312.736.2600

JUNE 2019

2019 has been a difficult year for those with significant long exposure to spot rates, be they Carriers or 3PLs with limited contractual business. Rates have been depressed nearly all year and though volumes have been relatively strong, albeit slightly down when compared to last year, spot market volume has been muted. Those companies with large portfolios of contract freight have been insulated as their margins remain high but those more dependent on the less predictable business of spot have seen reduced activity and revenues. Which brings us to May, the month where volumes typically pick up and rates see a natural lift due to this increased business. That has not happened this year, and all things being equal, this scenario wouldn’t be so entirely devastating to those Carriers and 3PLs if it weren’t for the fact that many of those participants need this typical freight pattern to materialize.

For many, spot market activity and the usually elevated rates they bring are a large portion of a company’s business. With the start to 2019 consisting of decreased business and low rates, a May like every other wasn’t so much about profits as it was about maintaining a business. Many 3PLs and Carriers with significant ratios of business from spot activity have been treading water for months, waiting with anticipation for better times ahead. Those times are supposed to be here now and for those less capitalized freight brokerages and those Carriers with recently added capacity, quite literally this will become a period of survival. This was supposed to be the month that kicked off the summer season of demand and higher rates, two things desperately needed by so many in the marketplace. Instead, we got lower volumes nationally to mix in with our current ingredients of excess capacity and muted rates. The result is a recipe for disaster.

For months you could almost hear everyone repeating the same mantra, “Just get to summer and everything will get better”. Even the futures market has the typical seasonality baked into the forward curve with national rates in June and July some 15-20% higher than the close of May. I hate to burst any rate bubbles here, but hope is not a strategy. In the simplest terms possible, we have far too many trucks and not enough freight. For rates to move higher either more volume must appear and/or available capacity must disappear. The demand increase seems very unrealistic as the recent onslaught of weaker US economic data (Industrial Production down 0.5%, Retail Sales down 0.2%, Durable Goods down 2.1%, ISM Purchasing Managers Index down 2.5%) paints a gloomy picture. The supply decrease sounds much more plausible and probable, but even that process, as painful as it is, will not happen overnight. There are 1,600 freight brokerages with annual revenues exceeding $10mm and 91% of all Carriers have six trucks or less. There is not an association or union stance on policy or rates, so there will not be idled trucks en masse nor a drawn line in the sand on accepted rates. These are decisions to be made on an individual company, case by case basis and that takes time, so get comfortable feeling uncomfortable because this tight rate environment isn’t going away anytime soon.

The Outbound Tender Volume Index measures the amount of loads tendered compared to March 1, 2018 and set at a baseline of 10,000. The green line displays 2018 compared to 2019 in blue.

All images are courtesy of FreightWaves’ SONAR.

The US National Van Rate is a tradeable future composed of an average of the 7 futures lanes for trade at Nodal Exchange. The forward curve is the average price per month, here displayed from May through December 2019, and showing an increase of 15-20% from current rates per mile.

MAY 2019

Welcome back to marKets, K-Ratio’s monthly, “State of Freight”, newsletter. K-Ratio is the latest entity formed by the executives at K & L Freight Management. K-Ratio provides market research, strategy, trade execution, and risk management services inside of the Freight Futures market. In last month’s edition, we introduced the debut of Freight Futures and what that new tool means to all industry participants. If you did not receive last month’s MarKets update or would like more information regarding K-Ratio, please reach out to your main point of contact. This month, we’ll breakdown what information the market gave us and what it means moving forward.

Forward. Get comfortable with that word because it will find its way into your world more and more each day. Why? Well, aside from futures contracts serving as an instrument to lock in prices in advance, on a very basic level they provide guidance on not only what the market believes futures prices to be but also what price a company hedging via freight futures can effectively secure. Futures markets have what’s known as a forward curve, the term used to describe the price of a given commodity across a duration of time. The most commonly referenced iteration would be the US Yield Curve, which represents the interest rates of various US Treasury debt instruments, and when viewed in graph form, gives movement of those rates curvature across a specified period of time. For freight futures, we can see the price of a lane averaged out per each month for 16 consecutive months.

This is an invaluable tool. For all the hype and anticipation leading up to the opening of this new market, of which there was plenty, this particular aspect of the market was not discussed as much, but rightfully so. We can all speculate as to what prices for lanes in near-term months should look like, but how could one reasonably project the spot rate of ATL-PHL for the entire month of December 2019? Sure, we could all do our research and pat ourselves on the back, confident and justified because we all know the market. Suppose we spoke last May, and I asked you what the year-end prices for 2018 on these lanes would be, do you honestly think your answers would have been within 5 or even 10 cents? How about 20 cents?

Now we don’t have to be correct, heck we don’t even have to be close. The market gives us the answers. In providing a platform for all buyers and sellers to financially voice their opinions and desires, we have a commonly agreed upon price for each lane, for each month, and if that price works for your business, prices you can lock in now. Speaking of now, the forward curve is currently telling us something of great value; rates aren’t really going anywhere. For context, the US National Average for 2018 started the year at $1.81 before a drop of $.27, followed by a $.55 rally, only to end with a $.49 freefall. Today, with a futures market to give a legitimate forward curve, from May until the end of this year the futures for the US National Average have a range of only 14 cents, 2 lower and 12 higher from where we presently rest. Not much of a summer peak, autumn fall, or Santa Claus rally.

