Q2 2021 Freight Outlook
Trucking is a commodity, and like any commodity, its price will seem stable at certain times and unpredictably irrational during others; static, flat prices followed by periods of extreme volatility and violent price swings.
Lately, the latter has been more commonplace than most participants would like to see, and the probability that we revert back to calmer times seems less likely with each passing day. As we move past the first quarter of 2021 with some light at the end of the Covid tunnel, the remaining balance of the year and what it may bring, with respect to freight, feels only slightly less uncertain than where we stood at this point last year.
Capacity is scarce, load demand is high, and rates are even higher. Which one(s) will change and when or where? A consensus has arisen that some version of normalcy will be here by the time this new quarter ends, but what does normal even look like? Are we all back in offices? Are schools fully opened? Restaurants and bars? Other countries?
Believe it or not, the answers to each of those questions carries serious implications for freight. The longer we go with those questions unanswered, the greater volatility we will see in rates.
At its core, freight rates are nothing more than the intersection of supply and demand. There are macro level factors which sit on top of the micro conditions localized to individual markets. Of the two, supply by way of truck capacity, has the greatest influence on price. Though attempts to measure this on a micro level are years away, at best, the total available count of tractors and trailers in aggregate sets the pace for each individual market to refine further. Total available truck capacity is the first step for a market area to formulate into a price for lane pairings. The problem for today’s marketplace is that starting point has not substantively grown in size since Covid first hit.
While Class 8 truck orders for November and December 2020 came in at the 3rd and 4th highest totals on record, the orders seen in April 2020 were the lowest in 25 years. Orders to begin 2021 remain strong, but the net result over the past year has been marginally better than what’s seen as replacement rate. In fact, FMCSA data for total tractors available for-hire is up a whopping 24,118 YoY. New trailer orders continue to outpace YoY in double digit percentages, but much like new tractor orders, these will not be fulfilled in time to help for this quarter, and growing trailer pools are not a realistic solution for the current refrigerated freight problem.
For all of the optimization talk centered around drop and hook solutions, there does not seem to be enough shipper adoption to materially affect the domestic supply chain as national detention average times are all of four minutes less than the average for all of 2019, a year of modest volume and ample truck capacity.
A hidden drag on truck capacity comes by way of long hauls as the rerouting of assets further away from markets most in need, restricts the ability to build up or replenish lost capacity in a timely manner. Current loads greater than 800 miles are roughly 50% higher than historical norms. Customer demand far exceeds current inventories to the extent that other slower options like intermodal or traditional distribution chains are simply not an option right now. That’s great for John Q. Public of Sioux City, IA and his expectation for prompt delivery of Dogs Playing Poker on canvas from China via Ontario, CA, but bad for the network as a whole as it will be days, if not weeks, before that truck can get back to the market where it started.
A similar situation exists with less than full trailers, not less than truckload, where full cargo utilization of the trailer does not take place. Similar to the concept of a daily available total of drivable hours and hours within the entire network, there exists a daily available total amount of space and/or weight inside all tractors attached to trucks. If consumer demand warrants shipping a half full trailer, again that’s great for the consumer, but bad for network utilization of total assets. Until non-fungible tokens garner critical mass, the seemingly insatiable appetite of the US consumer coupled with record low inventories (9-year low) will foster this largely inefficient asset deployment.
A brief update on inventories: The Great Restocking of last quarter has spilled over into Q2, and given the fact that the pace of goods moving out the door exceeds what is going in, this will undoubtedly persist throughout the entire quarter and well into the next. The inability of retailers to catch their collective breath will keep distribution centers and major transportation hubs short of capacity and serve as underlying support to outbound spot and contract rates in these areas.
Shifting to the other side of the equilibrium is where things become less transparent and more contemplative. A resumption of a more normal way of life is healthy for the US economy but likely means less freight moving through the supply chain. In an odd twist, the type of businesses and activities most affected by Covid restrictions tend to carry the least amount of freight along with them. Restaurants, bars, sporting events, concerts, vacation travel, theme parks, etc. all have a drastically lighter footprint on trafficked freight than the alternative destination for consumers’ discretionary income: durable goods. For now, Americans seem to like this new work from home lifestyle as recent data suggests post-Covid spending patterns continue their trends.
High frequency credit card data provides some insight into the choices more and more Americans are making with both their earned and stimulated wages. While airline travel and leisure spending are undoubtedly returning, the dollars spent on home improvement, furniture, and groceries continues to outspend prior patterns, and it doesn’t take much thinking to realize that $300 spent on home furnishings looks a lot different inside of a 53’ dry van than $300 at a hotel.
The same goes even to a greater extent for dollars spent at restaurants versus grocery stores. When the increments of change in sales are in the tens of billions as they are, those dollars do not simply translate into tens of billions of transportation spend. This is how we get a marketplace with 14% more reefer and 19% more dry van load volume YoY. With the ports of LA, Long Beach, Charleston, Savannah, and NY/NJ all reporting record months and quarters for imported containers, we are all but guaranteed to see these elevated levels of freight volume continue. Often overlooked is the potential for a more historical level of manufacturing output with continued strong residential and commercial building for this quarter. Though not the same type of trailer, these still compete for tractors at a time when every truck is needed, providing another level of price support.
