Following the National Truckload Index (NTI) release of a few weeks ago, FreightWaves has developed the spot to contract rate spread (RATES) to help users understand the short- and long-term relationships between transactional and long-term truckload pricing trends.
Traditionally, contract rates follow the spot market trend after about 90 days. Knowing the direction and velocity of spot rate movements in relation to contracted rates can tell you how supply and demand conditions are changing in the truckload market and give you early notice on what to expect in regard to upcoming bids.
FreightWaves CEO, Craig Fuller, recently wrote about this as it relates to the current trucking environment.
The RATES index displays the difference between FreightWaves National Truckload Index (Linehaul Only – NTIL), which excludes estimated fuel costs, and the Van Contract Rate Per Mile Initial Report Index (VCRPM1) – based on over $80 billion of freight invoices. Since contract rates are reported on a 14-day lag, there is also a 14-day lag in RATES.
The formula is NTIL-VCRPM1. See an explanation of how NTIL is calculated.
Contract rates are defined as long-term pricing agreements, normally established for a 12-month period, but can be shorter or longer. The main idea is to establish an efficient way of communicating the need for and securing capacity between the shipper/3PL provider and carrier without negotiating rates on a daily basis. These rates are slow to move because of their extended cycles.
When spot rates remain higher than contract rates for an extended period of time, it is a signal that contract rates will increase as well. The other implication for spot being higher than contract is that carrier compliance is also expected to deteriorate as they have shippers consistently willing to pay higher prices for trucking capacity.
On the contrary, when spot rates fall below contract, it is indicative that carriers may start bidding long-term rates lower with increasing contract compliance.
Since carriers price spot rates differently than contract rates when it comes to the inclusion of fuel (in the form of fuel surcharges), FreightWaves has also included two new NTIL variants that remove fuel costs at different levels – NTIL12 and NTIL20. These remove fuel costs above $1.20 per gallon and $2.00 per gallon, respectively, which are two of the most popular starting points for passing along fuel costs on the contracted side.
In short, NTIL pulls the entirety of the fuel cost out of the spot rate while NTIL12 and NTIL20 remove less fuel cost from the spot rate – allowing you to see varying levels of fuel influence.
The purpose of doing this is to be able to compare the spot and contract rate in a more apples to apples way. In the chart above, RATES reflects the deepest discount to the contract market, while RATES20 shows the smallest.
Click here for a detailed explanation of RATES calculation.
