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K-Ratio Q2 Rate Outlook

Q2 Rate Outlook

Where do we go from here? That is always the question in freight but never has that question mattered more and seemed equally unanswerable. The most severe pandemic in over 100 years has depressed the global economy, dislocated the domestic supply chain, and disrupted even the most sophisticated freight market models. Any pre-existing idea of what the remainder of 2020 was supposed to look like for the freight economy can be forgotten. What follows is our best attempt to repopulate the possibilities over the next three months in this new normal.


The pace may have softened but the count of trucks for hire continues to increase (1). Despite a commonly held belief amongst many participants, there are not too many trucks; or at a very minimum, others disagree with that assessment. Whatever the opinion might be, the current number of trucks, which is typically the single greatest influence on rates, is not the primary driver presently. During this period of great uncertainty, load volumes will dictate price.

The biggest risk to truck counts moving forward will be Carrier insolvencies. Trucking companies with cash flow problems and/or restricted access to credit may find themselves in dire circumstances. Capital expenditures for Q2 will come to a screeching halt, so it’s unlikely that companies will take delivery of new assets but those companies with customer commodity types no longer producing goods may shed assets, or worse, shutter their doors completely. Under normal circumstances, we would argue that Carrier bankruptcies only remove capacity from the network for a matter of weeks as those trucks are absorbed by other companies but acquiring more capacity in this environment seems unlikely. This could be a scenario where the closure of a trucking company truly results in those trucks sitting idle for the foreseeable future. Should that situation materialize, it would be the result of smaller volumes so a chicken and egg conundrum appears as it pertains to an influence on rates per mile.

One bright spot for Carriers is the significant drop in fuel costs but even that comes with a string attached. The positive is obvious; according to the ATRI’s 2019 report (2), fuel costs represent 24% of the operational costs to run a truck. The market price for a gallon of diesel has dropped more than 50% since January 1st to below $1/gallon. Further still, the futures forward curve at print time displays the remainder of 2020 below $1.20/gallon (3), something not seen since 2003. The potential drawback to this is the fact that the oil and gas industry will see drastic cutbacks in production, and those Carriers servicing that industry will then see corresponding declines in volume. That potential for additional excess capacity brings with it a deflationary effect on rates overall and possibly the final nail in the coffin for those still hanging on to the idea of a driver shortage.


Bluntly speaking, freight volumes in March exploded. Massive demand for consumer staples led to empty store shelves and breakneck restocking efforts. This frontloaded demand shall not linger forever and has already receded from the highwater mark on March 23rd when volumes crested at nearly 30% higher than average (4). The goal of restocking once plentiful warehouses will now begin, which will keep a floor under volumes, but the production halts of industries like automotive and restaurant servicers will force a great number of trucks into the pool of availability and pump the brakes on any chance of a sustained increase in rates.

Import flows into West Coast ports will begin to enter the domestic supply chain come mid-April and bring with it some welcomed relief to trucks in that region but store closures and mass employment layoffs will prohibit those goods from going farther than warehouses. Still, this props up weak outbound rates for the Los Angeles market.

The unemployment and shelter-in-place aspects of the Covid-19 fallout might not fully manifest in freight volumes inside of Q2 but the potential for lasting effects throughout 2020 remain. Any downshift in demand for non-essential goods from the US consumer will pull volumes out of the network and cause serious redistributions in truck patterns. This element coupled with the increase in demand for basic needs brings to life an eerie dichotomy between markets with greater than normal volumes contrasted with markets considerably below average. This rebalancing of demand against atypical supply patterns causes pockets of extreme price volatility both to the upside and downside.


The aforementioned potential problem of Carrier insolvencies is met equally with the possibility of the same unfortunate outcome for freight brokerages. Companies with unbalanced freight portfolios too heavily concentrated in industries halting or curbing production will face harsh declines in revenue that cannot be offset with spot business increases unless they possess access to a wider reach of customer types. Adding to that, spot rates overall continue to sit below contract rates meaning that offsetting lost volumes will not be enough to balance out lost revenues. Further complicating this matter but in a different twist is that for a majority of the industry, contract rates just reset and have narrowed to their lowest differential since inverting. Depending on the market, a brokerage may now own a year or two’s worth of loads at a rate that is no longer profitable due to excess demand for a particular commodity shipped from specific areas.