So, what does one do in this flat curve environment? Well if you’re a Shipper, you have the opportunity to lock in the cheapest rates in two years for the next seven months. I don’t have to tell you what you should do. A Carrier? Use the futures like you do operationally; select the lanes and regions with the highest prices that match up best with your business. It’s an admittedly hard task in today’s conditions, but with the recent announcement of a large carrier abruptly closing and news of others trimming payrolls both in headcount and wages, the market has the feel of a theoretical bottom taking hold. Whether or not rates immediately move higher in response to these actions, capacity will begin to fall off the grid and that would force a rebalance in the equilibrium between supply (trucks) and demand (volumes). Where does the 3PL come into play? Everywhere. Most are enjoying this current scenario of strong volumes and excess capacity, as spot and particularly contract business can be covered with minimal effort and at easy rates. This, Mr. Freight Broker, is your chance to keep the party going for a little bit longer until the market inevitably turns off the lights. Hedging with futures provides the ability to fix your revenues AND secure capacity expenses at these levels, regardless of whatever price trends later emerge, and independent of one another.

Rates are not static and do not always move together in symmetrical or even asymmetrical relationships, but this new market allows for protection from price sensitivities to both the upside and the downside. You might think this sounds too good to be true. You may even find the idea too risky in nature. I can assure you, however, that neglecting to hedge the risks to your company’s bottom line is purely speculative behavior.

The chart shows the forward curve of monthly settlements for the US National Average. Currently priced at $1.60 with a low in August of $1.58 and the high in December at $1.72, the market is implying a very tight range of prices for the duration of 2019.

All images are courtesy of FreightWaves’ SONAR.

APRIL 2019

Welcome back to K & L’s monthly, “State of Freight”, newsletter produced by K-Ratio. K-Ratio is the latest entity formed by the executives at K & L Freight Management. K-Ratio provides market research, strategy, trade execution, and risk management services inside of the Freight Futures market. In last month’s report, we highlighted the low rate environment and what it meant for the industry moving forward. If you did not receive last month’s MarKets update or would like more information regarding K-Ratio, please reach out to your main point of contact. This month, we’ll take an in-depth look at what the revolutionary new market means to freight companies.

Finally, the wait is over. Gone are the days of questioning the true value of a lane because for the first time in history, the freight industry now has publicly broadcasted and transparent rates per mile for everyone to see. The much-anticipated debut of Trucking Freight Futures finally arrived on Friday, March 29, 2019 and regardless of your level of participation, everything you know about the freight business is now different. Sixteen months of prices for seven highly trafficked lanes, three regional averages, and one national composite opened for trade and gave the entire industry a look at what fair value on a lane truly is.

Obviously, the direct benefits are there but so are the ancillary. Shippers using Freight Futures can effectively lock in rates their shipments will move at, Carriers will know what price their trucks will receive, and Third-Party Logistics Providers can protect revenues while limiting expenses. Beyond fixing costs and revenues, however, every market participant may now see prices further down the road with what’s called the forward curve. Aside from the immediate advantages one gets from hedging risk, this capability to not only see but lock in prices well into the future allows a company greater accuracy and compliance in contractual business, and affords the ability to correctly forecast operating incomes and free up cash flows. Additionally, weighing possible price risks while ensuring competitiveness on lanes during the RFP process is a painful procedure no longer necessary. Not only does the Freight Futures market give you the starting point on price for your lanes, it gives you the ability to remove the price volatility associated with those lanes.

Now for those of you doubters that point to seasonality for changes in price or insist that rates all move together in tandem, which makes hedging an exercise in futility, take a peek at last year’s chart of the US National Average set against LA to Dallas. That divergence you see is an all too common occurrence that every business can no longer afford to ignore, and one that many businesses, including your competitors, have decided to address.

Want to know what a load between Chicago to Atlanta in October will cost you? It’s $1.991/mile. Curious about LA to Seattle in July? That one is $2.413/mile. Want to buy those rates now to ship your widgets later? You can do that. Want to lock in the rate your trucks will run at in the future? You can do that too. Care to win more lanes on your next RFP bid and commit to 100% without failure? Now you’re starting to get the picture. Some of you might not like these prices, some of you may even disagree with them, but each price is the collective financial opinion of the marketplace as a whole, so you must accept them. Don’t want to accept them because you know the real value of those lanes? Well, we’ve got just the right tool for that too.

The chart displays the daily settlements of the US National Average in blue contrasted with LAX-DAL in red for the past year. We see the highly correlated rates breakdown in late September before reaching extreme divergence in late November/early December, then finally retreating to a more historical correlation in 2019.

All images are courtesy of FreightWaves’ SONAR.

MARCH 2019

Economically speaking, not much has changed since our February letter. The US economy has slowed from its rapid expansionary pace but continues to exhibit strong growth. The cons include both the NY and Atlanta Fed released estimates for US Q1 GDP below 1% (0.9, 0.3), and December Retail Sales completely disappointed, down 1.8% from November. The pros are the ISM PMI reading of 54.2, although down from 56.6 a month prior, coupled with a New Orders Index number of 55.5, and a still healthy employment outlook, all of which indicates the economy is still growing.

Specific to the industry, national freight volumes for February were firm, especially given the time of year, with an end of the month pop that pushed the National Outbound Tender Volume Index to its highest print since December 2, 2018. Nationwide, Tender Rejections went out nearly identical to where they came in, 7.28% vs. 7.66%, and rates per mile displayed similar performance (US National Avg. $1.37 vs. $1.39). It is that rate per mile price action that has caught our attention. Previously, we’ve stated our contention and uneasiness with accepting rates at these levels during this time on the calendar. Currently, we believe that our past assumptions have now found their proof, and that proof can be seen in the price action of the US National Dry Van Rate over the past month.

