Having looked at some historical examples of the main factors on rates right now, Noël Perry talks about how the pressures on rates will likely travel throughout the country, and how long we expect them to linger. Are these high rates temporary, or the new norm?
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 fifth in a series of articles about the topic.
Nick: Hey Noël, so we’ve looked at how in both 2004 and in 2014 there were regulation changes and big weather events 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. So how long will the effects last?
Noël: Well, it’s interesting, because in case of Harvey, we know from history that there is a national effect of these events; and in the case of Katrina, it was in the neighborhood of 5% at least for a couple of quarters. In the case of Sandy, it was more like 3% or 4%.
However, in the past, we didn’t know how the stress at the point of impact spread across the country. Was it 5% everywhere or was it 30% in Houston and 0% in Portland? Well this time out, we’re going to be able to track over the next 3 or 4 months the effect of this thing as it goes out. Those facts will be reflected in our forecast. Interestingly, by the way, outbound rates in Texas are low right now, inbound they’re very high. Nobody wants to go in there.
Nick: And everyone wants to get out for whatever cost.
Noël: Yeah, so if you’re wanting to ship stuff in there you’ve got to pay extra. Even though right now the volume’s not moving because of the dislocation, but when the volume starts coming back, wow.
Nick: Interesting. So in 2014, you said the contract rates adjusted by about 2% and sort of matched the effect on efficiency, but the spot was affected by 12%. Does contract over the next year after that see any lingering effects because spot went so high? Does it create a new sort of baseline price or affect contract ultimately further than that?
Noël: First off, there’s a small effect on the contract side, because there is movement in the industry between contract and spot. So one of the things that people want to do when you have these crises is get more stuff on the contract side. And so they try to get the fleets to agree to include more–and they do to some extent–and prices go up a little bit, so there’s a 1% or 2% effect there. It may be bigger this time, we don’t know. What we do know is in ‘14, it was in the neighborhood of 1% or 2% percent while in ‘04, it was in a neighborhood of 5-7% percent. So there’s a small effect.
That effect lingers for at least two years and then it fades back a little bit as people go back to what we’ll call “sustainable behavior”. On the spot side, the behavior is quite volatile, and it’s showed in the Truckstop.com statistics. Prices were up by 12% in 2014, reflecting two things; a 2% – 4% percent increase in baseline cost from the productivity hit, but then the rest of it was just scarcity. Economics 101 told you that when that scarcity goes away as it did by the end of ‘15 and in ‘16, then the price goes back down, but not as far–retaining some of that 2%-4% baseline cost increase.
What we saw in spot prices was significant decreases in price as that scarcity premium evaporated. And so what’s going to happen, if you look at the FTR forecasts for spot prices in 2019 and 2020, is we’re going to have negatives, because what we’re going to gain in 2018, which is a big number, has to be offset by a retreat. What’s happening is the Truckstop.com data in the forecast that FTR helps with are becoming all the more valuable because the markets are becoming more volatile.
Prep for the changes in 2018 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.