Busting Out All Over

By Mark Montague

If commercial freight is an early indicator of the economy, then the spot freight market is out there on the leading edge.

While most truckload freight moves under contract and at a predetermined rate, a growing proportion of “exception” freight flows to the spot market when demand is rising or capacity is constrained. Spot market activity remained far above historic norms in April, up 51% compared to April 2013, according to the DAT North American Freight Index, a measure of freight volume and truckload capacity on the DAT network of load boards. Freight designated for vans, the predominant equipment category, was up 48%, refrigerated (”reefer”) freight increased 53%, and flatbed freight saw a 66% increase.

Capacity Still Tight

Capacity, however, remains limited by a number of factors, including hours-of-service regulations that have curtailed productivity and a short supply of qualified drivers. Further, rail intermodal cannot accept more volume on a moment’s notice, so there has not been much opportunity to release the build-up of pressure on truckload capacity.

This tight capacity has been reflected in truckload rates.

I recently studied 8,800 lane rates for the differences between contract and spot market pricing from mid-April through mid-May. I found that the prevailing spot market rates were higher than shipper-to-carrier contract rates in 45% of freight movements in those lanes. In previous years, the corresponding percentage was between 15% and 25%, so this year’s statistic reflects an extraordinary change in the marketplace.

When spot rates are greater than contract rates, two things happen: 1) it puts freight brokers under tremendous pressure, and 2) shippers are going to get tired of paying a premium for spot-market capacity and will shift dollars back to the contract piece—as long as they can find a willing partner to haul their freight.

And a willing carrier will have ample opportunities to raise contract pricing. Current forecasts are for contract rates to rise from 3% to 6% this year. Some observers are calling for increases as high as 10%.

I’ve heard and read that large carriers got bigger increases on their contract rates in the most recent procurement cycle, but many are uneasy about committing all their assets in long-term agreements whose rates may not remain profitable for the entire term of the contract.

Wild Summer Ahead

If you’re a shipper or broker trying to secure capacity, cultivate carrier loyalty by treating your carriers like customers. Treat them honestly and fairly, give them access to good freight and good information, and they will naturally begin to call you whenever they have trucks available.

Keep your smallest carriers moving with loads that make a complete round trip to their home base or get them to their next desired destination. Your large carriers want a 48-hour lead time, a rate agreement for each load, and a single point of contact within your organization so they can make one call and get details about all the freight they are hauling for you.

Finally, track spot-market demand and capacity. You can predict (or even influence) trends in your contract pricing. Better still, you can negotiate a more fair and sustainable rate.

It’s going to be a wild ride this summer, especially if we continue to see encouraging signs in the retail and manufacturing sectors.

Mark Montague is manager, industry rates, for DAT Solutions, which operates the DAT® network of load boards. As a mathematician and statistician, he has applied his expertise to logistics, rates, and routing for more than 30 years, and was instrumental in developing DAT’s RateView truckload rates and analysis product. Mark is based in Portland, Ore. For information visit www.dat.com.