Taking a purely technical view, the price chart displays classic balancing action after the sharp drop to begin 2018. The freight futures market may not be open yet, but underlying business operates in the same manner. Trends do not reverse immediately nor overnight, save for exogenous events with implications that are clear to all participants. A long-term look at the chart shows the strong late-2018 rally in prices, the stall and subsequent pull-back (bull flag pattern), followed by a resumption of the rally that fails to take out the previous high. The failure to exceed that intended target coupled with lackluster January volumes provided the spark to ignite the trend reversal that led to our 2019 freefall in rates. Markets across the globe, throughout time, all behave in this fashion; trend, balance, resumption or reversal of trend. One could not find a more textbook example of a market in balancing action than the February US National Rate; a tight, narrow band with multiple failures to breakout of the band, both to the upside and downside. Carriers were not willing to accept rates below a certain point, Shippers were able to limit their cost so not to exceed a particular level, and the chart serves as a visual representation of those two participant’s actions. The market, both in practice and in theory, was in balance.

For those who choose to ignore the technical application, perhaps this fundamental take on things will lead to the same conclusion. The American Transportation Research Institute concluded in October 2018 that the average operational cost per mile for a Carrier was $1.69. The last DAT average rate per mile gave us a number of $1.90. How much lower can rates go before Carriers at the higher end of the range of operational costs stop running their trucks, or worse, face insolvency? To continue further, what if rates do go lower and now those same Carriers no longer offer their services, the industry will function with less available capacity. The trucks may be added to more financially sound companies, but who’s going to drive them given that even current salaries are not enough to retain some drivers, let alone entice new ones? Whether in theory or in practicality, the floor in prices appears to be set.

​BELOW

The DAT Van National Index will be a traded contract at Nodal Exchange starting March 29. Here we see the late 2018 rally in prices, the bull flag pattern pullback, the failed December attempt to take out November’s high mark, and the subsequent reversal in trend. Since Jan. 16, the market has remained in balance within a 10 cent range, $1.35 and $1.45. A breakout above or below this band with sustained price action will serve as the foundation for our next trend move in rates.

All images are courtesy of FreightWaves’ SONAR.

FEBRUARY 2019

Welcome back to K & L’s monthly, “State of Freight”, newsletter produced by K-Ratio. K-Ratio is the latest entity formed by the executives at K & L Freight Management. K-Ratio will provide market research, strategy, and risk management services for the upcoming Freight Futures market and the industry. In last month’s report, we presented the deflationary freight conditions and predicted the fall seen recently in spot market rates. If you did not receive last month’s MarKets update or would like more information regarding K-Ratio, please reach out to your main point of contact. This month, we’ll take another look at the significantly lower spot market rates and contemplate those rates going forward.

Now, without getting too full of ourselves, we’d like to remind the reader that we pride ourselves at K-Ratio as being completely unbiased in our perception and presentation of the marketplace and its conditions. We care not if rates are higher or lower, only that all relevant information and our opinions be given at face value for what the reader believes it’s worth. With that in mind, a quick peek at the most recent economic data suggests things may not be as bad as everyone now accepts them to be. The latest jobs report showed another 304,000 jobs added, though we do acknowledge the increase in the unemployment rate and the small uptick in average hourly earnings (4.0%, $.03). The last Core PPI number did show deflationary movement (-0.1) echoed by the ISM Prices Paid reading, but that same ISM report gave us a strong rebound PMI of 56.6 and a soaring New Orders print of 58.2. Obviously, the effect of the government shutdown is not yet fully known, and GDP forecasts are down, but no matter which estimate you believe, they’re still numbers indicating growth. Much like the freight market of 2018, the US economy expanded at breakneck pace and that simply isn’t sustainable for a prolonged period of time.

The cooling of the US economy and the overall freight market could not have been better timed for shipper as it coincided with everyone’s favorite time of the year – RFP season. A near perfect storm of events, data, and opinions came forwards with requests for new lane prices from carriers and 3PLs. Even shippers not scheduled for new RFPs magically came forward to revisit awards on many lanes priced during the inflated times of 2018. This nightmare scenario for those providing service comes on the heels of a surge in recently added truck capacity, adding even greater downward pressure on rates and during a time, seasonally speaking, that is typically light in shipment volume. The culmination of all these factors and events has led to a massive drop in spot rates and one that we propose is too far, too fast. Carriers and 3PLs raced each other to secure contract business; carriers to maintain revenue, much of it purposed to pay for newly acquired capacity, and 3PLs looking to capture the increased spread between contract and dramatically softened spot rates. In any other time, in any other market, this downward price action would have been met with some opposing force from the shipper, but because this price action came all at once in the form of the RFP process, carrier and 3PL offers were not equally or even partially met by the shipper and the cascading freefall began.

We are now in February, with spot rates sitting at levels not seen since August 2017. Typically, rates moving lower aren’t a bad or good thing, it’s just a function of the market, but it’s the pace and timing of the drop that gives us pause. On average, US National Dry Van Rates are down over $.40/mile and more than 20% since January 1, and this comes just before newly awarded contract rates go into effect. What happens when the post-holiday doldrums end? How about the end of Chinese New Year? What about the increased probability of a late winter/early spring snowstorm or hard freeze in the Southeast? Simply put, there’s a lot of uncertainty going forward in the very near horizon and the market has seemingly eliminated any risk premium priced into rates. If one or more of the above questions posed places any moderate disruption(s) into the national supply chain patterns, where will rates go then? Odds are they won’t be moving lower and what does that mean for all those renegotiated lanes? How long will carriers and 3PLs honor their commitments if spot rates begin spiking higher? Only time will tell how this all plays out and despite the slow start to 2019, this year has all the markings of an interesting one, to say the very least. Oh, did we mention produce season is just around the corner?