The US Economy is overwhelmingly and consistently the largest influence on the freight industry but never more so than the present. Rather than present you with our estimates on GDP, non-farm payrolls, industrial production, or any other major domestic economic report, we’ll instead inform the reader that predictions range from bad across the board to worst ever recorded and by orders of magnitude. None of us have any reliable clue as to how wide and deep this utterly unique experience truly affects our economy as a whole. There simply is no playbook for this or even a similar occurrence to draw parallels.

The Federal Reserve slashed its lending rate to 0% and unleashed a flood of more than $700 billion across many different avenues ranging from overnight loans extended to 90 days, outright purchases of US Treasuries and mortgage-backed securities, and credit facilities for commercial entities and banking institutions. While certainly easing conditions inside of the banking system, global pandemics don’t care much for liquidity solutions and bankers have an odd habit of tightening lending standards even when supplied with excessive amounts of cash at nearly no cost to them.

Putting arguments aside regarding the size or effectiveness of the recently passed federal stimulus package, few would debate that those in most need of relief will not spend those dollars on items beyond basic survival needs. This affirms consumer staples as the dominant type of freight and maintains the current supply chain flow. Sadly, the longer this pandemic and the resultant shelter-in-place edicts, which are now in effect for 75% of the US population, the longer this scenario of no demand for non-essential goods and halted production of many items holds true.

The aspect of a tight lending environment brings more uncertainty to the freight market. Beyond the obvious issue of some Carriers and Brokerages operating with diminished working capital exists the unanswered question: what does this mean for all of the investment capital floating around the industry? In times such as these, people and institutions favor having cash on hand and the idea of continuing to subsidize businesses in an effort to grow market share sounds less appetizing, especially when the business faces the prospect of a diminishing market to share. The long-lasting consequences of this pandemic remain to be seen but could include permanent damage to the behavior of the US consumer that ultimately leads to fewer goods trafficking throughout the country, not to mention fewer employed workers with the capabilities to buy those goods.

On the topic of unemployment, the current backdrop supplies the industry with a seemingly infinite driver candidate pool. This reduces driver retainment issues and the costs associated with it, both of which lean heavy on rates per mile as driver compensation is the largest component of operational costs.


Requiring no further coverage, Covid-19 and its duration are the supreme variables. Only time will tell on those. Related and specific to Q2, however, is produce season. With consumer tastes shifting to longer shelf-life items and the fact that border containment policies are restricting work visas for field harvest workers, yields and the loads they produce could be noticeably lower this season. Rates for markets in California and Florida would face atypical seasonal movement and bring about more disruption to freight patterns that result in even greater abnormalities in price.

HOS waivers can potentially reduce, but not eliminate, the severity of price surges in certain markets for certain types of freight and are not a lasting fix.

The ongoing oil price war between Saudi Arabia and Russia remains an item to closely monitor. The previously mentioned influences on freight can be eradicated in a day as the ever-volatile oil market will react to a truce or end to this war with a sharp rally in price. Depending on the velocity of the increase, unhedged market participants will find themselves rapidly losing ground to those with price certainty.


Get settled in, literally and figuratively. The nation’s broadest social experiment since the Cuban Missile Crisis has forced us all to reexamine our daily lives and priorities, both personally and professionally. What we all collectively learn from this will change the way business organize and operate going forward.

The unusual will become the norm. Seasonality, typical volume patterns, and freight folktales have been rendered worthless. Overall, rates will pull back from these elevated levels but individual locations will unequivocally dictate price. Some markets will jump in price when expected to be quiet while other, more robust markets will fall deafeningly quiet.

We do not know how long this will last or just how deep it will wound, but prosperity beckons for those who persist. Remember, when the worst global pandemic in 100 years is finally over, we might finally get the second half recovery in freight rates every model has predicted.

(1) FreightWaves’ SONAR, 03/2020 (2) American Transportation Research Institute, 11/2019 (3) NYMEX/CME Group 03/31/2020 (4) FreightWaves’ SONAR 03/2020

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