The Unpredictability of Spot Rates in the Changing Market
Nearly every industry relies on some manner of transportation to keep their sales flowing. Over the past decade, transportation rates have experienced a steady period of growth. A combination of recovery from the Great Recession of 2008 and consumers’ increased dependence on online shopping have kept the supply of trucking capacity at a premium. If we were sitting in an Economics 101 class, there has been plenty of demand for supply. National spot rates, which have remained high in accordance with this supply/demand formula, are becoming more volatile as market uncertainty pervades the industry.
Average daily spot market rates from August to November of 2018 have been nearly twice as erratic as spot rates during the same time-period in 2017. The DAT National Van Freight Rate Index places average daily movement in 2017 as $0.034 per mile. This number has climbed to $0.064 per mile in 2018!
The climb in average daily movement of the national rate per mile is indicative of uncertainty. Key players in the supply chain like shippers and carriers don’t have a solid grasp on market conditions and are quoting and booking rates with less foreknowledge than in the past. Things like fuel prices, driver wages, and the availability of capacity are no longer known facts. Many shippers accept rates without being able to tell what the market price should be.
Spot rates are likely to remain volatile for some time as a result of the capacity crunch and driver shortage. More and more baby-boomers are reaching retirement age, and younger workers are less likely to become truckers than past generations. This is leaving a hole in the industry and too many available positions for truck drivers, which causes wages to go up. Again, supply and demand.
Following a 10 year rise in the transportation market, we’re now in a period of cooling. According to FreightWaves, “The DAT Van Freight Index hit $2.11 per mile on June 27th, the highest rate all year. Since then the market has cooled significantly with the rates falling as low as 1.53 in the middle of October but bounced back up to 1.63 a few days later.” Volatility like this causes uncertainty for people trying to provide rates based on market pricing and for people who are uncertain what a fair price per mile is.
With customer expectations rising, there is a greater need to deliver faster with more visibility. Some companies trying to accommodate these new customer expectations are willing to take a hit to stay in their customers’ “good books.” This means they may take a loss just to meet their on-time delivery standards. This level of unpredictability is adding to uncertainty.
The transportation industry is morphing around emerging technologies and consumer expectations. One thing is for sure though, whether there is an increased or decreased demand for trucking capacity and spot rates, trucking will remain a key feature of the economy’s supply and demand curve. In this unpredictable environment, the goal is to find a comfortable middle where customers are happy and freight costs are kept down as much as possible.