​BELOW

The DAT Van Freight Rate Index is an aggregate of the seven Freight Futures lane contracts available to trade this March 29th at Nodal Exchange. The chart displays the average US Dry Van Rate for the past year, and we encourage the reader to take note of the precipitous fall in rates over the past 30 days.

All images are courtesy of FreightWaves’ SONAR.

JANUARY 2019

Welcome back to K & L’s monthly, “State of Freight”, newsletter. In last month’s report, we took an in-depth view of the beginning of the holiday season freight movement and tried to gauge its early impact across the industry. If you did not receive last month’s MarKets update, please reach out to your main point of contact and they will be happy to send you a copy. This month, since we at K & L are in the business of providing solutions for the future of freight, we’ll skip the 2018 recap and peer into our crystal ball for a 2019 outlook.

Now, we do not claim to know the future. If we did, you wouldn’t be reading this; but we can use the past freight movement patterns and present macroeconomic situation to rationally predict what may come ahead. Currently, the freight market is in the middle of a shift from what had been the dominant trend for much of the past year. Imported Asian cargo destined for the ports of LA and Long Beach, and NY/NJ to a lesser extent, not only disrupted the supply chain but demanded its full attention. We saw outbound LA freight command capacity nationwide and skew rates both into and out of the area. As the year ended, so did the trend as the race to beat upcoming import tariffs came to a close. This was easily seen both in the measure of prices paid for ocean cargo from Asia to the US and in the rapid decline of LA volume. Peaking in the second week of November, the price paid for shipping container transit from Asia to the US West Coast dropped 34% while the LA market’s share of national volume dropped from 7.55% of all loads to just under 6.4%. Carriers no longer accepted cheap rates to head west and any excess capacity in the area evacuated at a discount, slashing outbound LA rates and conversely sending inbound LA rates higher.

This scenario is likely resolved by now with declining volumes and the holidays allowing many truckers to return home, providing a reset of the supply chain for 2019. Moving forward, it appears the supply/demand equilibrium may be tipping in the opposite direction. 2018 was a record year for rates as increased demand was not equally met quick enough by increased capacity. That problem has seemingly come to an end. National volumes for Q4 2018 measured by SONAR’s Outbound Tender Volume Index saw only 6 days in the entire quarter exceed the index baseline of 10,000. Obviously, the holidays depressed several days’ output, but that is a shockingly low statistic no matter how one looks at it. Lower volumes may have been the genesis for the shifting equilibrium, but capacity seems to be driving force behind it. The December Class 8 Truck New Orders report came in at just 21,300 trucks, down 24% MoM and 43% YoY, which marked a 25 month-low. At the very minimum, we can reasonably assume truck capacity is at or near its needed level. Coupled with depressed volumes, this will undoubtedly put downward pressure on rates.

With the import tariff derby seemingly behind us, any new increase of shipping demand will most likely have to come domestically, and the prospects for that notion are getting less probable. The Institute for Supply Management December PMI reading registered at 54.1, down 5.2% from November, with prices paid down 5.8% and new orders down an alarming 11%. Housing starts for single-family homes dropped 4.6% to the lowest level since May 2017. Yes, the latest non-farm payrolls report was a strong one with 312,000 jobs added, but the 0.2% increase in the unemployment rate suggests the jobs added did not adequately offset the increase in newly available workers and the retirement of older current workers. Additionally, a virtually flat US Treasury yield curve with a market that has almost completely priced in an interest rate cut by the Federal Reserve by 2020 does not give one much hope for sustained growth in the US economy.

At this point, everything we’ve discussed is speculative in nature and certainly up for debate, however, it is certain the new year contains all the makings of an extremely volatile freight marketplace: capacity increases, rapid supply chain pattern changes, lower volumes, and an unpredictable national and global economy. Perhaps industry-wide we should make a new year’s resolution to remove this uncertainty and reduce risk in the marketplace. If we only had the tool to do so…

​BELOW

The Outbound Tender Volume Index is a measure of accepted tender volumes on a given day. The index was created with a base of 10,000 on a national level from March 1st, 2018 volumes. Here we see national levels of the metric for Q4 2018.

All images are courtesy of FreightWaves’ SONAR.

DECEMBER 2018

Welcome back to K & L’s monthly, “State of Freight”, newsletter. In last month’s report, we compared the early holiday season forecast with a very slow freight marketplace. If you did not receive last month’s MarKets update, please reach out to your main point of contact and they will be happy to send you a copy. This month, we’ll dive a little deeper into the holiday season freight movement and try to gauge its early impact across the industry so far.

After reading the first paragraph, one may wonder aloud, “What impact?” Unless some of your business was done in a select few markets, it would be hard to make an argument for any such impact at all. Therein lies the issue, however, as the market overall was entirely subdued excluding some very brief pre-Thanksgiving movement, but further inspection into what little business was done makes the case that we should be thankful for what was instead of what could have been.

By taking a look at the FreightWaves US National Tender Volume Index, we’re allowed to measure each day’s tender load count against a baseline set to the total on March 1, which uses the number 10,000 as its benchmark. One doesn’t need to look for very long to see that most of November was spent below baseline, with only three total days exceeding it, and in between the two peaks of strong business was a very deep valley. Holidays are always light volume days, that we know, but six days after Thanksgiving marked the lowest total volume output for the year, shattering the old low watermark (Labor Day) by an astonishing 20%.

