Coyote thinks the trucking cycle is about to roll over

  (Photo: Shutterstock)

(Photo: Shutterstock)

Coyote Logistics recently released a white paper titled “The Coyote Curve: A Model for Mitigating Risk and Uncertainty in Modern Supply Chain Operations” explaining how the 3PL sees the dynamics of freight market cycles. Coyote created a complex model that involves three overlapping cycles, including seasonality, annual procurement, and market capacity—and we’ll discuss that in a moment—but the most compelling claims made in the white paper are indirect, only implied by their charts. To put it bluntly, Coyote appears to believe trucking spot rates are due for a rapid downturn.

This doesn’t necessarily mean that the United States is about to enter an economic downturn; one of the more intriguing aspects of Coyote’s model is that it doesn’t include macroeconomic data like GDP growth, industrial production, imports, or consumer spending. For what it’s worth, at FreightWaves we continue to have confidence in the overall economic situation despite some softness in housing activity. Check out Ibrahiim Bayaan’s work for our macro thesis.

Instead of looking at freight demand as it’s driven by external factors, Coyote modeled the internal dynamics of the trucking industry. The seasonality component of freight market cycles is relatively simple and should be familiar to our audience: freight is usually slowest in the first quarter, there’s usually a June surge and a fall surge. When unpredictable events like natural disasters occur, the impact on freight markets often depends on where they fall with respect to seasonal cycles (i.e., a major winter weather event in October or November, when capacity is tight, can be much more disruptive than one in February, a slow month for transportation).

The white paper also looks at the spread between contract and spot truckload rates, which is largely driven by the timing of transportation procurement with regard to the trucking cycle. In the second half of 2017, spot rates rose far above contract rates, because shippers secured trucking capacity early in the year when the market was soft. In the middle of 2018, we’ve seen freight markets reach a fragile equilibrium with a lull in spot market action, because contract freight was re-priced at an exceptionally strong point in the cycle. Coyote illustrates this with charts, showing that the relative amount of pain felt by shippers in a given year depends on when in the cycle they negotiated their freight contracts.

Finally, Coyote modeled a third cycle—“the one cycle to rule them all: the market capacity cycle.” The market capacity cycle has to do with how carriers respond to favorable and unfavorable rate environments. Coyote points out that because trucking in the United States is so fragmented and little to no barrier to entry exists, capacity can be added to and pulled from the market quickly in response to market conditions.

 ( Chart: Coyote Logistics )

(Chart: Coyote Logistics)

Unfortunately, due to fragmentation and the predominance of small players, capacity is neither added or subtracted in a rational way; it’s more like a stampede, and it always lags truckload rate movements (see the above chart). During upswings, when spot price growth outpaces capacity growth, shippers feel the pain; during downturns, when the bottom falls out of the spot market and carriers are slow to take assets out of the market, carriers are left holding the bag. It’s a plausible theory, but again, we feel that leaving out the demand side of the equation, i.e., the macroeconomics affecting freight, is a bit of an oversight, because demand is even more volatile than supply. 

None of this is really new—it’s just layering different supply and demand cycles on top of each other—but Coyote has presented the data in a compact, compelling format. The real kicker is the shape of the chart, and specifically the point at the cycle Coyote thinks we’re in now. 

If Coyote’s right, trucking capacity has already nearly reached its ‘natural ceiling’, the point at which the glut of supply becomes imbalanced against freight demand and crashes prices. The problem is that it’s unclear what exactly is represented by the ‘market capacity cycle’ line. The chart cites Cass, which creates demand metrics—you can see the Cass Freight Shipment and Cass Freight Expenditure trends in SONAR. There’s a possibility that Coyote is somehow baking demand into its ‘capacity cycle’ line, but if that’s the case, it’s misnamed because it represents both demand (freight) and supply (capacity).

Again, we feel that in order to truly understand whether capacity has reached a level high enough to crash trucking rates, you have to take freight demand into account. That’s why factors like port activity (softer than expected), housing starts (stronger than expected), oil and gas E & P (unprecedentedly high), and industrial production (solid) must be considered.