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K-Ratio Markets Newsletter | February 2020

Welcome back to marKets, K-Ratio’s monthly, “State of Freight”, newsletter. K-Ratio provides market research, strategy, business intelligence, and risk management services inside of the freight industry. In last month’s edition, we took a glance at holiday market conditions with a peek ahead at 2020. 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 see if the first month can tell us anything about what remains for the new year.


New year, same story. Thank you for reading, we’ll see you next month.

All joking aside, it’s an eerily true statement. National long-haul dry van rates, which constitute the index for Freight Futures, sit at $1.38/mile, the same price as last year at this time. National volumes as measured by FreightWaves’ Outbound Tender Volume Index are .003% higher YoY. With flat volumes and flat rates, we can reasonably assume truck capacity is around the same, as well. Likely, a modest increase in truck capacity exists, just enough to absorb any inflation in wages and costs, which gets us to stagnant freight rates.


If everything on the surface seems to be the same, what’s different then? Well, quite honestly, something dangerous is lurking beneath the surface. Industry-wide, we all experience and interact with the same spot rates, volumes, and truck capacity, but one factor unseen to many has drastically changed. The single most important change from last year has not yet risen but is now only days away from popping its head above water, and its impact might force many companies under water. Contract rates are about to reset for a majority of the industry and the levels they reset to will greatly influence how the rest of 2020 will go, more so than any year in history.

Early indications on new Contract rates are very deflationary with DAT reporting the national average down from $2.03 to $1.82. Obviously, this type of price movement isn’t preferred by Carriers, but those companies that survived the “Trucking Bloodbath” of 2019 are the ones capable of making these lower rates work. The participant to keep an eye on in 2020 is the 3PL, as they find themselves squeezed on both revenues and expenses. If you couple that $.21 descent in Contract rates with flat Spot rates, you now have a narrowed spread that allows no margin for error.

Spot rates will not go up on their own simply because Contract rates are lower. There will not be a rally because of cyclicality in the marketplace. Research reports relying on past historical shifts, particularly ones heavily focused on seasonality, largely ignore the fact that the entire freight industry is massively different than it was just two or three short years ago. ELDs, automation, digital freight brokerages, and radically improved technology make comparisons to 2015, 2016, or 2017 feel like a conversation between the Flintstones and the Jetsons.


The conditions for an increase in price are certainly abundant but firewood does not spontaneously combust, it requires a spark. A truck capacity bleed off or over compressed brokerage margins will not do it, especially in the currently frothy time of logistics sector investment. Severe weather (probably not until hurricane season) and legal or government regulation (AB-5, insurance claims and costs) have the power to ignite a fire, but the lingering effects on Chinese goods imports from the yet to peak Coronavirus might dampen that. All of this to say there is not a clear-cut path to higher rates as seen in 2018 when the reduction in available capacity due to the ELD mandate dominated the market.

So far, 2020 looks a lot like 2019.

The Outbound Tender Volume Index for January 2020 (white) displays almost identical values to January 2019 (green).

What happens to 3PLs if Spot rates start moving higher? How long can and will they absorb flat or even negative margins? We’ve made the argument before about truck capacity never truly leaving the industry, only switching from insolvent to better run companies. There’s no argument to make about market share leaving one 3PL for another, that’s just a fact. Many in the industry predict this will be the year of massive consolidation in the brokerage space.

What if that doesn’t come by acquisition but from attrition, instead?

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