With truckload volumes accelerating and spot rates across the country holding steady, freight brokers are wondering how to talk to their customers about contract pricing.
Since July 31, FreightWaves has called a recovery in the freight market on the basis of sustained year-over-year volume growth, the first such trend in 2019. Although macroeconomic indices like manufacturing PMI and the yield curve in the Treasury markets continue to be bearish, FreightWaves notes that retail activity continues to be strong. Walmart (NYSE: WMT), Target (NYSE: TGT) and Nordstrom (NYSE: JWN) all posted stronger than expected earnings and provided guidance for growth in the back half of the year.
This thesis is far from fully baked and continues to be refined as more actors take positions in the freight market and FreightWaves receives additional data.
Brokers said this week that ‘contract’ rates are being marked to market – adjusted up or down based on conditions – at a faster tempo than in years past. As long as shippers think capacity is loose, they’re naturally inclined to drive rates down as far as they can go, but better information flows and an increasingly transparent marketplace have made contracted rates more fluid.
“Customers tend to act more quickly than in the past, not only because the market is currently in their favor, but because there have been major advances in the technology-enabled services customers have to choose from,” wrote one Chicago-based brokerage executive.
“Yes; more negotiations and more frequent,” said Michael Caney, president of logistics at Riverside Transport in Chattanooga. “Mini-bids often, more often than I’ve ever seen.”
According to the brokers surveyed this week, these negotiations seem to be split between shippers that are still asking for contract rate reductions and shippers that are being more cautious and want to lock up capacity for peak season, even if it means paying slightly more. Shippers that awarded primary freight to aggressively low-priced transportation providers have seen carriers go out of business and brokerages give the freight back.
In the fourth quarter of 2017 and the summer of 2018, capacity was so tight that many shippers had to resort to the spot market to move their freight. Brokers, too, had trouble finding trucks, and spot rates spiraled upwards. Some shippers that were burned in those hot markets are now making sure history doesn’t repeat itself, and they’re paying a touch more to brokerages to secure capacity and protect the savings they’ve already realized this year.
“Shippers are looking good year-over-year right now,” said Daniel Snow, managing partner at Traffix. “No one’s giving money away, but they’re trying to be reasonable coming into peak [season] to make sure they don’t go over-budget and reverse the early part of the year’s gains.”
“This is a crucial peak period that will paint the picture of how 2020 will play out,” added Duane Coghlan, who is another managing partner at Traffix, an Ontario, Canada-based freight brokerage that operates in all three NAFTA countries and generated roughly $300 million in revenues last year.
What’s fascinating about these recent moves is that some shippers apparently fear that freight markets could suddenly tighten and cheap capacity could abandon them. In other words, the risk in the spot market is to the upside. While no one knows for sure what direction rates will go and how far they will move, if volumes stay healthy, prices are more likely to break upward than downward.
On a national basis, contracted truckload volumes (OTVI.USA) are now a full 7 percent above 2018 levels, and the comparisons get easier over the next few weeks. Southern California truckload volumes have not risen dramatically in response to containerized maritime activity yet, but plenty of inland markets are growing their market shares. Ontario, California (OTMS.ONT), Fresno (OTMS.FAT), Houston (OTMS.HOU), Jacksonville (OTMS.JAX), and Ft. Worth (OTMS.FTW) have all grown their market share of outbound freight on a year-over-year basis.
Spot rates in the interior of the country are up off the bottom. Rates from Chicago to Atlanta (DATVF.CHIATL) have been on the rise since a particularly soft May.
Meanwhile, the forward curve, which indicates bids and asks for futures contracts on the Chicago to Atlanta lane (FWD.VCA) traded on the Nodal Exchange, shows that traders think rates will rise to about $2/mile by September. Peak rates do not look as strong as last year at this point, but sentiment in freight markets can change rapidly.
According to channel checks, at least some shippers are already shifting to a risk-off strategy which, in FreightWaves’ opinion, represents a meaningful shift in market sentiment. Shippers are conventionally thought of as the last parties in the market to become aware of prevailing conditions. Up to this point, the danger to brokers was that paper rates would continue to be pushed down on a lag but the spot market could suddenly tighten, squeezing gross margins.
If some shippers seem to be catching on to an underlying firmness in the freight market, it may be time for brokers to turn the tables and ask for a little protection on the contracted side.