The interesting side note to this is the direct correlation of US volume tied to outbound LA volume. When displayed in chart form and compared side by side, one can see this relationship play out in almost complete tandem. We know that prices paid for ocean containers from Asia destined for the US West Coast hit an all-time high on October 21, 2018 and continued to set new records in each of the next three weeks as merchants booked goods for the upcoming holiday season and raced ahead of potential new import tariffs set to hit January 1, 2019. From November 1 until November 21, the peak of the volume output, outbound LA volume increased 12% while the nation as a whole increased only 7%, and the November 21 LA reading was a new high for the area, 9% over the previous high set on July 12. All of these extra LA movements resulted in a $.40 rate per mile rise for the highly travelled LAX-DAL lane, while the reverse route increased only $.03 during the same time as capacity moved westward to fill demand. Interestingly, as typically is the case, the market corrected itself once this excess outbound LA business wrapped up. That same DAL-LAX rate soared $.35 from November 21 until November 30, as truckers demanded a premium to go into an oversaturated market from a capacity standpoint with the number of shipments set to rapidly decline as the window for holiday shipments started to close shut.

For the month of November, it appeared that however goes LA, so goes the nation as a whole, as the only business in November looked to be Asian cargo freight destined for the ports of LA and Long Beach before spreading out across the country. The trucks needed might not have been in the right places to start, but they certainly found their way there in a hurry. The freight industry is indeed a completely fragmented marketplace, but despite claims of inefficiency, all of the pieces in this gigantic puzzle routinely come together to balance the sides of its common equilibrium; supply and demand. It only requires the most important piece, price, dictating where the other pieces fall.

​BELOW

The Outbound Tender Volume Index is a measure of outbound loads for a given day compared to the amount of loads on March 1, 2018, set at 10,000.

The top chart shows outbound movements for the Ontario market just outside Los Angeles.

The bottom chart shows a cumulative measure of all US loads.

All images are courtesy of FreightWaves’ SONAR.

NOVEMBER 2018

Welcome back to K & L’s monthly, “State of Freight”, newsletter. In last month’s report, we took a look at the effects on freight from Hurricane Florence and what we expected to see moving forward. If you did not receive last month’s MarKets update, please reach out to your main point of contact and they will be happy to send you a copy. This month, we’ll juxtapose the early holiday season forecast against the currently subdued freight marketplace.

It’s quiet. There is no arguing that, but readers of this newsletter know our take on the calm in the market is one of seasonality, not of weakness in the industry or the economy in general, be it national or global. Yet again, monthly economic reports showed strong positive gains in key components of the economy, with the Institute for Supply Management showing a Purchasing Managers Index reading of 57.7, marking the 114th consecutive month of growth in the United States. Contained within that PMI report was a quote from a PM in the transportation sector that stated, “Demand is high, and the supply chains are stressed.” This assertation can be easily seen in the Total Business Inventory to Sales Ratio, where the 1.34 reading kept the trend of steady declines from early 2016, as businesses cannot replenish storages of goods faster than goods are being sold. Add to it a healthy US Retail Sales number that posted a 0.1 monthly increase, but a 0.5 increase in the core retail sales group, which strips out auto, gasoline, building supplies, and food services. Throw in an extremely strong Labor Report that gave us the lowest unemployment rate (3.7%) since 1969 and showed the highest Transportation and Warehousing Employment growth ever (+25,000). The need for more hires is obvious; consumer demand for goods is strong and will only get stronger as we near the holiday season.

Ok, so we know it’s slow right now but the economy as a whole and the freight industry remain strong. How do we use this knowledge going forward in the coming weeks when businesses ready themselves for holiday season? First, it’s important to put the magnitude of this season in context. The National Retail Federation has said the past five years saw a sales increase of 3.9%, which accounted for roughly 30% of annual sales for retailers. This year’s forecast is for an increase of 4.7-4.9%, and that’s on top of what has already been an extremely strong year for retail sales growth. Working with this anticipation of a very busy season, how can we expect all these goods to move through the supply chain?

Here is where we can apply what we’ve learned from the past few months of data and movements to predict the key markets and lanes for the last of 2018. We have already seen the patterns of ocean cargo freight destined for the Ports of LA and Long Beach, and how they work through the supply chain. We saw it first from LA through Phoenix and Dallas in May. June and July saw this freight move via rail from LA to Chicago before making its final destination, and much of this pattern remains today. Given the numbers we’ve seen for freight originating in Asia and destined for the US West Coast, rail congestion for the LA-Chicago lane, and outbound LA and Chicago freight volume numbers, we can safely assume this chain is still in place today. The new twist in this story is the sudden increase in East Coast port traffic. Maritime Asia-USWC is operating at full capacity, and in a way to help ease that capacity crunch, shippers are offering discounted rates for vessels to deliver to the US East Coast. The Port of NY/NJ is experiencing massive growth (+10.6% YoY) and we saw that increase in cargo pass through New Jersey-Pennsylvania freight volumes in August, but now we are seeing an enormous increase in the Port of Savannah (+30% YTD). We can see this in the Outbound Tender Volume Index for Savannah, GA, which has become a major port of choice for ocean vessels making the pass through the Panama Canal. The index has seen a 46% increase for the month of October and figures to continue further throughout the season, as the West Coast ports simply cannot handle any additional movements.

