Alphabet soup of regulations could present a nasty stew for truck shippers

For the past six years, U.S. truckload shippers have defied the numerous forecasts of soaring contract freight rates to keep control of the pricing reins. However, given the cross-currents buffeting the truckload market, few will be shocked if the contract rate segment—which lags the "spot," or non-contract market, by 3 to 6 months—catches up big time by next spring, if not sooner.

That's because what lies ahead—namely the Dec. 18 deadline for all post-2000 fleets to be equipped with electronic logging devices (ELDs) in their cabs—will collide with what has already occurred—specifically, last April's implementation of safe-transport provisions of federal food-safety rules—to create what some observers have called the tightest cycle for truckload capacity since an 18-month period that began in mid-2003. Then, the U.S. economy grew strongly as it emerged from the 2000-02 recession and the uncertainty surrounding the Iraq war, while capacity was subsequently hit by the 2004 implementation of the federal government's driver hours-of-service rules.

So far this year, most of the action has been in the spot market. There, demand and pricing have remained firm into August and have held up through periods of seasonal weakness, such as in July, when spot-market activity typically falls off. The number of available loads rose 2 percent in the last week of July, according to DAT Solutions, a load board provider that closely tracks the spot market. In the dry van segment, where most truck freight moves, the top 100 lanes set all-time volume records during the week, DAT said. In June, total loads were up a remarkable 90 percent from June 2016 levels, DAT said.

The spot market's surge has prompted carriers to move more of their fleets away from contract hauls, much to the chagrin of shippers and brokers, which find themselves increasingly going deeper down their routing guides to find a carrier that will haul under contract. One broker said he's heard first-hand loud complaints from large shippers about their carriers abandoning them in favor of spot-market lucre.

What's causing this? There has been exhaustive speculation surrounding the projected capacity decline triggered by the ELD implementation deadline. By several estimates, about half of all trucks—overwhelmingly run by owner-operators—are not in compliance with the ELD mandate. In a recent presentation, Cherry Hill, N.J.-based Tucker Company Worldwide Inc., a large freight broker, said the mandate will reduce total truck miles by 10 to 20 percent, as drivers who in the past may have fudged paper logs to operate longer-than-allowed hours either cut back their miles or park their rigs altogether.

With a 10-percent mileage cut at a 50-percent non-compliance rate, about 5 percent of truck capacity would disappear, according to Tucker's projections. At a 20-percent mileage cut, the capacity evaporation rate rises to 10 percent, it forecast. Such a capacity crunch would be "historic," said Tucker, noting capacity was still relatively abundant when the economy rebounded in the third quarter of 2003, only to tighten when the hours-of-service rules went into effect in 2004.

The expected impact of the ELD mandate will be amplified by the requirement, which took effect in April, that shippers and brokers comply with the safe-transportation language embedded in the Food Safety Modernization Act (FSMA), a landmark law regulating all aspects of the farm-to-table supply chain. The Food and Drug Administration (FDA), which wrote the rules, said the transport language didn't reinvent the regulatory wheel, and merely codifies the practices supply chain participants already had in place. Still, that hasn't kept rates from rising, and capacity from shrinking, for many shippers and brokers.

Many owner-operators don't possess the advanced level of technology required to meet rules governing the transport of the types of temperature-controlled cargo covered by the rules, Tucker said. In addition, major food shippers have been "stealing others' capacity" by paying higher rates or promising increased and consistent volumes, leaving fewer trucks for everyone else, it added.

The spot market for refrigerated loads reflects the phenomenon. Starting in mid-spring, the load-to-truck ratio for reefer equipment increased to 10 loads available for each truck, from 6 loads in 2016, according to DAT data cited by Tucker.

Despite all this, contract pricing remains tepid. A monthly index published by consultancy FTR that measures shipper conditions improved just moderately in May, the most recent month for which data was available. The May index indicated that contract rates were going nowhere fast and that the outlook was still favorable for shippers, FTR said. Jonathan Starks, the company's COO, said in a statement that the index reflected the perception that the economy hasn't received the boost from the Trump administration that many were hoping for. "We are back at the status quo, with moderate growth in both the overall economy and truck freight," he said in a statement last week.

However, in a subsequent e-mail, Starks said contract rates are poised to climb, and the only question is when. "We had expected earlier movement ... but we are now at the point where contract markets will start to show movement," he said. One tip-off is that the publicly traded truckload carriers were beating analysts' second-quarter estimates, despite confirming that rates remained subdued, he said.

Jeffrey G. Tucker, Tucker's CEO, forecast that the combination of the ELD and FSMA mandates will cause contract rates to spring forth with a vengeance not seen in more than a decade. Truckload contracts are dodgy things: They don't commit carriers to provide capacity, but they don't force carriers to abide by negotiated rates either. Contract rates can change mid-contract, and Tucker said that many will do just that during the upcoming cycle. What's more, because overall capacity is tighter today than it was in 2003-04, the impact on rates will be more extreme than in 2004, which he called a "brutal" year for shippers.

Larger carriers that didn't chase the spot market and stood by their shippers will be in high cotton as the pendulum swings, according to Tucker. They will "have the luxury to pick and choose the best lanes, maximizing their ROI systemwide," he said in an e-mail. Addressing those carriers, he said: "Everyone will have you on speed dial, you'll be overbooked every day, and you'll be able to call your shots like Babe Ruth."