The word that Craig Fuller used to explain the freight market in February: “abysmal.”
That was considered one of the initial observations in FreightWaves’ February State of Freight webinar. But could it’s that the month marked a low point within the long freight recession?
Listed here are five takeaways from Wednesday’s webinar.
One other tough month within the freight market
Fuller, FreightWaves CEO, said he had spoken to several trucking executives who had a high exposure to the spot trucking market, and that it had been “a reasonably abysmal February.” But that’s when the chance that the tip of the cycle had arrived got here up.
“One in all them said that this was form of the start of the tip of the cycle,” Fuller said. “So it’s the massive washout and I believe that’s a good statement.”
The “washout” is the exit of capability that the market has been waiting for because the starting of 2023. Predictions of a stronger market by the tip of last 12 months never got here true, and there was wide agreement within the trucking sector that it was stubborn capability sticking around that was bringing a few freight recession that will not end.
The February market perspective comes after signs of an upturn in January, Fuller said. And he pointed to an unusual cause for a part of it: tax refunds.
“A whole lot of folks which have been impacted by inflation are getting a surge of cash, they usually’re spending that in January,” Fuller said. “And we don’t appear to be repeating that in February, March and April.”
The tip result’s that “as bad as February may feel, I believe the explanation it feels worse is because things were on the up and up,” Fuller said. The hope, he said, is that “we’re bouncing off the underside.” But he added that he didn’t foresee a return to the lows of last May. “I believe we’re actually in pretty fine condition.”
Capability continues to bleed out
One in all the explanations for that optimism: the continuing decline in net trucking authorities, as shown within the CDNCA.USA chart in FreightWaves SONAR.
Fuller reviewed the variety of motor carrier authorities lately, going back to the weak freight market of 2019, followed by “this massive construct and growth in authorities throughout the COVID cycle.” Authorities collapsed after that, and Fuller said they continue to be in a “churning-out phase, which is definitely positive for the fleets since it means there are less participants out there.”
“I doubt we’ll see expansion in 2024,” he said. At one point, it may very well be argued that the variety of authorities was 90,000 greater than was needed.
Zach Strickland, FreightWaves’ director of freight market intelligence, said the lack of capability “still has a protracted approach to go” but that net revocations of motor carrier authorities are trending lower.”
Spot vs. contract and what it means
Fuller said the connection between spot and contract rates is essential, and what is going on now suggests a market that’s returning to normalcy.
In a standard market, spot rates is likely to be about 20 to 35 cents per mile lower than contract rates, “so it’s cheaper to go spot.” But throughout the strongest days of the COVID bull freight market, it became dearer to book freight within the spot market than the contract market.
When that happens, Fuller said “it was a possibility for carriers to make loads of money by shifting capability” into the spot market. But when spot rates collapsed within the second quarter of 2022, based on Fuller, “shippers said, ‘Hey, I don’t must honor my contract rates so screw it. I don’t care if the carriers get upset at me. That’s not going to matter anyway because I don’t need them.”
But Fuller said with spot and contract rates now more in alignment, because the lagging contract rates adjust to the brand new reality, it’s an indication of “rational behavior.” With the 2 rates, contract and spot, normalizing their relationship, “it starts to suggest that the recovery within the freight markets is back and the market is beginning to act rationally,” Fuller said.
But that behavior may not hold. Fuller said when the rates begin to normalize, it could end in situations where carriers reject contract freight and switch to the spot market that has gotten up off the canvas. “Carriers now have options to truly do what the shippers could have done last 12 months, and that’s go find something more financially rewarding.” If that happens, the rejection rates can “skyrocket,” he said.
California’s weather issues
With one other atmospheric river pounding the Golden State, it raised the query: What does this mean for produce season?
Strickland said — after admitting “the produce season fascinates me” — that the heavy rains within the state aren’t only a flooding issue, but can delay planting as well. “Those harvests can get delayed since the fields are too wet to plant,” Strickland said. The result’s that ordinary seasonal flows get “pushed out,” and even worse, crops may be ruined by the excessive wetness.
The refrigerated season for California produce often runs from late March through July, Strickland said. That’s when disruption within the markets from the rains could happen, “and I believe it’s going to occur,” he added.
That disruption signifies that the demand for freight finally ends up being in a smaller window. “The sense of urgency is higher,” Strickland said, and that might create profitable opportunities for produce carriers.
How are earlier calls looking right away? And what does it mean for brokers?
A listener on the webinar asked whether Strickland and Fuller were sticking to earlier bearish predictions heard on the Way forward for Freight Festival from November in Chattanooga, when the State of Freight for that month was held live.
Fuller said at the moment, he was pondering there may not be a turnaround until early 2025. “We’re continuously getting latest information here and we’re bringing it in,” Fuller said. “But yes, I actually have turn into more bullish. But it surely’s not dramatically different. I wouldn’t say it’s 1 / 4 ahead, but perhaps two quarters.”
The shifting of margins is just not excellent news for already beleaguered brokers, Fuller said. The spread between contract and spot rates, which are actually normalizing, is “where the brokerage margin lives.” When spot rates invert to lower levels lower than contract, “they make loads of money because they’re capable of charge high premiums,” Fuller said. But a compression within the rates ends in tighter margins, “and we see brokers lose on this a part of the cycle.” Conversely, it’s that form of spread that provides more power to carriers, he added.
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