Everything You Need to Know About Spot Market Rates
In an effort to help you make more money in the trucking industry, Truckstop.com is committed to helping you break down important business information. Here is what you need to know about spot market rates and the current transportation market.
What are spot market rates?
In transportation, the spot market refers to the price or rate that’s paid to move freight in the moment or in the immediate future. At its simplest, spot market rates are just the price paid to ship goods “on the spot.”
Why do spot market rates fluctuate so much?
Spot market rates are directly impacted by supply and demand – if demand for a product is high and supply is low, spot market rates go up. If the demand for a product is low and supply is high, spot market rates go down. Furthermore, when you factor in the number of trucks and drivers that are available on the road at any given time, spot market rates can really fluctuate.
For example, if there are 100 trucks in Dallas with drivers ready to go but there are only 10 loads to move, drivers would likely accept a rate lower than what they would get if there were 1,000 loads to move and only 100 drivers.
Rates to move freight go up when there are fewer trucks and drivers. Rates to move freight go down when there are fewer loads. This is known in the industry as a load-to-truck ratio or capacity.
More capacity means rates go down; less capacity means rates go up
To make rates even more complicated, they vary by lane, too – meaning rates are going to fluctuate up and down depending on the road (the “lane”) the truck is running. If there are a lot of trucks heading to Dallas for deliveries, and then all of those trucks want a load out of Dallas to Chicago, spot rates for running the lane between Dallas and Chicago will likely go down because the load-to-truck ratio is low.
Rates vary by hour, by day, by week, by month, and by year.
How are spot market rates different from contract rates?
Spot market rates are paid in varying amounts from load to load, unlike contract rates which are a predetermined rate to move loads over a certain period of time. Contract rates are determined ahead of time via a contractual agreement. Basically, rates in the spot market go up and down from day to day, and contract rates are fixed for a set amount of time (often 12 months).
How do spot market rates impact truck drivers and owner-operators?
Spot market rates directly impact truck drivers’ and owner-operators’ bottom line. When spot market rates are high, they’re going to be a lot more profitable in their business. Often times that’s when you see carriers start their own trucking operations, and owner-operators may expand their business by taking on more trucks and/or drivers. When the spot market is low, many carriers give up driving, and you may see a lot of owner-operators closing up shop and/or going to work for a trucking company.
Spot Market Rates vs. Contract Rates
If you are a carrier working within the spot market, there’s no escaping the fact that you’ll be susceptible to the ups and downs of the daily market. If you’re a carrier with a contract or several contracts, it may be a somewhat steadier choice, but you can also miss out on spot market rates when they’re high.
What do I need to know about the current* market?
*This is an examination of the market in late October 2019.
Current market rates are low in the trucking industry for a number of reasons, but the factors below seem to be affecting the market most:
- Trade wars and global economic uncertainty
- Inbound container shipments are down
- Fears of Recession
- Load volume is down
- Truck capacity is up
- Fuel prices are up
To explain the current conditions further, we need to look at the global economy and the U.S. trade strategies. The factors impacting the rates create a domino effect. Rates are down because of decreased load volume with fewer inbound container shipments coming into the U.S. due to trade disputes. Trade disputes could influence domestic recession fears & economic uncertainty. Fear of economic uncertainty leads to decreased retail sales & consumer confidence. Decrease retail sales results in decreased industrial and manufacturing production. Additional factors influencing rates include severe weather conditions, weak agricultural production, and labor disputes. All of these factors along with increased fuel prices, it’s no wonder rates are low.
How can I use rates information to grow my trucking business?
Shipping costs are hard to predict and can significantly impact the bottom line. So, understanding the factors that affect freight rates and cost can be critical.
Rates are down because of various economic conditions that are reducing the types and amounts of freight available for carriers and decreasing supply of loads. Reviewing daily rates and understanding what causes the fluctuation is critical for owner-operators and carriers.
How to protect your trucking business during rates fluctuation:
- Try to secure more contracted freight, perhaps a short-term contracted project, or look to secure freight for your truck further in advance to avoid being stranded.
- Do your best to avoid the types of freight or regions that are most vulnerable to the conditions and factors driving rates down.
- At a minimum, try to diversify your freight types or customers to ensure that if one thing falls off or declines, that you’ll still have other options available.
By watching and understanding rates and rate changes, carriers and owner-operators can see a bigger picture. That perspective can help to make better decisions on which loads to take, how to factor in fuel costs, and how to maneuver a market that might have low spot rates but more reliable contact rates.