There is no doubt the unprecedented amount of goods demand is the primary contributor to the shortage of transportation capacity, but one consequence of such sudden strong growth has been a disproportionate increase in truckload rates between markets across the U.S.
The two lanes depicted in this week’s chart from the FreightWaves SONAR Market Dashboard are great examples of the current state of the truckload market. The average TRAC spot rate from Los Angeles to Dallas has been falling since the start of the year but remains 90 cents per mile above the trip from Elizabeth, New Jersey, to Dallas. The Elizabeth origin is just slightly longer but well within a comparable range as both take around three full days to cover.
Taking the average rate per mile and multiplying it by the miles from Elizabeth to Dallas produces a total of $3,907.50 while the Los Angeles origin gives the carrier $4,889.20, nearly a thousand-dollar (25%) difference for arguably the same amount of work. From a carrier’s perspective, this is a no brainer decision and they are actively making it.
While these two lanes do not necessarily compete directly for capacity, carriers can decide to take loads moving to the East or West coasts. You can see this reflected in the rates from Chicago to Los Angeles and Chicago to Elizabeth.
The average rate per mile has increased from $4.37 on Dec. 30 to $4.84 (+11%) on Thursday from Chicago to Elizabeth. The rate from Chicago to LA has been moving at a much lower level, hovering around $1.74 so far this year.
Keeping in mind these two lanes are not entirely comparable from a rate per mile standpoint due to their disparate mileages (~1,200 miles difference), the rate differential is still too extreme to be explained by mileage alone.
The load from Chicago to LA (2,000 miles or four days) would pay approximately $3,570, whereas the two-day or 800-mile lane to Elizabeth would total $3,970. Carriers are taking the hit on the westbound lane in order to make high profit margins moving east.
Tender rejection rates — the rate at which carriers decline electronic requests for capacity under a previously determined/contract rate — for Chicago to LA have fallen to 14.7% while Chicago to Elizabeth rejection rates are currently around 20% and trending higher, even though the spot rates suggest they could make more on the shorter haul lane. So why would they do this?
Simply looking at rates will only tell you what they want, not why they want it. There are a few reasons why carriers prefer moves out West over into the population centers of the East. The simplest reasons are total demand and the balance of freight flow. There is more freight leaving than entering the area and there is a lot of it.
Southern California produces more freight than it consumes, by a wide margin. The LA markets account for roughly 7% of the total outbound demand in the U.S. and continuously operate in a capacity deficit. The Headhaul Index (HAUL) measures outbound less inbound tender volumes and shows the LA market with a 143 HAUL value while Elizabeth has a 56, indicating competition is a lot stiffer in the Northeastern market.
Efficiency also plays a role. The average length of haul out of LA is over 800 miles while Elizabeth’s loads average just over 600 miles — which has increased nearly 100 miles since July. The Northeastern miles are also more congested and prone to weather disruptions this time of year. Many of the loads move into high-consumption areas with lower chances for reloading.
While most of these characteristics are not new to the trucking market, they have been greatly exaggerated by the overwhelming demand. Price disparity is fueling the natural imbalance, though it would appear we are seeing a natural correction in the spot market as rates are falling out of the West and rising from the East.
The trucking spot market looks more like a commodities exchange board than what used to be more of a Craigslist.
About the Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
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