There is a finite number of trucks, that we all know. Lately, the general slowness of the market has given the heated markets of LA, Chicago, and Pennsylvania the ability to handle this increasing import business by soaking up excess capacity. If Savannah becomes a major point of origination this holiday season, how does that fit into the current supply chain? Will this excess freight wake up a sleeping giant by moving first to Atlanta before making its final run? What would an unseasonal snow or ice storm for the region, both of which have been designated with above average chances this winter, do to this increased Southeast business? This is an extremely interconnected industry, one where one disruption can cause several others to follow. As much as we’d like to predict the future, we know we cannot, but we do know there will be very little margin for error anywhere this season. All that remains unresolved, is where the first domino in the supply chain to fall will be and which piece falls next?

​BELOW

The Outbound Tender Volume Index is a measure of accepted tender volumes on a given day, and is measured against the level of tenders on March 1st, 2018.

The OTVI chart shows the 46% increase in tender volumes in the Savannah market for October 2018.

The OTVI displays the increase in tender volumes for the LA market since March 2018. The metric now stands at its highest level of the year.

All images courtesy of FreightWaves SONAR.

OCTOBER 2018

Welcome back to K & L’s monthly “State of Freight” newsletter. In last month’s report, we discussed the fragmented marketplace and diverging trends in the major transportation hubs. If you did not receive last month’s MarKets update, please reach out to your main point of contact and they will be happy to send you a copy. This month we’ll take a look at the effects on freight from Hurricane Florence and what we expect to see moving forward.

​Seasoned veterans of the freight industry are certainly familiar with hurricane season and the significant impacts that can be felt nationwide before, during, and after an unfortunate landfall. Hurricane Florence, however, was not a typical hurricane with a diameter 500 miles wide, significant moisture, and a devastatingly slow movement that made landfall considerably further north than most hurricanes. Flooding, rather than wind shear, proved to be the worst feature of the storm as some areas recorded over 40 inches of precipitation that caused many major roads and interstates along the Carolinas to close and remain closed for several days. Obviously, planned freight movements suffered major cancellations and those successfully delivered were priced at elevated rates as supply chains in the area were severely distorted.

What came in the days that followed, though, was somewhat unexpected as the rush to get necessary supplies to the area resulted in an overabundance of inbound trucks with no outbound freight to move as ports, roads, and shippers remained closed or operated at very depressed levels. Inbound rates skyrocketed while outbound rates plummeted as the supply/demand balance searched for a new equilibrium. This development persists today as the region continues the process of repairing and rebuilding, with the Atlanta market still oversupplied on capacity and short on freight to move. Typical low cost short hauls exploded in price, which in turn sent cancellations higher, subsequently sending prices even higher again in a vicious cycle that played out for days, if not weeks, after the storm. Trucks nearby turned down lower rate loads in the area for rich loads in saturated markets, which caused a ripple effect on spot prices and cancellations that spread to large neighboring markets like Nashville and Baltimore.

It will be interesting to see how these scenarios play out in the weeks to come as the holiday season is just around the corner, with strong US Retail Sales numbers (+6.6% YoY), firm US GDP (Q2 4.2%, Q3 3.0% est.), overloaded rail traffic (2.83 million carloads in August, +4.5% YoY), and record ocean cargo freight destined for the US (2.51 million TEUs, +4.2% YoY). One thing is certain; there will most certainly be a large amount of freight to move, making that side of the supply/demand equilibrium heavily set. The other side of the equation will come down to capacity location, with the great unknown, price, hanging in the balance.

​BELOW

Load Tender Rejections for Wilmington, NC in September. The vertical line denotes September 14, the day Hurricane Florence made landfall. We see that Outbound Cancellations (white) peaked first after the storm, followed by Inbound Cancellations (green) as shipment receivers in the area found conditions oversupplied with trucks, making it less desirable for truckers headed to the area.

Outbound Load Tender Rejections for Nashville, TN (white) and Baltimore, MD (blue). Again, the vertical line represents the
landfall date of Hurricane Florence, and we can see Nashville reacting 3-4 days later, with Baltimore cancellations peaking about one week after before both markets return to more consistent business patterns.

All images courtesy of FreightWaves SONAR.

SEPTEMBER 2018

Welcome back to K & L’s monthly “State of Freight” newsletter. In last month’s report, we covered the market wide summer slowdown. If you did not receive last month’s MarKets update, please reach out to your main point of contact and they will be happy to send you a copy. This month, we’ll take a bird’s eye view of the entire market from a supply and demand perspective before we try to solve the mystery of this fractured marketplace. Why are some areas so hot and others so cold?

Firstly, we know the demand for trucks has not eased as all macro indicators still point to increased shipments. We’ve seen continuing highs on the Baltic Dry Index for prices paid to ship containers out of China to both coasts of the United States. The CASS Freight Index remains at levels not seen since the Great Recession. The Total Business Inventory to Sales Ratio dropped to 1.33, a mark last reported in 2014, as consumer demand outpaces supply rebuilds. So, if the number of shipments is up, and demand is quite strong, why isn’t the nation as a whole seeing increased rates?

Earlier this year, the nation experienced a spot rate surge as an influx of ocean cargo showed up at Los Angeles’ door after the Chinese New Year and ahead of trade war tariffs. The ensuing supply chain disruption moved the equilibrium for prices much higher. Since then, we’ve seen elevated supply levels continue to pour into the Port of LA, but this time something changed. Instead of the freight heading east to Dallas before settling to its final destination, if we begin to connect the dots, it appears a large amount was shipped via rail to Chicago. According to the Association of American Railroads, intermodal traffic of containers increased 6.9% YoY in July, and as the nation overall saw steady metrics, the spread between Chicago and Dallas measured in both outbound load cancellations and outbound volume increased dramatically. Since inbound traffic to Chicago was not a part of this equation due to the cargo moving via rail, sufficient capacity was not in Chicago and not able to meet the need, while Dallas was well supplied with trucks but less freight to move. All things being equal, the marketplace is extremely efficient and truck capacity will appear in the areas needed most, however, when the status quo is suddenly disrupted, pockets of surging rates will arise as shippers scramble to meet their requirements.

