The term "freight" refers to large quantities of goods being moved through the supply chain using various modes of transportation such as trucks, trains, ships, or airplanes. "Freight rates," on the other hand, represent the costs incurred by shippers who pay carriers to transport their products within the truckload (TL) market. These rates are determined by numerous factors, including economic demand, fleet capacity, fuel prices, weight, size, distance, and the nature of the goods being shipped. Shippers and carriers negotiate and agree on these rates either through long-term contracts or on an ad-hoc basis. Throughout the year, especially during the request-for-proposal (RFP) season in the contract market, businesses rely on reliable freight data and analysis provided by companies like ACT Research and DAT to strategically formulate their RFP bids.
Understanding freight rates is crucial for businesses as they fluctuate constantly in the ever-changing truckload market. Companies need to stay informed to adapt effectively and plan accordingly.
It's essential for businesses to grasp the current state of freight rates to navigate the unpredictable truckload market successfully.
What influences freight rates? Beyond the cyclical nature of the truckload market, several key factors play a significant role. According to ACT's freight analyst, Tim Denoyer, "At its core, it's all about supply and demand."
Supply and demand in the TL market dictate the current level of freight rates. When demand exceeds supply—such as when there's a shortage of drivers or tractors—prices rise. Conversely, when supply outpaces demand, prices decrease. This pattern repeats cyclically.
To delve deeper, let's examine how economic demand and fleet capacity affect freight rates.
Economic demand plays a critical role. Nearly every tangible product in the economy moves via full truckload freight. The retail and industrial sectors are the two largest contributors to this demand. As the saying goes, if you buy it, a truck delivers it.
In general, when the economy thrives, consumer spending increases, leading to higher freight volumes. In contrast, during economic downturns, spending decreases, reducing the need for freight transportation. Over the long term, freight generation per person remains relatively stable, although slower population growth has long-term implications for freight generation and overall economic activity.
Freight typically grows rapidly at the start of an economic cycle when businesses expand and stock up on inventory. However, this growth slows down as the cycle progresses. Freight seldom continues to grow for more than two years before encountering slowdowns or "freight recessions," which occur more frequently than broader economic recessions. The freight cycle usually lasts around two years on the upside, while downturns can range from a few months to two years.
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The shipments component of the Cass Freight Index fell 1.7% month-over-month (m/m) in September, following a 1.0% increase in August. In seasonally adjusted terms, the index dropped 2.6% m/m from August to September. Shipments declined by 5.2% year-over-year (y/y) in September after a 1.9% y/y decrease in August. This decline suggests that private fleet insourcing isn't over yet, as Class 8 tractor sales surged in Q3 following supply constraints in Q2. After rising 13% in 2021 and 0.6% in 2022, the index fell 5.5% in 2023. With typical seasonality, the index is expected to fall about 3% y/y in October and 4%-5% in 2024.
Fleet capacity is another dynamic factor. As capacity expands, consumer spending shifts, and inventories are replenished, reducing freight demand.
The concept of truck capacity is flexible. Typically, Class 8 tractors over eleven years old are not used for freight in the TL or less-than-truckload (LTL) sectors, though this varies across different fleets.
When conditions tighten significantly, older trucks return to the roads because original equipment manufacturers (OEMs) and parts suppliers cannot quickly meet sudden demand spikes. Conversely, when capacity loosens, older and less efficient trucks are sidelined due to lower freight rates.
How do rates differ among the various types of freight trucking? Currently, in a freight recession, we're witnessing declines in freight rates across the board. The rate difference between the two specialized trailer types—flatbed and reefer—relative to dry van, widens at the bottom of the cycle. This gap narrows slightly in the early-cycle phase as dry van rates catch up somewhat. However, the gap remains wide into mid-cycle and contracts in the late cycle.
But does each type of freight trucking have unique nuances?
Dry van trucking involves hauling dry cargo in fully enclosed trailers. Dry van is the largest and most standardized form of truckload shipping, primarily focused on retail goods.
Refrigerated trucking, also known as reefer, transports temperature-sensitive products like food, film, and medications in refrigerated trailers. Reefer market rates tend to be more stable compared to other types.
Flatbed trucking involves hauling goods on platform trailers with flat loading decks without permanent sides or roofs. Flatbed usually handles more industrial freight, such as machinery and construction materials. Theoretically, flatbed freight rates fluctuate more due to the seasonal nature of the flatbed market.
All types of trucking rates are interconnected. Although freight and trailer types can vary significantly, most tractors can handle any of the three primary trailer types.
How do freight rates differ between contract and spot trucking? Contract freight rates are fixed prices agreed upon by carriers and shippers for a specified period. Spot rates, as the name suggests, are immediate prices for shippers without carrier contracts. While it's commonly assumed that spot rates are more volatile than contract rates, there are advantages and disadvantages to both, depending on your perspective. Businesses engage in both the contract and spot markets to address unexpected shipment changes and diversify their short- and long-term strategies.
This ongoing analysis highlights the complexities and dynamics of the freight market, emphasizing the importance of staying informed and adaptable in this ever-evolving landscape.
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