Guest commentary by Mike Mulqueen, JBF Consulting – as provided for the October 2020 Freight Market Index report
It is always with great anticipation that I await the arrival of the BluJay Freight Market Insight report. Being someone who loves data, combing through the report enables me to identify hidden trends and insights that are impacting my clients’ freight operations. However, a keen eye is hardly required to discern trends in this report. They are neither hidden nor nuanced and are almost universally negative when viewed through the lens of a shipper. Still worse, the trend lines in the report indicate that perhaps the worst is yet to come. This is especially ominous given that we are now entering the traditional contract negotiation period in TL freight.
How Did We Get Here
Just seven months ago, we were looking at historically low spot rates. Before the pandemic, there was already pressure on the spot market due to excess carrier capacity; however, in late March when demand dried up, rates tumbled to unsustainable levels. There were many stories of sub $1.00/mile spot rates. The spot market is a forward indicator of the slower-to-move contract markets, which also declined in the March/April time.
However, since then, spot and contract rates have spiked due to both lost capacity and significant changes to what carriers anticipated in terms of the annual rhythm of freight volumes and flows. Industries that provide consumer staples, such as CPG, grocery and general merchandise retail are doing great, while the industrial and discretionary consumer components of the economy continue to struggle. Transportation professionals are used to some level of disruption driven by normal economic volatility, ever-increasing regulations and macro-trends that take years to play out. However, the disaggregated nature of the US freight system, for all its benefits, is not able to react in an orchestrated manner to this level of upheaval.
While this report is replete with great information, four figures in the accompanying analysis provide us a lesson into how the US TL freight market goes from favoring shippers to favoring carriers. These four steps do not simply describe 2020, but seem to be the recurring pattern that we see as markets flip in terms of whom they favor.
Step 1 – Spot market volume (Figure 18) began increasing in Q2 as shippers servicing the consumer staples market began to exceed their contracted capacities. Step 2 – This put upward pressure on spot market rates (Figure 17). Step 3 – As the spot market soared, carriers began to reject more contract freight moves to drive more revenue through the spot markets. This has led to a significant drop in Primary Tender Acceptance (Figure 16). Step 4 – This inevitably leads to shippers going deeper into their routing guide and paying more to haul freight (Figure 15). This is a reinforcing feedback loop that drives prices higher. However, as we have seen numerous times (most recently, 2018), the balancing component of the feedback loop is that as rates rise, new capacity enters the market. The disaggregated nature of freight transportation ensures that no provider has the power to significantly influence capacity, so the reinforcing effect, while perhaps slow, will ultimately serve to put us back into a natural equilibrium.
There continues to be significant pressure on TL carrier spot and contract rates which are blowing out shipper budgets. While there will be a plateau, and likely reduction as capacity comes back on-line, the charts don’t indicate we are there yet. However, please note that as the BluJay data charts show, there is a great deal of variability between the top and bottom quartiles within each metric. Being a BluJay customer, you have the technology to be best-in-class. I would be interested to know how you are using that technology to improve your operations.
Mike Mulqueen is a Partner at JBF Consulting and leads the Logistics Technology Strategy practice. JBF Consulting is a unique supply chain execution consultancy of TMS experts. Sign up here to receive the JBF Freight Transportation Bulletin, published monthly: http://bit.ly/JBFbulletin2020.
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