, or $0.30/mile for a carrier operating at 6.5 MPG. With national van contract linehaul rates at $2.80/mile as of January 9, 2022, the fuel rise raises contract prices by 11%.
When fuel and linehaul prices are combined, a shipper operating entirely in the contract market would have witnessed a 14 percent increase in truckload van costs.
The last jump largely explains the anguish voiced by Target (NYSE: TGT) CEO Brian Cornell this week when revealing an unanticipated increase in freight charges totaling more than $1 billion in 2022.
The difference between spot and contract rates
The difference between spot and contract rates is nearly as huge as it has ever been (only slightly smaller than at the depth of the COVID lockdowns in April 2020). The spot-to-contract spread (RATES.USA) is -$0.80/mile. In April 2020, the greatest spread in history was -$0.84/mile.
Looking back to 2019 (the last freight recession), the spread averaged -$0.43/mile for the entire year. This suggests that moving a load on the spot market was $0.43/mile cheaper than moving it on a contract basis.
Truckload carriers will argue that the van contract prices do contain some gasoline, and it’s only fair to consider the spread in this light, with spot rates having a tiny fuel foundation in the same manner that contract rates do. Using a base price of $1.20/gallon (RATES12.USA), the spot to contract spread is $0.63/mile. The spot to contract spread is $0.51/mile at a $2.00/gallon basis (RATES20.USA).
The link between the current number and the former number is relative, regardless of the value chosen for the fuel base. As a result, a -$0.43/mile difference in the spread between 2019 and 2022 will be stable as long as the fuel base remains constant between the two years.
Why haven’t contract rates fallen with such a large spread between spot and contract?
The best explanation would be that the drop in trucking spot prices was sudden and took practically everyone off guard. We entered 2022 with optimistic economic forecasts and shippers witnessing the highest level of supply chain chaos in history. Few expected the economy to slow, and even fewer expected freight capacity to relax so rapidly. Many shippers were naturally wary of decreasing contract rates in reaction to spot market volatility after being stung by routing guides that collapsed in 2020.
However, since tender rejections have fallen below 10% and the spot market has collapsed, available capacity has quickly returned to the market. According to the Bank of America poll, shippers now expect contract rates to fall in tandem with spot and rejection rates.
Contract rates have historically tracked the direction of spot rates, with a three-month lag. We’ve already been three months since spot rates spiked.
Channel inspections that are sobering
According to channel checks, shippers are taking steps to reduce their contracted freight expenses. We’ve heard the following in the last month:
A big shipper requested a 25% rate reduction in its contract proposal from its 3PL, but only if the reduction came from the brokerage margin rather than the spot carriers. The shipper stated that the 3PL will be audited to guarantee this occurred.
A big-box retailer won a contract with a truckload carrier, but the business was transferred to the firm’s internal fleet. Because it possessed a huge private fleet, the retailer told the carrier that it had too much merchandise per store and didn’t need as much for-hire capacity.
A large consumer products company had awarded 12 percent rate increases to contracted van fleets for the year but had subsequently requested at least half of this returned from the same carriers.
A major beverage shipper has transferred at least one-third of its contracted volume from the routing guide to its internal load board.
While every shipper’s demands and risk tolerances are different, truckload carriers should expect some decline in contact rates in the second part of the year. Rate cuts may not occur until after the end of the second quarter, and shippers may cautiously shift part of their freight to cheaper carriers to hedge against the likelihood that the freight market tightens again.
If the market matches the 2019 spot to contract spread, contract pricing might fall by as much as $0.35/mile or 12.5 percent. Surprisingly, if linehaul rates fell this much, the current rise in diesel would return shippers’ contract truckload expenses to where they began the year, with no feeling of relief.
This is bad news for trucking companies since any fall in linehaul rates immediately affects their operating profits. It is, however, welcome news for consumers and businesses who have faced enormous increases in freight charges over the last two years. Supply chain concerns and transportation costs account for a substantial amount of inflation.
With logistics accounting for 12% of the global economy, freight costs have a disproportionate impact on inflation. According to the International Monetary Fund, freight rises in 2021 will add 1.5 percent to overall inflation this year. If freight rates have peaked, it would provide some relief that at least one inflationary input for the COVID cycle has halted or peaked, which would be excellent news for everyone.
