Take a look at these sober statistics:
- Spot truck rates have fallen by almost a third since the beginning of the year, while truck contract rates have risen.
- The spread between truck rates and contract rates is close to a historic high.
- Spot rates are always ahead of contract rates, usually by about three months.
- Shippers (firms that buy trucking from trucking companies) buy most of their capacity in the freight contracts market, which means they haven’t seen a reduction in freight rates yet.
- There are indications that truck contract rates have peaked (collected through a combination of surveys, channel checks and index models).
- Truck contract rates could drop by $ 0.35 per mile.
- As the price of diesel has doubled, contract rates will fall by more than 12.5% before shippers see a reduction in freight costs compared to the beginning of the year.
Bank of America Shippers Survey
According to a biweekly survey of shippers conducted by the Bank of America (BoA), freight rates are set for an even bigger rollback. This is bad news for transport companies, but good news about inflation.
The reduction in spot freight rates has been well documented by FreightWaves, but contract rates are still held. That will soon change, at least according to the second-largest bank in a survey of shippers in the United States.
The BoA Shipper Survey tries to capture the sentiment of 1,300 shippers by calculating their views on demand, capacity and rates. Consumer-related shippers account for 53% of the survey (retail and CPG), while industrial, manufacturing, materials and medical shippers make up the balance. The survey results are pooled every two weeks and have proven to be incredibly reliable predictors of future indicators measured by the survey.
Beginning in late February, survey results show increasingly negative views on demand and rates. This tracks with freight market data reported by FreightWaves over the past two months.
Indicators are presented as a diffusion index that measures whether participants believe that indicators will increase or decrease. When it comes to rates, anything in excess of 50 indicates that shippers expect rates to rise quickly. Below 50 indicates that shippers expect rates to fall.
Bank of America analysts wrote that “the rate indicator, which measures shippers’ opinion on truck rates, fell further after the April collapse, falling again to 38.0 from 38.8 in the latest poll, the lowest level since May 2020.”
Since most shippers buy all or most of their capacity at contract rates, we can safely assume that shippers ’views on rates are largely related to their expectations regarding contract rates.
Reduction of spot rates in 2022
Spot rates on trucks peaked on January 14, 2022 and have fallen by 30% since then, according to the National Truck Index – Linehaul (NTIL.USA), which measures the main spot rate minus fuel. The index peaked at $ 3.01 per mile and is currently $ 2.09 per mile.
On the other hand, contract rates rose 3% over the same period and now stand at $ 2.90 per mile.
Over the same period, retail prices for diesel on the highway, according to a weekly survey by the US Department of Energy (DOE.USA), jumped 54%, or for a carrier operating at 6.5 miles per gallon, $ 0.30 per mile . With national contract rates for regular minibus transportation at $ 2.80 per mile as of January 9, 2022, the increase in fuel adds an 11% increase in contract rates.
If you combine fuel tariffs and liner shipping, a shipper who is fully operational in the contract market would see a 14% increase in van costs.
This surge largely explains the pain that Brian Cornell, CEO of Target (NYSE: TGT), expressed last week, describing the unforeseen increase in freight costs that the retailer has experienced so far in 2022, totaling more than 1 billion dollars.
Spread between spot and contract rates
The difference between spot and contract rates is almost as wide as ever (only slightly smaller than during the COVID block in April 2020). The spread for the contract minus fuel (RATES.USA) is -0.80 dollars per mile. The biggest spread in history was -0.84 dollars per mile in April 2020.
Looking back on 2019 (when the last freight recession occurred), the spreads averaged $ -0.43 per mile throughout the year. This means that on average $ 0.43 per mile was cheaper to move the load at the spot market rate than at the contract rate.
Truck carriers will argue that some fuel is indeed invested in contract rates for the van, and it will be fair to look at spreads in this light if spot rates have a small fuel base, like contract rates. Taking a base of $ 1.20 per gallon (RATES12.USA), the point for the contract is $ 0.63 per mile. At a base price of $ 2.00 per gallon (RATES20.USA) the point for the contract is $ 0.51 per mile.
Regardless of the value used for the fuel base, the relationship between the current number and the previous number is relative. Thus, the change of -0.43 dollars per mile in the spread between 2019 and 2022 will be consistent as long as the fuel base is consistent between the two periods.
With such a big gap between spot and contract, why haven’t we seen contract rates fall?
The best explanation would be that the reduction in freight rates was very fast and caught almost everyone by surprise. We have entered 2022 with bullish expectations regarding the economy and shippers experiencing the highest level of supply chain disruptions in history. Few expected the economy to slow, and even fewer expected freight capacity to decline so quickly. Many shippers, oppressed by route guides that fell into chaos in 2020, for obvious reasons referred to the hasty reduction in contract rates in response to spot market volatility.
But as the number of rejections in tenders fell below 10%, and the collapse of the spot market demonstrated, available capacity quickly returned to market. According to a Bank of America poll, shippers now expect contract rates to fall for spot and waiver rates.
Contract rates have historically followed the direction of spot rates with an approximate three-month delay. We have now crossed the three-month mark as spot rates peaked.
Check channels soberly
We have heard from channel checks that shippers are taking steps to reduce their contract freight costs. Over the last month we have heard:
- The major shipper asked its 3PL to reduce the rate by 25% in the contract application, but demanded that the reduction be made at the expense of the brokerage margin and not from spot carriers. The shipper said 3PL would be audited to make sure it happened.
- The haulier received a contract with a major retailer, but received word that the business would be relocated to an in-house retail fleet. The retailer told the carrier that he had too much stock on the store and didn’t need as much capacity to rent because he had a large private fleet.
- A major consumer goods company will raise contract rates by 12% for the year, but recently asked to return at least half of that to the same carriers.
- The major beverage shipper has moved at least one-third of its contract volume from the routing guide to its internal loading board.
Although each shipper has different needs and risk tolerances, truckers should expect some reduction in the contact rate in the second half of the year. It is possible that the rate reduction may occur only after the end of the second quarter, and shippers can carefully move some of their cargo to cheaper carriers, warning of the possibility that the freight market will escalate again.
If the market has to match the 2019 spread between seats and contracts, there is a risk that contract rates could fall by $ 0.35 per mile, or 12.5%. Shockingly, if freight rates had fallen so sharply, the recent surge in diesel fuel would have returned shippers ’contract costs to where they started the year, and would not have experienced a significant reduction.
This is not good news for trucking, as any reduction in traffic speeds comes directly from their operating margins. However, this is good news for consumers and businesses that have had to face significant increases in freight rates over the past two years. Much of inflation is due to supply chain and transportation costs.
Since logistics accounts for 12% of the world economy, the cost of freight has a big impact on inflation. International Monetary Fund estimates that an increase in freight traffic in 2021 will add 1.5% of total inflation to the economy this year. If freight rates peaked, it would take some relief that at least one inflation contribution has at least stalled or peaked in the COVID cycle, and that should be good news for everyone.