Along these same lines, East Coast port traffic hit all-time highs in several U.S. cities, with NY/NJ alone seeing a 10.4% July increase YoY. This increased traffic led to westbound markets seeing a spike in cancellations and rates as this pickup in loads resulted in capacity constraints. Beginning in Elizabeth, NJ and working through to Allentown, PA and Columbus, OH, each market saw monthly increases in both volume and cancellations with Elizabeth witnessing a 4.35% tender reject increase, Columbus 5.86%, and Allentown an astounding 7.12%.

These situations and conditions are not static and will most certainly revert to more normal levels across the board as capacity will shift to meet the needs of demand, but with the threat of more cargo freight continuing to land in U.S. ports set against traditional supply chain patterns, it remains very possible we will see a fractured marketplace persist into the final months of 2018.

​BELOW

Typically moving in similar fashion, we see diverging cancellation metrics as Chicago increases (orange) from the national average (white) as Dallas decreases (blue).

Outbound movements expressed as a percentage of all U.S. volume show Joliet, just outside Chicago, separating from its similar share then widening as compared to Dallas.

30 day look at outbound market share of all U.S. volume for Harrisburg, PA.
All images courtesy of FreightWaves SONAR.

AUGUST 2018

Welcome back to K & L’s monthly “State of Freight” recap. In last month’s report, we covered the ongoing driver shortage problem. If you did not receive last month’s MarKets update, please reach out to your main point of contact and they will be happy to send you a copy. This month, we try to answer the question on everybody’s mind. Is the slowdown in freight just a seasonal, post-holiday layover or is it a sign of things to come? We think it is a case of the former, as all global and national macroeconomic indicators seem to point to a resumption of increased shipping demand.

​PPI continues to grow (.3% June 2018), alongside the US economy as a whole (4.1% Q2 GDP), while CPI less food, energy, and services is dropping (-0.2% June 2018). Businesses are getting leaner, smarter, and more efficient; all of which leads to greater purchasing power to the consumer and more goods being shipped as evidenced by the CASS Freight Index still above pre-recession levels.

Transportation employment and truck demand continues to outpace supply, with truck-driver shortfall hitting an all-time high of 296,000 in 2018 Q2, leading to constraints in capacity and higher mileage costs. There doesn’t seem to be an end in sight for the continued demand of goods that need to be shipped. The supply of trucks, and the necessary drivers especially, remains nearly inelastic. That market imbalance should keep mileage rates elevated in the near future and well supported on price dips; all of this operating under the assumption there will be no disruption in the marketplace by way of excess demand in one particular area or a crash in truck capacity in another area due to weather.

If you’re a shipper, this calm stretch is a welcomed respite from the chaotic start to 2018. If you’re a carrier, this looks to be a time to catch your breath as the second half of the year holds all the potential to be equally as crazy.

​•Retail Sales increased 11% since June, stripping out seasonality the YoY increased 6.46%.

​•Industrial Production sits at 107.7% of its 2012 average, 3.8% higher than June of last year.

​•Baltic Freight Index remains at levels not seen since before the Great Recession, with four successive weeks of more freight coming over from China than ever before, in advance of potential trade war tariffs.

​•Total Business Inventory to Sales Ratio dropped to 1.34, furthering its decline since mid-2016 as businesses cannot replenish supplies fast enough due to ever increasing demand.

​•Housing Starts for the month of June totaled 1.2 million, down from May but still at seasonally adjusted levels not seen since 2007.

​BELOW
The National Outbound Tender Rejection Index is a measurement of carriers’ willingness to accept the loads that are tendered to them by shippers under contract terms. It is expressed as a percentage of loads rejected to total loads tendered, and is an extremely reliable predictor of spot rate price moves.

​The Cass Freight Index is a monthly volume driven index using January 1990 as its baseline. Each index point above or below 1.0 represents that month’s volume in relation to the January 1990 baseline.

JUNE 2018

Welcome back to K & L’s monthly “State of the Marketplace” recap. In last month’s coverage we discussed becoming a Shipper of Choice as well as the fallout in produce affected markets to start the year. If you did not receive last month’s MarKets update, please reach out to your main point of contact and they will be happy to send you a copy. And now to the good stuff…
Owner Operator Growth and the US Driver Shortage:

•According to FMCSA data, the trucking industry has added more than 500,000 jobs since 2012, representing an overall growth in employment of > 30%. That number seems to contradict the familiar narrative of the impending “driver shortage”

​•Why does the ‘driver shortage’ narrative exist? Because large carriers are having trouble seating their trucks in times of increasing driver demand from smaller companies who are more willing to make large pay concessions

​•When looking at the raw data, the trendlines show that trucking, as a whole, has become more fragmented and less consolidated since 2012. The number of ‘very small’ trucking fleets (1-6 trucks) grew 89.9% from March 2012 to March 2018. The number of ‘small’ fleets (7-19 trucks) grew 46.6%; the number of ‘medium’ fleets (20-100 trucks) grew 34.6%

​•This demonstrates that much of the growth in trucking employment is happening at the very small and small fleet level. The trucking industry can experience healthy employment growth at the same time that large carriers can complain of a ‘driver shortage’

​•The driver turnover rate at large truckload carriers (greater than $30MM/year in revenue) climbed 6% from the prior quarter, to a whopping 94% annual turnover according to the American Trucking Associations’ quarterly report.

