By Matt Harding | Vice President, Freight Market Intelligence Consortium | Chainalytics |
Every year around September or October, the emails and random phone calls start. “Matt, what are rates going to do next year?” our customers ask. Their concern is understandable. And it’s a simple question that many struggle with – including yours truly. But it’s an important question, since transportation costs are such a big part of each supply chain’s financial performance.
Why it’s important to look at the bigger picture
Setting this all-important planning and rates question aside, there’s a larger picture to explore that affects both committing to and setting future rate expectations. To plan effectively, you’ll need to consider two major business cycles in your transportation planning process.
Let’s break it down…
- Long-Term Cycles: Much like stock market portfolio returns, the answer to “how much will rates increase” is easy if you want to be right in the long run: Stock market returns average 5 to 7 percent annually, over the long term, just as freight rates increase 2 to 4 percent (or a simple 3 percent average). Easy, but not very reliable. And what may be good for your 401K is not good from a transportation planning perspective.
- Short-Term Cycles: These cycles create all the freight market chaos. Take a look at rate trends in 2014 vs. 2016 … opposite ends of the spectrum, as we saw spot rates for truckload capacity decrease from 20 percent over contract in mid-2014 to 10 percent below contract in less than two years. Meanwhile, contract rates climbed 4 to 5 percent over 2014 but are now dropping under significant pressure as a result of the well documented capacity glut.
If you understand long- and short-term business cycles, you’ll understand what is happening at a macro level. But the often-overlooked step is understanding your business in the context of the business cycles. To develop a more nuanced answer, understanding the impact from the short-term cycle combined with your rate benchmark position and choice of carriers is more useful for parsing out your best choices and setting realistic expectations.
What’s going on with the current short-term cycle, market position and carrier composition?
As to what’s going on for the foreseeable future? Carriers will not sit idle when a freight recovery hits and current Freight Market Intelligence Consortium (FMIC) data show minor upward directional changes in market rates today. Whether that change leads to capacity issues in 2017 is anyone’s guess – but soft markets do not last long and in 2017, Q2 is the most likely period for a significant recovery. There are many reasons for this (the topic for another blog).
What we have witnessed over the years is:
- Shippers who have significantly BELOW market rates from specific carriers in a soft market are the first to suffer from fleeing capacity in a tightening market. It’s my opinion that aggressive shippers are likely going to give all the savings back that they gained in recent aggressive bids – either back to the incumbent, or an alternate carrier.
- Shippers whose carriers are trending the herd with an AT MARKET position will be split into two main categories by their carriers – large customers and small customers. Carriers will target large at-market customers first for recovery rates that are meant to adjust for inflation simply because of the efficiency of working with large accounts.
- Smaller shipper customers and shippers whose rates are priced ABOVE market in 2016 will likely get a reprieve, and those rates adjustments (if any) will likely fall within a more scheduled bid setting with normal market forces working on new route guides.
So for budgeting purposes, it’s very difficult to keep significant rate savings through the short term business cycle if you are well BELOW market. We see the excessive gains on either side of the market as temporary and in essence excessive savings/profits simply flow back and forth between shippers and carriers with (as we’ve stated before) a ~3 percent increase in rates over the longer term.
Taking a look at 2017 U.S. rates
The pressure on U.S. rates is on a national (not seasonal) level. Given that a return to balanced capacity is imminent, here is what I see for our FMIC customers and their carrier relationships for 2017 as industrial production rebounds in concert with fleets tailored for the current output levels:
2017 DRY VAN BUDGET PREDICTIONS
|2016 FMIC Network Market Position||Expected % Rate Increase in 2017*|
|5-10% BELOW Market||5-8%|
|2.5-5% BELOW Market||3-5%|
|AT MARKET +/- 2.5%||2-3%|
|2.5%-10% ABOVE Market||FLAT|
*Based on current FMIC benchmarks and market conditions. Significantly higher-volume lanes or locations with concentrations of a few large disciplined carriers will trend on or above the higher end of the ranges.
To all our customers and shippers in general – good luck with your budgets this year – I believe we are in for a bumpy ride in 2017. And don’t forget – even if you had a magic crystal ball that could nail your budget to the penny, your proposed budgets would still be challenged by your executives!
Matt Harding is vice president of Chainalytics’ Freight Market Intelligence Consortiums.
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