The word **freight** refers to large quantities of goods transported through the supply chain via trucks, trains, ships, or airplanes. **Freight rates**, on the other hand, are the costs shippers pay carriers to transport their products within the truckload (TL) market. These rates are influenced by numerous factors, including economic demand, fleet capacity, fuel prices, weight, size, distance, and the nature of the goods being shipped. Rates are typically negotiated and agreed upon between shippers and carriers, either through long-term contracts or on a spot basis. Throughout the year, especially during the request-for-proposal (RFP) season in the contract market, shippers rely on reliable freight data and analysis from sources like ACT Research and DAT to strategically prepare their RFP bids.
Understanding freight rates is crucial for businesses to adapt to the constantly fluctuating truckload market and plan accordingly.
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What factors shape freight rates? Beyond the natural fluctuations of the truckload cycle (more on this below), several key elements influence freight rates. According to ACT's freight analyst, Tim Denoyer, "Simply put, supply and demand."
Supply and demand in the TL market dictate where freight rates stand at any given moment. When demand grows faster than capacity, and there’s a shortage of drivers or tractors, prices rise. Conversely, when supply exceeds demand, rates fall. This cycle repeats itself regularly.
To break it down further, let’s look at how economic demand and fleet capacity affect freight rates.
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**Economic demand**
Nearly every physical product made or sold in the economy relies on full truckload freight for transportation. The two largest sectors driving the TL industry are retail and industrial goods. As the saying goes, if you buy it, a truck delivered it.
In general, when the economy booms, people spend more, leading to increased freight volume. During an economic downturn, spending decreases, reducing freight demand. Over the long term, freight generation per capita remains relatively stable, though slower population growth has broader implications for freight generation and economic activity.
Freight typically grows fastest early in the economic cycle when businesses expand and build inventory, slowing down later in the cycle. Rarely does freight grow continuously for more than two years before experiencing soft spots—what we call "freight recessions"—which occur more often than broader economic recessions. The freight cycle usually lasts about two years on the upside, with downturns lasting from a few months to two years.
[Referencing the Cass Freight Index]
The Cass Freight Index showed a 1.7% month-over-month (m/m) decline in shipments in September, following a 1.0% increase in August. In seasonally adjusted terms, the index dropped 2.6% m/m from August to September, with shipments falling 5.2% year-over-year (y/y) in September after a 1.9% y/y drop in August. This decline comes 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 declined 5.5% in 2023. With normal seasonality, the index is expected to fall around 3% y/y in October and 4%-5% in 2024.
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**Fleet capacity**
Capacity adjusts dynamically as consumer spending patterns change and inventories are replenished. When freight demand decreases, so does the need for capacity.
The idea of truck capacity is flexible. Typically, Class 8 tractors over eleven years old aren’t used in the TL or less-than-truckload (LTL) sectors, but this varies among different fleets.
When conditions tighten significantly, older trucks return to the roads because manufacturers and parts suppliers can't quickly meet sudden demand spikes. Conversely, when capacity loosens, older and less efficient trucks are sidelined by falling freight rates.
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How do rates differ between various types of freight trucking?
During a freight recession (currently underway), we're witnessing freight rates decline 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 spread narrows slightly in the early-cycle phase as dry van rates begin to catch up. However, the gap remains wide into mid-cycle and contracts in the late cycle.
That said, is there any distinction between the different types of freight trucking?
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**Dry van trucking**
A dry van truck transports dry goods in a fully enclosed trailer. Dry van is the largest and most standardized type of truckload shipping, primarily handling retail goods.
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**Refrigerated trucking**
A refrigerated truck carries temperature-sensitive products such as food, film, and medicine in a refrigerated (reefer) van trailer. Rates in the reefer market tend to be more stable compared to other types.
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**Flatbed trucking**
A flatbed truck transports items on a platform trailer chassis with a flat loading deck but no permanent sides or roof. Flatbed typically handles more industrial freight, like machinery and construction materials. Flatbed freight rates fluctuate more due to its seasonal nature.
Although the freight and trailer types vary widely, most tractors can handle any of the three main trailer types.
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How do freight rates differ between contract and spot trucking?
Contract freight rates are fixed prices agreed upon by carriers and shippers for a specific duration. Spot rates, as the name suggests, are immediate prices for shippers without carrier contracts. While spot rates might seem more volatile, both have advantages and disadvantages depending on perspective. Businesses engage in both the contract and spot markets to manage unexpected shipment changes and diversify their short- and long-term strategies.
Understanding these nuances helps businesses stay competitive and adaptable in a dynamic market.
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