Supply Chain Expertise and Technology Blog by TMC, a division of C.H. Robinson

Cutting Through the Fog of Freight Rate Predictions

Predicting truckload freight rates

Expert opinion is one commodity that is never in short supply. The challenge is sorting through the abundance of views to find the ones that are credible and make sense. This is certainly the case when it comes to predicting how full truckload (TL) freight rates are moving. It is possible to approximate where rates are headed in the short term, but you still need to be circumspect when heeding the advice of so-called experts.

There are many sources of data and opinions on this subject. All you have to do is open up Transport Topics or other trade journals these days and you will see article after article telling you that rates are rising dramatically. You can also find many indexes (e.g. American Trucking Association, TransCore, Morgan Stanley) that show what is happening with supply and demand on a weekly basis. But these indexes don’t tell you what is really happening with rates. For contractual rates the best information I’ve found on actual rates comes from publicly traded TL carriers’ 10Q’s where they divulge what their average loaded RPM is. Brad Delco of Stephens Inc. recently shared with me the data that his firm has been tracking since 1998. Since the information is readily available and the numbers do not lie, the index provides a good guide to likely rate outcomes.

Here are some observations on TL rate movements derived from the Stephens figures. The index’s compounded growth rate since 1998 through the second quarter of 2010 is 1.59% (Figure 1). As you can see from Figure 2, this growth is not linear and fluctuates considerably. Year-over-year increases were greater than 0% and less than or equal to 2.5% more that 37% of the time over that period. For 80% of the time increases were between minus 5% and 5% (Figure 3).

Figure 1:

StephenIndex_TL

 Figure 2:

StephenIndex_YOY

Figure 3:

StephenIndex

Note that contract rates and spot market rates do not always move in the same direction, let alone at the same pace. This is no different than comparing short and long term interest rates. Or what’s happening with oil futures compared to the price of diesel.

What does this data indicate about how freight rates are trending? Well, since increases happen more that 71% of the time according to the Stephens data it is reasonable to assume that the overall direction will be upward. The $64,000 question is, by how much? This depends on the following factors:

· How the economy performs (most economists continue to predict growth this year).

· Whether increases in the cost of fuel will cause trucking failures owing to the increased float that trucking companies would have to shoulder.More trucking failures mean less capacity.

· How many trucks remain sidelined. When all the parked trucks are back in business, it will become harder to add capacity and rates will go up.

· Class 8 Truck production. The more new trucks entering the market the less pressure on rates.

· Unemployment levels. As long as the jobless figures remain high the likelihood of a driver shortage is low and driver wages should remain stable, instead of creating pressure on rates.

· The impact of the Comprehensive Safety Analysis 2010 (CSA 2010) government initiative. While the details of the new program are still in flux, many industry observers are predicting that a certain percentage of drivers will be forced out by these new regulations, potentially adding to driver shortages.

Certain market behaviors should also be taken into account. For example, when demand for capacity starts to outstrip supply, carriers are able to achieve more miles per truck and decrease the number of deadheads per load (carriers such as Knight and Werner have already reported progress in these areas in the first quarter of 2010). However, they might not get a better price for this business. It is not easy for carriers to improve rates in response to market changes; with many customers they only get one chance per year to negotiate an upward revision.

With all these various factors in mind, where do you think TL freight rates are headed in the second half of 2010?

In my next blog, I will explain what happened in the first half of the year, and offer some advice on how often TL rates should be reviewed.

- Director of Consulting Services, C.H. Robinson
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