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The trucking industry could soon see a jump in contract rates if the current environment holds steady, experts said.
While the spot market has remained strong amid the coronavirus pandemic with demand driving up rates, contract rates have remained fairly flat — consistent with their historic trend of shifting more slowly to market changes. But indications are emerging that the contract market is seeing some activity.
“Carriers and 3PLs have renegotiated contract rates due to the surge in spot rate activity, indicating an inflection point in contract rates,” Jim Nicholson, vice president of carrier sales and operations at Loadsmart, told Transport Topics. “A sharp increase in spot rates above contract have placed a strain on shipper routing guides.”
“If we get a sustained period where the spot rates are 20% or 30% above contract rates, that’s where you really start seeing the pressure coming in on the contract side,” said Kevin Zweier, the vice president of transportation at Chainalytics. “We’ve been seeing that a little, but it hasn’t been sustained enough.”
DAT Solutions is forecasting that contract rates will stay relatively level throughout the fall, but says increases may come in the first or second quarter of 2021. DAT Chief Scientist Dr. Chris Caplice noted contract rate increases often occur 12 to 18 months after spot prices spike.
“July was a paradox of exceptionally high spot rates but flat active contract rates,” Caplice told TT. “Our spot premium ratio for dry van spot freight hit a two-year high at 23.5% in July, reflecting the chaos of imbalanced supply chains.”
The DAT Freight Market Intelligence Consortium measures contract rate pressures with its spot premium ratio metric by dividing average spot rates per mile by average contract rates per mile. It signals potential changes with a positive number indicating a tightening market.
“Given the stress on the markets and the clear lag in driver capacity so far, we probably will see contract rates start to turn soon but mostly for shorter durations,” said Avery Vise, vice president of trucking research at FTR Transportation Intelligence. “Three to six months, perhaps.”
Vise noted that while carriers may want to lock into longer contracts, market uncertainty may restrain shippers from committing to longer terms at rates that would be attractive to carriers. He also suggested that more routine rate negotiations likely will not take place until at least the fourth quarter.
FTR Transportation Intelligence is a freight forecasting and research company that tracks industry trends weekly in partnership with Truckstop.com. Its latest report found spot rates increased 0.6% to $2.33 from $2.32 during the week ending Aug. 21. That follows about four months of steady spot rate growth.
“In general, with contract rates, we see them respond to what’s happening in the spot market. We see them respond several months afterwards,” Nick Wynkoop, product manager for rates and analytics at Truckstop.com, told TT. “I have not seen them pick up near as much. I think that has to do with uncertainty.”
DAT’s Caplice added, “Carriers are honoring their committed volumes but not necessarily providing customers with additional surge capacity. Second, the volatility of shipper networks is creating new lanes to be covered, which are falling predominantly to the spot market. Third, it’s a reflection that carrier networks are still unbalanced, and while there are enough trucks out there, they are not necessarily in the right places for shippers.”
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