COVID-19 Update
  • pcdraut

COVID-19 Update

There is a lot of anxiety in the world right now, so in response to the recent volatility seen in all financial markets around the globe and certainly felt domestically across the supply chain, we’ve released this mid-month update on our current situation to help relieve some of the uncertainty. Our intent is not to mislead you with promises or prognostications; instead, we aim to provide both a brief recap of how we got to where we are today, as well as carefully laid out scenarios for tomorrow so that you can be prepared for what may occur.

Following on the heels of Chinese New Year, the Wuhan, China outbreak of COVID-19 led to province-wide quarantines and production halts. This immediately slammed the amount of imported goods to the US, particularly West Coast ports, to levels not seen since the midst of the Great Recession in 2009. The downturn in import volumes began to spread throughout the country from the coasts to the Midwest and brought rates down with them. We shall call this move Phase 1.

Phase 1 was short in duration, however, as panic buying of food and consumer staples led to massive inventory restocking and the beginning of Phase 2. Markets containing a large warehousing presence such as Stockton, CA, Columbus, OH, and Harrisburg, PA have seen significant increases in both volume and rates as the demand to restock shelves is far outpacing supply. The twist inside of Phase 2 is the shifting balance between major markets and lanes typically seen as backhauls, especially prominent in port cities. Since March 1, the spread between LA to Dallas against Dallas to LA has narrowed to $.14/mile from $.32/mile at a time when it should be expanding. This shift in localized volume growth is exacerbated by the drastically reduced import volume in port cities, and when coupled with overall rate strength, it has driven the amount of load tender rejections nationally to double in less than three weeks. These cancellations and the new business inside 2nd tier markets have forced a repricing in lanes inside of the spot market just as new, lower contract rates took effect across much of the industry.

Phase 3 of the COVID-19 fallout is our next stop, but one riddled with many unknowns and possibilities. First, the current surge in volumes is a direct result of panic buying. The US consumer just bought several weeks’ worth of food, cleaning supplies, and toilet paper, and this front-loaded demand will not be suddenly met with an equal increase in consumption at anywhere near the same level. Potentially worsening this scenario, the nationwide closures of schools, sporting events, conferences, restaurants, bars, movie theaters, retail stores, and offices will not bring any additional demand. In this event, rates will tank as there will not be enough volume to sustain these elevated levels.

Clouding that line of thinking is the supply side of the equation; what are the trucks going to do? It is conceivable that smaller Carriers with concentrated business that is not being shipped right now, for one reason or another, may choose to idle their trucks until safer times reappear. This is incredibly bullish to rates overall. On the other side of the coin, should interstate travel be limited to only delivery of essential items, rates would plummet and some lanes could see prices deeply below the operational cost to run a truck. Further still, the severe selloff in crude oil has lowered fuel costs which offsets lower RPMs, which is also deflationary to rates but comes with an ominous future outlook. At current prices, sub-$40 for all of 2020, much of the oil and gas industry would become insolvent and the loss in demand for flatbed and tanker could push many drivers into the dry and refer space, furthering the downward pressure to rates.

Another possible outcome for Phase 3 would be if national quarantine procedures took place, complete with government supported shelters and procurement of supplies. Should FEMA step in, this could produce an environment of extreme demand for necessities and send volumes, along with rates, exponentially higher.

In summary, there are too many variables to correctly predict what will happen to freight rates or even volumes in the coming days. Unfortunately, some amount of up and down volatility is to be expected in these unprecedented times, so the best course of action that we can recommend to you is to be prepared for all scenarios and mitigate your risk as best you can. We are confident that we can all get through this and the period of anxiety will pass. However, until then protect yourself…protect your health, your family, and your bottom line. Stay safe and stay healthy.

K-Ratio_Horizontal Logo_White.png

Address: 4809 N Ravenswood | Chicago, Illinois 60640
Phone Number: 312.736.2600

Copyright ©  K-Ratio Freight Futures 

Information included in this website, including research reports or explanatory/background studies or papers, as well as RSS content feeds, is provided for informational purposes only and has been obtained from sources K-Ratio Advisory, LLC (K-Ratio) believes are reliable; however, K-Ratio makes no representation or warranty regarding the accuracy or reliability of such information or the suitability or appropriateness of such information for any person.The risk of loss in trading or hedging through commodity futures or options can be substantial. You should therefore carefully consider whether such trading or hedging is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity futures or options can work against you as well as for you. The use of leverage can lead to large losses as well as gains.Managed futures or options should only be considered after careful review of all material factors, including but not limited to disclosures regarding risks, fees and charges and liquidity. Managed futures or options accounts are subject to charges for management and advisory fees. It may be necessary for such accounts to produce substantial trading profits to avoid depletion or exhaustion of assets.This brief statement cannot identify all of the risks and other material aspects of the futures markets. Neither CFTC nor NFA has passed upon the merits of participating in any program offered by K-Ratio or on the adequacy or accuracy of information contained in this website.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE POTENTIAL FOR PROFIT IS ACCOMPANIED BY THE RISK OF LOSS.