Could Rates Go Bonkers? – How Will ELD and Hurricanes Continue to Affect Rates? – Part II


We continue our chat with Noël Perry on rates as we launch Rate Forecasting. In this article, we look at changes and trends to the industry that may be often overlooked when projecting rates. With close to 100% capacity utilization, we could be seeing just the beginning of rate volatility.

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. This article is second in the series of articles about the topic.

Nick: Ok, so we looked at how in both 2004 and in 2014 there were 1) regulation changes (hours of service), and 2) big weather events, which sounds an awful lot like 2017 with hurricanes Harvey and Irma, and ELD. We also talked about the goal of using the past to inform our forecast going forward. So can we learn from the last 2? Is it the same or are there new considerations for 2018?

Noël: Well, the other way to think about it is there are two big changes that have occurred since ‘14 and ‘04 that allow us, or indeed force us, to think differently and look at things differently. The first is that it’s FTR’s strongly held belief based on our research—it’s not 100% certain but it’s highly likely—that the industry keeps getting more efficient and it keeps ringing out excess capacity, leaving less margin for error.

For instance, in the 80’s and early 90’s, it was a good time for the industry (capacity utilization percentage in the lower 90% range). By the end of the 00’s, it was in the 95% range, and now good is 97% or 98% capacity in use. On that scale, a hundred is where things begin getting squirrely. It’s not an absolute shortage, but over a hundred is where you’ve got to be worried about supply chain failures. When there are supply chain failures because of inadequate truck supply, the impact on customers is very large, and so they’re willing to do almost anything to get the trucks they need.

The easiest way to think about it is let’s just say that this ELD thing peaks in November, just for the sake of argument. Well what would Wal-Mart say if they don’t have product on the shelf on Black Friday and Amazon does? Oh my, people in Bentonville will do anything to prevent that. So the first thing is that there is apparently less margin for error than there was in the previous cases.

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Nick: Wow, so losing capacity to ELD will certainly have a disruptive effect. Certainly really good for higher rates (or bad if you have to pay those). And the second change since ‘14 and ‘04?

Noël: The second thing really applies to Rate Forecasting at least in the spot market—not so much in the contract market, but the spot market side—we have real-time information to figure out what’s going on as these events unfold.

Look at that in two ways; first, as the market tightens, the underlying rate gradually tightens, too. We can measure it, and sure enough if we look at Truckstop.com’s T4C product, it tells us that rates are up over 10 percent year over year, and capacity utilization as measured by the ratio of loads posted to trucks posted, is at an all-time high.

Nick: …meaning there are a whole lot of shipments out there and relatively fewer trucks to move them.

Noël: Yes, exactly. So we know right now that the spot market is responding exactly as everybody thought. And of course the second thing related to the real-time info available this time around, is that as of October, FTR and Truckstop.com will be taking that insight and turning it into a forecast on a very disaggregate, point-to-point basis, specific to the lane. So we’ll be able to make a logical analysis as to what these events—that we know are occurring—will imply for a month, 6 months, or even a year out. This whole revolution in big data and digital processing, represented by Truckstop and FTR, is offering practitioners in the industry a lot more information. Valuable information.

 

Get a hint of what’s ahead 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.