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Rise of spot rates shifts pricing power to carriers and away from brokers

( Photo: Shutterstock )

The latest DAT data brings into stark relief how strong the current marketplace for trucking has become.  Over time, the spot market pricing for any particular mode (dry van, reefer, flatbed) may briefly exceed the contract price, but normally the contract rate exceeds the spot rate. However, in the past several weeks we have witnessed something very unusual. Overall demand was already improving at a rate that led us to predict that we were seeing the first fall surge in truck freight since 2007. Then… hurricanes hit Texas and Florida, which are areas that are both well-insured and well-heeled enough to rebuild quickly.  We saw a wave of dislocation of equipment, followed by a wave of equipment for recovery, which was followed by a wave of equipment for rebuilding. That wave continues today, as the normal fall surge of freight has continued to build momentum in earnest. 

Net result of all this activity is very simple, the spot price for all modes has exceeded the contract rate. This is the first time since DAT began reporting its data in the current format (2010) that the monthly spot rate has exceeded the contract rate at the same time in all three modes.  The following three charts tell us all we need to know.  The latest weekly and monthly DAT Trucking Freight Barometers are continuing to surge strongly into even more positive territory, and signaling that the ‘fall surge’ is happening for the first time since 2007.  We expect coming weeks (post Harvey and Irma) to show continued strength.

What does this mean?

Two things:

1.  Trucking companies should see an extraordinary improvement in pricing power when negotiating contracts in the coming weeks and months. This is especially true if the current conditions (spot above contract) continue through the end of the year. We are hearing shippers use terms such as “strategic partners,” “core carriers,” and “collaboration.” As one of our favorite sages on the industry said to us recently, “We haven’t seen this much smooze from shippers since the 2004-05 timeframe.”

We should also point out that this has occurred before the ELD rule has become effective, leaving those who are predicting its implementation will lead to higher pricing for truckers potentially right by default. Said another way, if ELDs do lead to even tighter capacity then the magnitude of pricing power for truckers may be unprecedented. 

2. Brokers will struggle to produce operating profit. To the degree to which a broker has locked in the price it will provide trucks to its shipping customers, it will be forced to do one of three things:

a. Move the load at a loss (buying at spot and selling at contract);

b. Not move the load (telling the customer it is unable to find a truck, when they mean, “there is no way we can find a truck at the price we quoted you.”);

c.  Go back to the shipping customer and request a pricing increase to secure capacity.

No matter how the freight broker chooses to react, they will make less operating profit on the loads which they are locked into a contract price. If current conditions continue as we expect them to, we expect many of the publicly traded freight brokers to miss fourth quarter earnings expectations unless they can either profiteer enough in the loads which they are not locked into contract rates, or are successful at lowering fourth quarter expectations to levels low enough to be met. Either way, now is a good time to have secured capacity and a bad time to be locked into contract rates.

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Donald Broughton, Principal & Managing Partner, Broughton Capital

Prior to starting Broughton Capital Mr. Broughton spent nine years as the Chief Market Strategist and Senior Transportation Analyst for Avondale Partners. Before that, Mr. Broughton spent over twelve years at A.G. Edwards. At A.G. Edwards, in addition to being the Senior Transportation Analyst, he was the Group Leader of the Industrial Analysts and served on the firm’s Investment Strategy Committee. Prior to going to Wall Street, Mr. Broughton spent eight years in various distribution and operations management roles in the beverage industry, including serving as the Corporate Manager of Distribution for Dr. Pepper/Seven-Up companies and Chief Operating Officer for Bevmark Concepts.