Shippers look to past to plan for future in cyclical freight market

The past can be an indicator for the future when it comes to freight market cycles, and data shows that 2020 looks to be a year of tightening capacity and increased uncertainty, according to a recent whitepaper. But shippers have high confidence with regard to the year.

In the whitepaper, “Get Ahead of the Curve: Learning From The Past To Prepare For The Future,” FreightWaves and third-party logistics provider Transfix of New York City provided results of a shipper survey after receiving responses from 119 shippers to learn about how they can work with logistics companies and prepare for a tighter market.

“Shippers, more than carriers and brokers, have the most narrow view into the fluctuating freight market,” according to the whitepaper. “This is because shippers’ main focus is the manufacturing of goods. When they manage transportation and forecast future pricing, they are beholden to a narrow window of their own historical transportation pricing and volumes, leaving them to benchmark against themselves instead of the market as a whole.”

Knowledge, data and partnerships can help increase their visibility into the future, the whitepaper shows. Without third-party information, shippers might struggle to find capacity and pricing data that shows seasonal and historical trends. Shippers can learn from past market cycles to prepare for an uncertain market in 2020.

Trucking and logistics operate in cycles and are influenced by supply and demand, according to the whitepaper. External events, such as hurricanes or global trade wars, can contribute to volatility in the market. When rates are low, truck capacity exceeds the number of loads that are available. When rates are high, the number of loads is higher than the number of trucks available to haul the loads. Determining the timing of these cycles is difficult, the whitepaper shows, but one can identify when the highs and lows happen and volatility occurs.

The whitepaper looked at one of the most volatile periods for loads, capacity and rates in a freight cycle: the second quarter of 2017 to the third quarter of 2019. Several factors contributed to the tightening in truck capacity, including hurricane damage from Harvey in 2017, Irma in 2017, Michael in 2018 and Florence in 2018; corporate tax cuts leading to increased GDP growth; and the electronic logging device (ELD) mandate. Half of small carriers waited until about three months before the mandate went into effect to switch from paper logs to ELDs, and a learning curve might have contributed to the tightening capacity.

The ELD mandate wasn’t the primary cause for changes in capacity, but carriers believed that keeping electronic logs rather than paper logs would impact productivity and capacity. Spot market rates rose for 12 consecutive months from the third quarter of 2017 to the third quarter of 2018. The double digit-rate increases throughout 2018 led carriers to add capacity. New truck orders rose to a 15-year high, and as small fleets expanded, so did used truck sales.

The survey showed about half of shippers experienced high volatility with trucking rates and capacity in the second quarter of 2018, up from less than 10% in the second quarter of 2017. By the second quarter of 2019, about 10% of shippers noted high volatility in rates and capacity. Nearly 20% of shippers had high volatility in rates and capacity in the third quarter of 2019.

When capacity was tight in 2018, half of shippers looked to build their pool of third-party logistics providers and freight brokers, according to the survey. Also, half of shippers expanded the number of asset-based carriers in their network. And, 39% of shippers rebid freight rates with third-party logistics providers and carriers to acquire capacity.

As rates rose, shippers looked to become a shipper of choice by providing amenities for drivers, quick payments, weekend deliveries and drop-and-hook freight, according to the whitepaper. In the survey, shippers were asked how they would handle times of tight capacity like in 2018, and more than 60% of large shippers, or those with transportation budgets of more than $100 million, said they would expand the pool of third-party logistics providers and freight brokers. Smaller shippers, or those with transportation budgets of less than $30 million, said they would expand the number of carriers in their network. Also, about half of large shippers said they would rebid freight rates with carriers to acquire capacity.

Three-quarters of shippers in the survey said transportation costs have the most impact on their business. For 44% of shippers, raw materials costs accounted for the greatest impact on their business. And for 34% of shippers, labor costs had the greatest impact on business. Other costs, such as manufacturing, inventory, and sales and marketing had the greatest impact on business, for 29%, 26% and 13% of shippers, respectively.

In the second half of 2018, shippers and carriers had expected capacity to remain tight and load counts to continue to rise, but it didn’t come to pass, the whitepaper shows. Capacity continued to be added to the market, and new drivers learned how to use ELDs. But the fears that ELDs would impact productivity over the long term weren’t realized. As a result of the added capacity and the slowing of GDP growth, this opened the door for lower rates.

Dry van spot rates fell 3.9% in January, from the same month in 2019, according to DAT Solutions. The rates declined 3% in January, from December 2019. However, prices in January were higher than they were in November 2019.

Spot rates are expected to rise after shippers start to take advantage of the lower rates and shift loads to the spot market and rebid contract rates, the whitepaper shows. When spot rates are high, carriers will reject contracted loads for the loads with the higher rates.

Nearly four out of five shippers are confident about their transportation budgets in 2020, according to the survey. Shippers likely will increase their transportation budgets in 2020 because they believe they’ve gained pricing power, the whitepaper shows. Recently, they have cut the number of transportation providers in their network.

The first part of the year is typically soft for the freight market, but capacity is expected to tighten in 2020, according to the whitepaper. FreightWaves’ analysts believe that should start to happen in March with the beginning of produce season and a rise in manufacturing output.

About one-third of shippers use data outside of their own historical pricing information, the whitepaper shows. Without this data, shippers wouldn’t have the information to compare their pricing information to others in the market. This might impact a shipper’s ability to identify trends, according to the whitepaper. The survey shows 59% of shippers use a transportation management system to budget for full truckload rates. About half of shippers use internal historical data, 34% use third-party data and one-third use data from third-party logistics providers and freight brokerages to budget for full truckload rates.

About 85% of the largest shippers, or those that spend more than $100 million on transportation annually, use a transportation management system to budget for full truckload rates. More than 60% of the largest shippers and about half of the smallest shippers use internal historical data. More than 60% of midsized shippers, or those that spend between $30 million and $100 million on transportation per year, use a transportation management system to budget for full truckload rates.

About half of shippers use freight brokers to handle 20% to 60% of their capacity, according to the survey. A majority of smaller shippers use brokers to haul their freight, and about 64% of larger shippers use carriers to haul their freight.