State of Freight: Delta between contract and spot rates higher than ever

Today’s freight market environment of loose transportation capacity, falling demand and low rates is the logical tail end of a business cycle made more volatile by the COVID-19 pandemic and the monetary and fiscal responses to the pandemic. FreightWaves CEO Craig Fuller and head of market intelligence Zach Strickland recounted “the round trip” the freight economy has taken since the pandemic began in North America in the spring of 2020 during FreightWaves’ annual State of Freight webinar this week. 

As stimulus dollars dissipated and inflation took hold in 2022, contract truckload volumes as represented by SONAR’s Outbound Tender Volume Index (OTVI) fell, on a stacked year-over-year basis, nearly to 2019 levels.

Outbound Tender Volume Index (OTVI) in Seasonality Mode. Chart: FreightWaves SONAR. To learn more about FreightWaves SONAR, click here.

Domestic truckload volumes fell before inbound ocean container shipments to the United States, revealing how the trucking market sits closer to end consumer demand. The urgency to replenish retail locations and distribution centers fell quickly as inventories rose and consumers pulled back, contributing to softer conditions in trucking. Meanwhile, Strickland noted, the percentage of truckload tenders rejected by carriers, or Outbound Tender Rejection Index (OTRI), has fallen to a cycle low of approximately 4%.

Truckload carriers don’t have higher revenue opportunities in the spot market so they’re trying to get as much as contracted freight as they can, rejecting fewer loads and lowering their rates to stay near the top of the routing guide. 

Fuller and Strickland explained what current market data tells us will likely happen next. First, the freight market is fairly late into its down cycle already, because less-than-truckload carriers such as Old Dominion Freight Line are citing weak volumes. Owing to high barriers to entry for new capacity, including real estate, cross-dock operations and local fleets, as well as the mode’s smaller shipment sizes, the LTL market is less responsive to cyclical volatility than full truckload. Truckload carriers will have experienced volume and rate softness for months before LTL carriers see the same movement. 

Even though we may be late in the cycle already, Fuller cautioned, the data suggests that we’ll be in a flat trough — not a “V-shaped recovery” — for some time. 

“Now we’re seeing a situation where we have too much capacity on the road, too much dispatchable capacity and not enough freight to fill the trucks,” Fuller said. “There is no peak. Spot rates have increased over the past two weeks, but the rejection rates, the willingness of trucking companies to turn down freight, [are] telling us that there are no issues if you’re a shipper covering the loads that you’ve got — none.”

One key measure bodes especially poorly for contract rates in the near to midterm: the spread between contract and spot rates. When spot rates fall far below contract rates, as they have in today’s climate, shippers can move freight more cheaply on the spot market, and their contracted carriers have to lower their rates in order to keep the volumes they need. 

Van Contract Rate Per Mile – Initial Report (white) and National Truckload Index – Linehaul (purple). Chart: FreightWaves SONAR. To learn more about FreightWaves SONAR, click here.

“The delta between contract and spot is as high as it’s ever been,” Strickland said.

“The way I think of the spot rate,” Fuller said, “is that it’s always going to pull the contract market — it’s either going to pull it up or it’s going to pull it down. And right now it is naturally going to pull it down. It’s going to pull the contract market because shippers are saying, ‘I can find capacity in the spot market and I get it as much as 60, 70, 80, 90 cents a mile cheaper than I can by going through my contracts.’” 

In addition to the near-term downward pressure on contract rate posed by wide spreads to spot rates, there are larger supply and demand issues in the freight market and macroeconomy that may keep capacity loose and rates low. On the demand side, higher interest rates have sharply curbed growth in finance-dependent industries like homebuilding and automotive, two industries that also drive significant freight demand. And on the supply side, the trucking industry’s enthusiasm for drop trailers may have exacerbated a new capacity dynamic that favors shippers.
To watch the entire hour-long State of Freight conversation between Fuller and Strickland, click here.

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