Trucking rates are notorious for their volatility, fluctuating dramatically due to a complex interplay of factors within the freight market. At the core of this volatility is the fundamental principle of supply and demand. The freight market operates as a dynamic ecosystem where buyers of capacity (shippers) and sellers of capacity (carriers) engage in a constant dance of negotiation and adjustment.
Understanding dispatchable capacity
One of the primary drivers of rate fluctuations is the concept of dispatchable capacity. This refers to the total number of trucks available on any given day to haul loads. When dispatchable capacity is tight, meaning there are more loads than available trucks, rates rise. Conversely, when there’s an oversupply of trucks compared to freight demand, rates fall.
Dispatchable capacity is a key element in understanding the nuances of trucking rate volatility and should not be conflated with the total number of trucks in the market. Unlike the mere count of trucks available, dispatchable capacity refers to the fleet of trucks ready and available to transport loads on any given day. The distinction lies in this readiness and availability because not all trucks in the market are dispatchable at a moment’s notice. Some may be under maintenance, between contracts, or simply not in use due to a lack of drivers.
For instance, while a trucking company might own numerous vehicles, the actual number of trucks that can be deployed to meet current freight demands depends on various factors, including the availability of drivers, fuel constraints, and maintenance schedules. Thus, a fleet might technically have ample trucks, but not available on a given day to haul requested loads or “tenders”.
Moreover, dispatchable capacity is influenced by the entry and exit of owner-operators and the availability of intermodal rail options, which provide significant additional capacity in times of high demand. These dynamics make dispatchable capacity a fluid and adaptable measure, better reflecting real-time market conditions than simple truck counts. Understanding this distinction is crucial for stakeholders aiming to anticipate and respond to rate fluctuations effectively.
How the freight cycle drives trucking rate volatility
The freight cycle, typically lasting three to four years, plays a significant role in this volatility. In the early stages of the cycle, the market is balanced, with trucking fleets primarily working in the contract market. As capacity tightens, freight demand in the contracted market exceeds available trucks, leading to increased tender rejections. This pushes more loads into the spot market, driving up spot rates.
When spot rates consistently exceed contract rates for an extended period, trucking companies begin to shift their focus from contracted freight to the more lucrative spot market. This shift further increases tender rejection rates and spot market prices. In response, new owner-operators enter the market, attracted by high spot rates and abundant load opportunities. This capacity expansion can take several quarters and continues as long as spot rates remain high and freight demand is plentiful.
However, this expansion eventually leads to an oversupply of capacity. As demand slows and capacity exceeds load opportunities, tender rejections fall, followed by declining spot rates. If this persists, some trucking companies may go out of business or declare bankruptcy, further contributing to market instability.
Interestingly, the often-cited “driver shortage” doesn’t necessarily correlate with market conditions. The freight market can experience a capacity shortage without having a true driver shortage. While individual fleets may struggle to fill all their trucks with drivers, the overall market capacity is determined by the total number of dispatchable trucks, including those operated by owner-operators and intermodal rail networks.
Seasonal factors also contribute to rate volatility. Different businesses have unique peak seasons and shipping patterns, which can cause fluctuations in demand throughout the year. Additionally, market fragmentation exacerbates volatility, as shippers and carriers often communicate about only one lane or region at a time, leading to incomplete market pictures and speculative behavior.
The industry’s reliance on short-term solutions, such as mini-bids and frequent RFPs, paradoxically adds to the uncertainty. While intended to provide more certainty in shorter time frames, these approaches can actually increase market volatility by compressing contract lengths and forcing frequent rebidding of the same lanes.
External factors like fuel costs, economic cycles, regulatory changes, and weather events also play significant roles in rate fluctuations. For instance, changes in global oil prices directly impact diesel costs, which carriers often pass on to shippers through fuel surcharges. Economic expansions or recessions can dramatically shift freight volumes, while new regulations can affect capacity by limiting driver hours or increasing operational costs.
The volatility of trucking rates is a complex phenomenon driven by the intricate balance of supply and demand, the cyclical nature of the freight market, and a host of external factors. Understanding these dynamics is crucial for all stakeholders in the logistics chain to effectively navigate the ever-changing landscape of freight pricing.
The role of freight brokers in trucking rate volatility
Freight brokers are pivotal intermediaries in the trucking market, operating between shippers and carriers to facilitate the transportation of goods. Their primary role is to match loads with carriers, thus ensuring goods move efficiently across the supply chain. Despite their crucial function, brokers also contribute to rate volatility through their influence on capacity dynamics and pricing strategies.
In a freight market characterized by fragmented communication and regional silos, brokers provide valuable oversight by accessing a broader network of carriers. This connectivity allows them to navigate varied capacity conditions and offer competitive pricing. However, because approximately 20% of all trucking freight is contracted through brokers, their actions can amplify rate fluctuations. Brokers’ ability to leverage their network to find available capacity during tight conditions can lead to increases in spot market activity, creating upward pressure on rates.
Moreover, brokers operate in a highly competitive environment where they vie for loads from shippers and secure carriers to haul them. This competition intensifies during periods of capacity shortages, as brokers scramble to fulfill shippers’ needs, often resulting in paying higher prices for available loads. Conversely, in times of surplus capacity, brokers benefit from lower spot rates, offering shippers more favorable terms while maintaining their margins.
The dual role of brokers as buyers and sellers of capacity positions them uniquely, allowing them to influence both sides of the market. By efficiently matching supply with demand, brokers facilitate smoother operations, but their profit-driven motives can also contribute to short-term rate volatility.
Brokers’ effectiveness hinges on their adeptness in navigating these market cycles, securing best rates, and maintaining relationships with reliable carriers.
Brokers use SONAR to gain an edge in the market, as high frequency data provides brokers with advanced signals of where rates are moving. Brokers with advanced information are able to win more deals and expand their margins over competitors which have not invested in this technology.
To learn more about how SONAR can provide rate insights, request a demo.