​1 .Large truckload fleets felt the biggest squeeze, seeing a 20% increase over the same quarter in 2017.
2. Small fleets (>$30MM in annual rev) fell from the prior quarter but was up 7% from last years first quarter.

In Other News: K & L Freight Announces Partnership with the Blockchain in Transport Alliance (BiTA)

K & L has joined BiTA, the Blockchain in Transport Alliance, which was established in August 2017 by experienced technology and transportation experts with the purpose of developing a platform for dialogue, building common standards and promoting the education of blockchain technologies. In May, K & L and the biggest names from across the logistics landscape came together in Atlanta to discuss and develop blockchain standards for the industry. While the development of the standards are just getting started, some standards are expected to be published within 2018. These standards are the foundation in which trucking companies, logistics providers, manufacturers, warehousing, and all of the technology solutions providers within the industry can speak the same language and successfully take full advantage of the power of blockchain technology.

“With a host of Fortune 500 companies entrusting us every day with their critical and time-sensitive freight, it is imperative that we continually provide our customers with the most cutting-edge solutions that ensure integrity within the chain of custody,” said Leigh Anne Espinosa, SVP of Business Processes and Innovation. By joining BiTA and further exploring the power of blockchain, K & L aims to increase efficiency and continue to enhance its customer experience. “We are looking forward to working with the alliance in building the standards in which blockchain technology will contribute to trust, transparency, and efficiency in transportation.”
We are firmly committed to providing leading technological solutions to our customers. Blockchain is the next step in our technological evolution. We are excited to partner with BiTA as we look for opportunities to deliver innovative solutions across the entire North American marketplace,” said Dustin Vock, SVP of Customer Operations.
“Much like with the advent of the internet, we do not entirely understand the full power of blockchain technology and the ultimate role blockchain will play in delivering transportation solutions. What we do know is that K & L is firmly committed to this movement, and as technology continues to play an increasingly important role in the supply chain, we intend to be at the forefront,” said Patrick Draut, SVP of Business Intelligence.

K & L announces its membership in BiTA

APRIL 2018

As we come to our first week of ELD enforcement, the team at K & L Freight Management felt like it was a good time to extend to our valued customers our first “State of the Marketplace” address, with the intention of informing you of some of the key market drivers taking place and how we anticipate them impacting the OTR landscape. Without further ado…
Eld Enforcement Goes Live April 1st

•While the ELD mandate was introduced to the marketplace in December resulting in a 2 month bull market for OTR trucking rates, officers were still in the probationary phase of implementation, giving warnings and small fines to any carrier deemed out of compliance.

•As April 1st came and went, those same officers are now directed to place any carrier found without compliant ELD software in cab out of service for a 10 hour break, and upon completion of the load they are under, out of service until ELD software has been installed.

​•Current surveys are showing ELD compliance reaching its peak as of this week, with 97% compliance reported across all companies listed, with the remaining 3% comprised mainly of small companies (20 trucks or less).

​•An estimated 75-100k trucks would still be deemed outside compliance, with most industry experts anticipating 50,000 trucks will completely disembark from the industry over the coming months.

​Spot Market Capacity Tightens

​•Truck capacity per the DAT network of load boards fell 3.1% while the number of loads jumped an additional 3.5% during the week ending March 31 . Expect this trend to continue through produce season in the southeast, and beverage season nationwide.

•Current nationwide van ratio shows 7.2 loads per truck, rate per mile is exhibiting an 8.5% week over week increase, year over year is exhibiting a 22% increase by month.

​•Current nationwide reefer ratio shows 10.5 loads per truck, RPM is exhibiting a 2.5% increase week over week, year over year is exhibiting a 29% increase by month.

​•Overall, the marketplace is exhibiting 24% inflation over previous years’ averages, with that trend expected to continue with a strong possibility that it will surpass monthly all time highs as it did in January and February.
Produce Season Begins

•The first week of April tends to be the kick off to rate increases in produce markets as it is the last 2 months of season for some winter harvests, the middle of the citrus season, and the start of melon season.

•The markets affected during kick off are Miami and southern Florida, the Texas Valley, and Southern California/Arizona border crossing stations of fresh produce crossing from Mexico. The markets tend to move about 50 miles per week North, so expect central FL and Los Angeles markets to exhibit signs of inflation beginning in the next week and the rest of Florida by end of the month (link included below to track produce crop typical harvest times).

​•While these markets heat up, traditionally there is a few week lag on inbound rates to those markets, but anticipate decreased costs on those lanes in the coming weeks.

​While rare to have a bull market exist for this long without an extended pull back, many industry experts have been forecasting this for well over a year. While the market likely hasn’t seen the peak of the craziness, I would anticipate the general bull market to extend through October of this year before seeing a significant pull back. Expect nationwide rates to continue to rise through the summer months while beverage and produce season are on full tilt, with the largest increases coming in team markets, in lanes falling in a middle mileage band (500-650 loaded miles and 1100-1300 loaded miles), and in the refrigerated and flatbed segments.

​Starting to seem like a perfect storm? At K & L, we have been bracing for this change for some time and are prepared to weather the storm and service the people who have taken care of us for over 21 years. While we cannot control the variables taking place in the market, we are more willing than ever to provide strategic insights, bring creative approaches to complex problems, and work diligently to ensure that your customers can count on K & L to deliver. We don’t know anything other than providing excellent service when service matters most, it’s the K & L way.

https://www.freshfromflorida.com/Divisions-Offices/Marketing-and-Development/Consumer-Resources/Buy-Fresh-From-Florida/Crops-in-Season