Chart of the Week: Van Contract initial report of average base cost per mile, Van Outbound Tender Rejection Index – USA SONAR: VCRPM1.USA, VOTRI.USA
The post-pandemic trend of pricing long-term or contract rates to the ground isn’t over, but the information shows that is slowly ending.
the past six years of dry van contract rates (VCRPM1) and van tender rejection rates (VOTRI), we are able to see a lagging correlation between the 2. Rejection rates are likely to lead the slower-to-move contract rates.
What’s a young rejection rate?
Tender rejections are a measure of carrier compliance or adherence to covering freight under a previously agreed-upon price. Load tenders are electronic requests sent from a shipper to a transportation service provider asking if it might cover a truckload move. The service provider accepts or rejects the load.
The tender rejection rate is the proportion of tenders the transportation provider declines to cover. The upper the number, the tighter the market. Historically, national figures below 5% have indicated that contract rates will fall as there’s more carrier capability than demand for freight. When the OTRI is above 7%-8%, rates are likely to increase.
It must be noted that FreightWaves SONAR’s tender and contract rate data biases toward large shipper-to-carrier contract agreements, which represent the baseline and majority of the freight market.
Which era is trucking in?
There have been 4 general cycles of the transportation market over the past six years, when the tender data history began in 2018. That cycle began in 2017, but we only have history for the past 12 months. This market was characterised by rejection rates averaging above 17% and a robust single upward trend in contract prices that stabilized.
The 2019 market was characterised by a rebalancing of capability after an overheated capability growth period in 2018. The above chart shows net changes in lively motor carrier of property operating authorities registered to the Federal Motor Carrier Safety Administration. It isn’t a pure measure of capability since an authority can represent any variety of trucks. It also biases toward growth. Periods of decay (in red) are usually not as common as growth (green).
Rejection rates averaged slightly below 5% from February to December in 2019, with the market bottoming in August at 3.2%. This cycle lasted 14 months before COVID hit the U.S. in March 2020. There have been signs that capability was tightening before the black swan pandemic event hit, nonetheless. Holiday season rejection rates spiked above 14% that 12 months.
The pandemic era was characterised by overwhelming demand and lasted roughly two years, with rejection rates averaging above 20% and rates increasing 50%. The capability growth was subsequently historic as operators flooded the market, many leaving larger fleets to start out their very own ventures.
Unfortunately that growth proved to be an unsustainable bubble and commenced bursting in 2022. Contract rates fell rapidly from July 2022 to the spring of 2023 but have slowed since.
Rejection rates bottomed in May of last 12 months around 2.5% and have been slowly trending higher since. While tender rejections are still hovering in deflationary territory, the indication is that they might move above the 5% threshold sustainably sometime in the subsequent 12 months.
What to do?
For carriers it’s a game of survival. For shippers it’s an exercise in risk management. For brokers/3PLs it’s a balance of each. Shippers have the least sense of urgency but essentially the most control. As with all freight markets, success is decided by how much preparation was made within the previous cycle. The controlling party has to arrange before its turn ends.
Shippers can do essentially the most to regulate their destiny at this point. Maintaining service must be the goal for any bids implemented moving forward. Some lanes will likely be harder to cover in a decent market. Diversified route guides and never having rock-bottom rates in comparison with the market will likely be crucial.
Service providers should be vigilant. Watching the market closely for signs of disruption is the simplest motion but sometimes hard to do if only looking internally. Targeting customers who’re willing to take the above approach is less complicated said than done, but it surely is definitely more attainable than within the pre-COVID world.
The timing of a cycle turning has been unattainable to predict with precision, but there have been signals that it’s approaching. Let’s end this one with a timeless quote from Louis Pasteur, which has change into somewhat cliche: “Fortune favors the prepared mind.”
Concerning the Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that gives an interesting data point to explain the state of the freight markets. A chart is chosen from hundreds of potential charts on SONAR to assist participants visualize the freight market in real time. Each week a Market Expert will post a chart, together with commentary, continue to exist the front page. After that, the Chart of the Week will likely be archived on FreightWaves.com for future reference.
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