Note these factual stats:
- Spot truckload rates have fallen by about a third since the beginning of the year, while truckload contract rates are up.
- The difference between truckload and contract rates is close to an all-time high.
- Spot rates always lead contract rates, usually by around three months.
- Shippers (companies that buy trucking capacity from trucking companies) buy most of their energy in the truckload contract market, which means they haven’t seen a drop in freight rates yet.
- There are signs that truckload contract rates have peaked (collected by a combination of surveys, channel inspections, and index models).
- Truckload contract rates can be reduced by as much as $0.35/mile.
- As the cost of diesel has doubled, the contract rate will drop by more than 12.5% before shippers will see lower freight costs compared to the beginning of the year.
Bank of America survey of shippers
According to a Bank of America (BoA) biweekly survey of shippers, trucking rates are set for an even bigger decline. This is bad news for trucking companies but good news on the inflation front.
The collapse in spot trucking rates has been well documented by FreightWaves, but contract rates have so far held steady. That is likely to change soon, at least according to the results of the second largest bank in the US shipper survey.
The Shipper’s BoA Survey attempts to capture future sentiment from 1,300 shipping companies, and outline their views on demand, capacity and rates. Consumer-related shippers make up 53% of the survey (retail and CPG), while industrial, manufacturing, materials, and healthcare shippers make up the balance. Survey results are compiled every two weeks and have proven to be an incredibly reliable indicator of the future direction of the indicators measured by the survey.
Beginning in late February, survey results are showing increasingly negative views of demand and prices. This tracks with freight market data reported by FreightWaves for the past two months.
Indicators are reported as a diffusion index, which measures whether participants think the indicators will increase or decrease. When it comes to rates, anything above 50 indicates that shippers think the rates are about to increase. Anything less than 50 indicates that shippers think rates will go down.
Bank of America analysts wrote that “the rate index, which measures shippers’ opinions on truck prices, has fallen further from the April crash, falling again to 38.0, from 38.8 in the last survey, its lowest level since May 2020.”
Since most shippers purchase all or most of their energy under contract rates, we can safely assume that shippers’ forward views on prices are mostly related to their expectations of contract rates.
Falling spot prices in 2022
Truckload spot rates peaked on January 14, 2022, and have fallen 30% since then, according to the National Truck Load Index – Linehaul (NTIL.USA), which measures the net base fuel price of a truck. The index peaked at $3.01/mile and is currently at $2.09/mile.
Contract rates, on the other hand, have increased by 3% in the same period and are now $2.90/mile.
During the same period, retail diesel prices on highways, according to the US Department of Energy’s (DOE.USA) weekly survey, jumped 54%, or for the carrier operating at 6.5 mpg, $0.30/mile. With National Trucks contract line rates at $2.80/mile as of January 9, 2022, the fuel increase adds an 11% increase to contract rates.
When you combine fuel prices and linehaul, a truck that is fully operational in the contract market could see a 14% increase in truckload costs.
The surge largely explains the pain that Target (NYSE:TGT) CEO Brian Cornell expressed last week when he described the unexpected surge in shipping expenses the retailer has experienced so far in 2022, which totaled more than 1 billion. dollar.
Spread between spot and contract prices
The spread between spot and contract rates is about as wide as it has ever been (only a bit smaller than it was at the depth of the COVID lockdowns in April 2020). Contract Spot Spread, Net Fuel (RATES.USA) – $0.80/mile. The biggest spread in history was – $0.84/mile in April 2020.
Looking back to 2019 (when the last shipping slump occurred), the average spread was -$0.43/mile over the course of the year. This means that it was on average $0.43/mile to move a payload at the spot market price cheaper than the contract price.
Truckload carriers will claim that truck contract prices have some fuel embedded in them and it’s only fair to look at the spread in light of this with spot prices having a small fuel base in the same way contract rates work. Taking $1.20/gallon basis (RATES12.USA), the contract spread is $0.63/mile. At $2.00 per gallon (RATES20.USA), the contract spread is $0.51/mile.
Regardless of the value used for the fuel base, the relationship between the current number and the previous number is relative. So the change – $0.43/mile in difference between 2019 and 2022 will be constant as long as the fuel base is constant between the two periods.
With a wide gap between the spot and the contract, why haven’t we seen contract prices drop?
The best explanation is that the decline in trucking rates was so rapid that it surprised almost everyone. We entered 2022 with bullish expectations regarding the economy and shippers experiencing the highest level of supply chain disruption in history. Few predicted a slowdown in the economy and fewer predicted that cargo capacity would decline very quickly. Many shippers, swayed by guidance guides that fell into disarray in 2020, were understandably wary about hastily lowering contract rates in response to spot market volatility.
But with bid rejections dropping below 10% and the spot market crashing, available capacity quickly returned to the market. As the Bank of America survey showed, shippers now expect contract prices to track spot rates and rejection rates down.
Historically, contract rates have followed the trend of spot rates, with an approximate three-month delay. We are now past the three-month mark since spot prices peaked.
Serious channel checks
We’ve heard from channel checks that shippers are taking action to lower contracted freight costs. Over the past month we’ve heard:
- A major shipper asked 3PL to reduce its price by 25% in its contract offer, but demanded that the reduction come from brokerage margin and not from the spot carriers. The shipper said 3PL will go through audits to ensure this happens.
- A truckload carrier has been awarded a contract from a high-volume retailer, but has been notified that this business will be transferred to the retailer’s inland fleet. The retailer told the carrier that he has a very large inventory per store and doesn’t need rental capacity since he has a large private fleet.
- A large consumer products company has awarded contracted truck fleets with 12% price increases for the year but has recently ordered at least half of that amount from the same carriers.
- A large shipper moved at least a third of its contracted volume from the steering guide to its internal loading plate.
While every shipping company has different needs and different risk tolerances, truckload carriers should expect some decline in call rates in the latter half of the year. The rate cuts likely won’t happen until after the end of the second quarter and shippers may cautiously move some of their shipments to cheaper carriers, hedge against the possibility that the freight market will shrink again.
If the market matches the 2019 spot contract spread, there is a risk that contract rates could drop as much as $0.35/mile, or 12.5%. Shockingly, if linehaul rates were to drop that low, the recent increase in diesel would put shippers’ contractual truckload costs back to where they started the year and you wouldn’t feel like much of a reduction.
This is not good news for trucking companies, as any drop in line rate comes directly from their operating margins. However, it is good news for consumers and businesses that have had to deal with massive increases in freight rates over the past two years. Much of the inflation is due to supply chain issues and transportation costs.
With logistics accounting for 12% of the global economy, the cost of shipping has a significant impact on inflation. International Monetary Fund Estimates That the increases in freight that occurred in 2021 will add 1.5% of overall inflation to the economy this year. If freight rates peak, it will come as some relief that at least one of the inflationary inputs has stalled or has peaked for the COVID cycle, and that should be welcome news for everyone.