July 16, 2018

It's become the mother...

It's become the mother...

Of truckload rate cycles, that is. The pick-up in demand has done what many feared it would do.

By Mark B. Solomon

To appreciate the significance of the current truckload rate environment, all one need do is listen to the historical commentary. When the cycle began about a year ago, folks compared it to the winter 2013-14 spike during the so-called Polar Vortex. As it continued, comparisons were being drawn to the 2003-04 period when rates zoomed higher due to changes in the driver Hours-of-Service rules, a strong economy and, in particular, a boom in housing demand that would prove disastrously unsustainable.

Now, as the current cycle increases in duration and intensity, folks are travelling further back in time to create parallels. The latest came late Thursday when the veteran analyst Donald Broughton, in his monthly market analysis of truckload data culled from transport audit and payment provider Cass Information Systems, called this the strongest "normalized level" of truckload pricing since the trucking industry was deregulated in 1980. Normalized pricing excludes extreme periods of recovery coming out of a recession. Also that day, executives at DAT Solutions LLC, a provider of load board data for the spot, or non-contract, market, arrived at the same conclusion.

Broughton forecast 2018 contract rate increases to range between 6 and 12 percent, with the risks to his prediction skewing to the upside. The spring contract bidding process ended recently with rate increases averaging anywhere from 6 to 10 percent. In June, which was one of the strongest months in years, contract rates soared 17 percent from the same period in 2017.

The catalyst behind the surge appears to be the one part that had gone missing: Demand. For years, more than a few observers have warned that drum-tight supply conditions only needed better than decent demand to trigger the situation that exists today. J.B. Hunt Transportation Services, Inc., the Lowell, Ark.-based transport giant and the first big company to report second-quarter results, posted revenues and earnings today that beat even the most optimistic analyst estimates. Bascome Majors, transport analyst for Susquehanna Financial Corp., said in a note today Hunt exceeded analysts' consensus estimates across its four product lines for the first time in at least four years.

Despite the strong results, share prices of Hunt and other major providers declined as Hunt executives did not raise their outlook for the balance of the year, leading some traders and investors to surmise that the pricing peak has passed, an assumption that many observers would think is wildly misinformed.

Data released in mid-June by Cass showed that U.S. shipments across the board jumped 11.5 percent in May from the prior-year period, and that freight spending surged 17.3 percent year-over-year (June data was not yet available at this writing.) What made the May data so extraordinary is that it had a tough comparison off fairly strong numbers around the same period in 2017, Cass said.

Most of the supply-demand imbalance has manifested itself in the spot market, where rates in the first week of July for dry van equipment—the most common form of truckload trailer--touched $2.45 a mile for the week ending July 7, which was an all-time record. In June, spot van rates rose 52 cents per mile from the same period in 2017. Spot rates for flatbed and refrigerated, or reefer, equipment, were also positioned at all-time highs, though flatbed rates remained unchanged from the prior week, according to DAT data.

Craig Fuller, head of Freightwaves, a logistics data and analytics provider, and the second-generation of the family that co-founded truckload carrier US Xpress Enterprises, Inc., said spot rates have soared simply because there isn't enough capacity to capture all of the additional freight. Spot rate increases have actually paused in the past week to 10 days due to more owner-operators entering the market, Fuller said. By contrast, contract rates have begun to catch up because the bulk of that business is handled by the larger fleets, which are having the most trouble finding qualified drivers, he said

Fuller expects spot rates, which are still showing upward pressure, but not real volatility, to gather steam again before too long.

Much has changed in the past year or so. DAT said its database shows that 60 percent of truckload volume moves on the spot market, with 40 percent moving under contract. For years, the spot market comprised 25 to 30 percent of DAT's database, and the contract market the balance.

Contract durations which have historically been a year, are, in some cases, shrinking to 90 days or even 30 days as more carriers are loath to luck up capacity for 12 months. The practice of "shipper spot," where a shipper goes directly to the spot market to find capacity without relying on a freight broker or a third-party logistics (3PL) provider, has increased in frequency, according to Mark Montague, a pricing analyst for DAT.

The current cycle will not continue into perpetuity. Yet no one is expecting it to turn before year end. Analysts like Majors of Susquehanna are already sticking their necks out to project that 2019 has a good chance of being a repeat of 2018.

Meanwhile, the ground supply chain will be kept busy today and tomorrow as Amazon.com, Inc. completes its fourth annual "Prime Day," a 36-hour online shop-fest that started at 3 p.m. (ET) this afternoon. With more than 1 million deals beckoning shoppers, the Seattle-based e-tailer will keep trailers filled during what is normally a slow time of the year.



About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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