Shippers lock in higher contract rates to hedge against spot price inflation
FreightWaves has been watching a series of technical indicators to track the freight market, including monitoring how shippers are reacting to the capacity crunch in the market.
For the first time in years, quarterly conference calls with major shippers are talking about transportation cost headwinds have a profound impact on their profit margins. In fact, freight transportation as a percent of the costs in the economy is greater than that of oil prices. If the freight market is inflationary, it has a tremendous impact on the margins of corporations. If freight were traded like a traditional commodity- i.e. energy, agriculture, or even electricity- there would be a way for shippers to hedge their exposure. Unfortunately, until the launch of freight futures contracts that are planned for late 2018 by FreightWaves, DAT, and Nodal, shippers must find other ways to ride the truckload pricing waves. FreightWaves’ CEO was featured on CNBC last fall discussing freight futures.
How are they doing it? They appear to be shifting volume away from the spot market and locking in higher contract prices. In discussions with carriers and large enterprise 3PLs, we are hearing contract rate increases that exceed 10% year over year. Since mid-year 2017, the spot market rate was higher than the contract rate. That development appeared to cool off in Feburary and the first half of March. What didn’t cool off is the increase in contract rates as shippers implemented higher contract rates based on the latest bid cycle.
It is not just the big guys are that are getting rate increases. Many shippers that FreightWaves spoke with mentioned that carriers that haven’t asked for rate increases for the past five years are coming to them demanding increaes. In the tweener market, carriers are reporting getting high teens, as the owner operators are moving down market into shorter lengths of haul (i.e. moving out of the tweener market) to maintain compliance.
DAT’s data shows this is the case as well. While spot and contract volumes both expanded in the first quarter, the contract business saw greater volume and price expansion in the freight market, as compared to the spot market. Additionally, because carriers with trailer pools operate far more efficiently with proper HOS compliance, these enterprise fleets are receiving more support from shippers as they scramble to find alternatives to paying detention and securing capacity.
The term “shipper of choice” has become a hot term of late. The concept is that shippers can do things to attract capacity providers, beyond price. While shippers have historically awarded carriers with awards for “carrier of the year” for performance, customer service, and value, perhaps carriers could reward shippers with a similar award of excellence in how they run their operations and treat drivers.
Regardless of how shippers address their issues, based on the movement of capacity into longer term fixed rates, it is apparent that carriers and shippers both agree that higher rates are going to be around for a while.
Originally published: https://www.freightwaves.com/news/shippers-contract-rates