How low will truck fares go?

Chart of the week: Spot (linehaul) to contract rate spread ($1.20/gallon fuel basis), van contract rate initial report sonar: RATES12.USA, VCRPM1.USA

Spot-to-contract rate spreads have averaged record lows since early May (about -74 cents per mile), putting downward pressure on contract rates for bids negotiated later this year. It takes. There is little precedent for such a dramatic difference, but there is little historical evidence that contract rates fall as fast as they rise.

The contract trucking market is very different from the spot market. The main difference is volatility, mainly caused by the way prices are negotiated.

The charge 12 The index used in this week’s chart is the difference between the spot rate and the contract rate minus the level of estimated cost of fuel. This is done to more accurately compare his two rates, as contract rates include a portion of fuel costs, much of which is passed on in the form of fuel surcharges. This is a mechanism rarely found in spot pricing.

A contract or published rate market is simply a long-term agreement between a shipper and a carrier. In most cases, neither volume nor service is guaranteed, so the commitment is somewhat tenuous.

The only binding part is that the shipper bids the shipment to the carrier and if the carrier is willing and able to transport the customer’s shipment, it will do so at the stated price until expiration of the contract. Spot rates are negotiated on the spot and usually only apply for a few days with minimal volumes.

Contract Fee Contracts are generally valid for approximately 12 months, but may be longer or shorter. Many shippers have moved to shorter procurement cycles due to their inability to reliably secure capacity during the pandemic. This basically bid each other and pushed rates up faster than ever before.

Contract rate movements have been minimal since March, early signs of deterioration, down about 2% since early June. Assuming a base fuel cost of about $1.20 per gallon, the spot rate would drop 27% over the same period, leaving a difference of 74 cents per mile between the spot (NTIL12) index and the contract rate (VCRPM1) index. is occurring.

Spreads between spot and contract averaged -24 cents per mile in 2019, but contract rates moved little until January 2020 when they dropped around 2% to 4%.

However, spreads have tripled since 2019, suggesting shippers may have a stronger appetite for cost savings after two years of rapid inflation.

Contract rate movements are ultimately determined by carriers and their equipment utilization needs. And so far, most listed trucking companies have mentioned minor deterioration at best. Reports Strong Second Quarter Results.

Accepted contract load volumes support this for now, showing a slight decline in July compared to June, when the market was still in turmoil, and 3%-5% year-on-year. shows a decrease in

On the supply side of the equation, most of the capacity increase over the past two years has been on the smaller fleet/owner-operator side, which relies heavily on spot market cargo. That is, the larger fleet heavy contract market maintains high rate levels.

That said, if demand-side conditions remain below current levels, interest rate differentials are too large to sustain over the long term, resulting in some degree of lower interest rates. Judging by past history, a conservatively estimated 3% to 5% decline looks imminent in the coming months.

About this week’s chart

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https://www.freightwaves.com/news/how-far-will-trucking-rates-fall How low will truck fares go?

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