How Will ELD and Weather Affect Contract vs. Spot Rates? – Part III


The industry has changed since the last time we saw regulatory and weather pressures like this. Noël Perry talks about the interplay between contract and spot markets, and what it could mean for rates as forces converge in 2018.

Anticipating the launch of Rate Forecasting, the new week-by-week, lane-by-lane forecast from Truckstop.com and FTR, we sat down with Truckstop.com and FTR chief economist Noël Perry to talk about rates, and this article is third in a  series of articles about the topic.

Nick: Ok, so we’ve looked at how in both 2004 and in 2014 there were regulation changes and big weather events, which we have to learn from for 2018, but there are also differences, as the industry has less margin for error and more information.

You also mentioned that today we do business a little differently, with the growth of the spot market?

Noël: Sure. There’s a very, very important change here, particularly with respect to the publicly published statistics. Traditionally—and it was still occurring in the early 00’s—when a carrier provided a contract bid to a large shipper, they would basically quote a price for almost everything that shipper had on the bid. This would include what we call in the industry “bad freight” (that’s freight which is not regular)…it moves once in a while. But the customers wanted standard, reasonable pricing for all their goods, and there was this unspoken agreement that if you take the good freight—if you want the good freight—you take the bad freight, too. And what that meant was the good freight was a little overpriced to make up for the fact that the bad freight was underpriced in the same contract.

What happened in the late 90’s and all through the 00’s is that people came in and said, “Hey, you don’t have to overpay for the good freight; I’ll move it for less.” They stripped out the gravy and left a lot of fleets just handling the crap. Then what happened (particularly after the crisis of the recession in ‘08 and ’09) is the fleets wised up and they said, “I won’t take that crap if I have to discount the good stuff.” In the old days, that stuff moved in the contract side, and when there was a market crisis, the contract rates had to go up to account for the fact that there were real shortages and it took a lot of extra money to move that bad freight. That bad freight was included in contracts.

So in ‘04 and ‘05, when we had the first hours of service regulations and Katrina, rates before fuel went up by double digits for two straight years to reflect that. By ‘14, the base load freight that gets the contract business was mainly moving very regular freight, and so it doesn’t have peaks and valleys—it’s the same volume every day. That ‘14 hours of service change raised rates, lowered productivity by 2%, and it only increased the contract rates by 2% or 3%, but not by the double digit shortage that we had in ‘04.

What happened is all of that random freight, that stuff that used to be included in contract, is now moving in spot market, and it showed up in the Truckstop.com numbers. In 2014, our spot numbers were up by 12% on average across the whole year, and if you look at individual weeks, it went up to around 20%, because all of that odd stuff that was the focus of the crisis got pushed into a single market.

And that’s why Truckstop.com’s spot market coverage is so valuable, since it reveals what’s happening in the in this volatile part of the market. The spot market is the canary in the coal mine.

Nick: So with ELD and the hurricanes, ‘17 is very similar to ’14. Do we expect contract to see a small change and spot the bigger swing?

Noël: It’s happening right now. The contract numbers are barely moving in the last month up 2% year over year, while our [spot] numbers are up over 10%. So it’s been a big change in how the market responds to these differences in freight. There’s the regular stuff that moves relatively benignly, and then there’s everything else that goes crazy.

Nick: So ours [spot rates] are up around 10 percent. Do you believe that is the majority of the rate hike we’ve already absorbed, a lot of the price change for the new ELD?

Noël: Oh no, no. If this trend continues, I expect (and our data shows) that we are on pace to have a very tough time early next year, assuming it continues—and there’s no reason to expect that it won’t. You probably saw that the economy grew now by 3% in the 2nd quarter, higher than we thought, and most people think the 3rd quarter will be somewhere in the same neighborhood, maybe 2.5%, or 3%. So we’re on course. It’ll be much worse, probably at the peak 20% like it was in ‘14.

Nick: In our article about rates going bonkers, we talked about this emotional effect to pricing, where a hurricane or fuel prices support truckers asking for a higher rate, because it gives them a good reason. Does that play in here?

Noël: Yes, absolutely. One of the most powerful potential values of the Rate Forecasting product is to give fleets some documentation as to what’s expected. So rather than saying, “We think something’s going to go up,” they can go in to their customer and they say, “Hey, look at what these smart people in Indiana and Idaho are saying. You guys, get real with these price increases.”

Nick: Brokers can turn around and say the same to shippers, and shippers can, in turn, expect and project cost changes if they see the trend.

Negotiate the right price with Rate Forecasting, the groundbreaking, lane-by-lane rate forecast which projects spot market rates for each of the upcoming 52 weeks from leaders Truckstop.com and FTR.