Late produce season, freight boom pushing rates higher and pressuring broker margins
With spot rates now at two-year highs, brokers and shippers may be beginning to worry if they will face a situation that last occurred in 2014 and early 2015 when the average truckload spot rate was above the average contracted rate. While it may still be a bit premature to conclude that 2017 will see a repeat of 2015, it is a rate situation that bears watching.
“Margins for freight brokers have been under pressure,” Donald Broughton, managing partner of Broughton Capital, told FreightWaves.
Broughton noted that the oil boom in 2013 through early 2015, led by new fracking technologies, drove up contract rates as demand for trucking services increased. The oil collapse in late in 2015 changed that, though, and “by the time we started 2017, contract pricing was 2% to 3% below where it was at the end of 2015,” he said.
In its latest Trendlines report on spot rates, DAT noted rates and load postings remain strong. The dry van ratio was up 6% last week, with 5.5 loads posted per truck. The same was true in the refrigerator segment, which is now at 10.4 loads per truck, up 14% from the previous week. Overall, the number of posted loads gained 2.5% while truck posts dipped 1.2% on the spot truckload market during the week ending June 24.
On the rate side, spot truckload rates remained steady and are holding at nearly 2-year highs at $1.79 per mile, which is 10 cents higher than the rate in May.
The Atlanta region is particularly hot right now, as severe weather down south has contributed to the nation’s highest outbound freight rate of $2.29 per mile. That climbed 10 cents from the previous week, DAT said. Chicago, at $2.08 per mile also saw an increase of 4 cents.
On the reefer side, the national average rate climbed to $2.12 per mile, again with Atlanta leading the way buoyed by seasonal produce. The average outbound rate was $2.50/mile, up 5 cents.
“Atlanta was a super-hot market for reefers as well as vans, thanks to all the seasonal produce leaving refrigerated warehouses and food processing plants,” wrote DAT’s Peggy Dorf. “A lot of that produce originates in the Tifton and Macon markets in Southern Georgia, and is distributed out of Atlanta. The biggest gain came on the lane from Atlanta to Chicago, where rates rose 39 cents per mile to a total of $2.15.
Complicating matters is the economy. The American Trucking Associations reported that May’s advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index jumped 6.5%. That followed a downward adjustment in April’s reading, which ATA lowered from a 2.5% drop to 1.5%. In May, the index equaled 144.1 (2000=100), up from 135.3 in April.
Compared with May 2016, the SA index increased 4.8%, which was the largest year-over-year gain since November, ATA said. Year-to-date, compared with the same five months in 2016, the index is up 0.9%. For all of 2016, tonnage was up 2.5%.
The not seasonally adjusted index, which represents the change in tonnage actually hauled by the fleets before any seasonal adjustment, equaled 145.3 in May, which was 8.5% above the previous month (134).
“After three straight declines totaling 2.6%, truck tonnage snapped back in May,” said ATA Chief Economist Bob Costello. “One month does not make a trend, but the nice gain last month fits more with the anecdotal reports I’ve been hearing from fleets, at least more so than three straight months of decreases.”
The slow start to the year held contract rates in check, but as the 2017 oil boom continues and areas of the country such as California emerge from years of drought to produce record harvests, demand for trucking capacity has increased, driving up rates.
In a recent Transportation & Logistics research note, Stifel executives noted that “it does not appear that there is widespread evidence that contract rates are rising much even in the midst of what has been a solid end to the 2Q17 from a supply/demand perspective.”
“And, the caution expressed by some carriers regarding the uncertainty surrounding the pricing environment in the 2H17 and 2018 suggests to us that [Wall Street’s] general view of the supply/demand balance in the truckload sector is still shaded toward the optimistic side of the contract pricing equation,” the note added.
“So, here we find ourselves midway through 2017, and we are still looking for that magical combination of economic growth, federal regulations, driver shortage dynamics, fleet right-sizing, and disciplined truckload management teams that will allow for truckload contract prices to rise faster than costs are rising over a sustained period of time,” Stifel’s analysts wrote.
Stifel’s view is that this sudden surge in spot rates, moving them closer to the average contracted rates, may be due in part to seasonal freight, the produce season in California and a wet spring in the Northeast that delayed seasonal freight. The California effect may be significant, as there has been some anecdotal evidence that refrigerated haulers in that market had moved into the dry van market to fill trailers during the drought.
“Refrigerated carriers that had been looking to keep the wheels turning in the over-capacitized dry van truckload sector have repositioned themselves to haul produce out of California just as the surge in late-spring/early-summer merchandise is ramping up demand in the dry van sector,” Stifel suggested.
As a result, shippers, Stifel said, may be sitting and waiting, expecting this rise in spot rates to be temporary and any real contraction of capacity to still be off in the future.
“Contract rates, however, have been slow to follow,” the Stifel note said. “Instead shippers seem content to pay inflated spot rates over a short period of time or prefer to set up expensive but effective pop up/short-term dedicated fleets with their core carriers, in order to handle the temporal spike in volume.
Once these short-term factors play out, though, the question becomes what will the freight ecosystem look like?
“Our view is that the permanent tightening of demand won’t occur until the 2Q18 and may be delayed until the 2Q19, depending on the extent to which some or all of the Trump Administration’s pro-growth agenda is implemented and depending upon the extent to which incremental federally mandated trucking safety regulations (i.e., speed limiters, sleep apnea testing, hair follicle drug testing, etc.) will be shelved, delayed, or implemented,” Stifel’s note read. “So we are dealing with a multivariate future that, almost by definition, is impossible to predict. Our sense is that supply and demand will eventually tighten.”
For now, the only true winners in the rate rise seems to be the carriers.