By far the greatest internal impact on linehaul rates right now are the annual bid cycle implementations, or lack thereof. Some of the largest service providers like C.H. Robinson and J.B. Hunt has stated that many of their customers have delayed their annual bids in the hope of pricing new contracts after this cycle of inflationary rates has passed. Anecdotes of mini-bids to hold things over have almost become commonplace in the industry. Regardless of classification, the rise in contract prices has been nothing short of astounding, yet somehow not enough. According to DAT, the national contract linehaul average has risen 30% YoY, from $1.81 to $2.34/mile, a shocking $0.53 that turns into $0.64/mile when you account for fuel.
For those shipping managers still breathing, national spot rates have jumped 65% YoY, $0.94/mile for linehaul and $1.05 all-in. National spot rates are once again above contract rates, as has been the case for 7 of the last 9 months. When coupled with relentless load demand, this dynamic of persistent spot rates over contract renders routing guides useless, while unnecessarily increasing workloads and decreasing profitability.
The situation for reefer is even worse where the spread between the two is spot $0.21/mile over contract. The mythical “Produce Season” is still not even in full gear and this relationship between the two types seems to be worsening. Expectations for a mass reset in contractual prices during Q2 can be eliminated. Without such, conditions exist for further price increases overall and sharp localized spikes, both of which can be expected as near certainties.
Complicating this situation even further is the aforementioned Great Restocking or at least its attempt. Demand still outpaces inventory supply, while growth is the goal and seasonality already favors demand this quarter. When combined with rising contract rates, this type of demand will create a floor for spot rates. We can see tender rejection ease, but price will remain firm, and any moderate capacity dislocation by way of regional volume surges or weather events will send rates skyrocketing; localized at first, then spreading outward from the epicenter of disruption in waves as capacity slides into and out of areas of higher/lower rates.
In a preview of our Q3 Outlook, in an admittedly cynical take, overwhelming consensus is for this restocking effort to end with H1, and when coupled with seasonal factors, bring about the next phase in rates: that being a downward one. Given inventories’ position behind the proverbial 8-ball and conventional wisdom that says when everyone predicts the same thing to come true, it most certainly will not, our expectation is for The Great Restocking to continue well beyond H1, likely full year, and for rates to remain elevated until at least 2022.
Consumer behavior is the big risk here. It’s either a continuation of the WFH lifestyle and the consumption of goods that comes along with it, or we resume life as we knew before Covid. We know what the former looks like for freight. The latter, if you don’t recall, means we’re all back in the office and travelling for business, which means less freight running through the supply chain. Nothing in life is ever binary, so somewhere in between seems more likely. How that rebalance and reshuffling settles remains to be seen, but ultimately the patterns we settle into in post-Covid life could, and likely should, bring more freight than past historical norms. There are only so many desks and exercise bikes we need to order, but continued home improvement and more meals prepared at home look to be here for the longhaul.
Rail capacity is available once again but only because consumers have demanded their goods quicker and longhaul OTR became the shipping method of choice. Conceivably, intermodal growth could soak up some OTR share but given that inventories are most definitely are not in order, this is an unlikely alternative, particularly when confined to Q2.
More likely to disrupt current patterns is the ever-increasing times for anchoring and unloaded cargo vessels in Southern California ports. This has become a publicly acknowledged issue with companies like Peloton and Yeti opting for more easterly ports. Continued shifts such as these will draw more truck capacity away from the West Coast, but only if prices rise high enough to elicit that response.
Landing by definition as an external factor but probably more of an internal one, the topic of driver recruitment and retention resurfaces yet again. Nearly every single major carrier has listed unseated trucks as a 2021 problem and there is one quick, simple, and easy solution to that: increased driver pay. The temporary closures of driving schools have limited the available pool of drivers, so those remaining will be enticed by those companies offering the sweetest deals. Since driver compensation is the largest expense for a carrier and there is plenty of volume to be moved, this is yet another inflationary aspect for rates.
The section title may be plural but the risk here is singular. Covid-19 and its many variants are the greatest concern and unknown. Domestically, vaccinations are steadily and rapidly increasing, yet infections are soaring again. Elected officials from the bottom, all the way up to the very top, have insisted another round of lockdowns or restrictions will not come. The light at the end of the tunnel is growing brighter each day so the path to life as we once knew it should come.
Overseas, however, conditions are not as sunny. Delayed vaccinations and shorter supplies, coupled with rising infections, have troubled much of Western Europe while South America seemingly cannot gain control. Freight implications here are not too deep, the risk is to the global economy if the picture internationally should worsen. Barring another new, more contagious, and lethal variant (a legitimate concern), Covid and our interactions with and because of, as it pertains to the movement of freight within Q2 2021, is likely not a major influence. Given its calamitous effects, however, it warrants mention here and constant monitoring for changes to conditions.
The timeline for normalcy has been moved up from fall, to possibly summer, and this aspect has potentially the greatest impact on freight as this would coincide with seasonal freight demand weakness. A return to normalcy means less freight but it’s hard to imagine this creeping into Q2, though it’s possible, so therefore noteworthy.
The song is collectively written and sung by all participants. The verses are ones of discomfort for shippers and contract heavy 3PLs, outright joy for carriers and spot board brokers. The chorus dances between shouts of glee and cries of pain. The name of the song is, “Higher for Longer”, at least that’s the radio edit. Just wait until the uncensored version is released in July.
.FTR Associates, 03/2021  FMCSA, 03/2021  ACT Research, 03/2021  FreightWaves SONAR, 04/2021  US Census Bureau, 04/2021  FreightWaves SONAR OTVI x (100-OTRI) = Implied Accepted Tender Index  DAT, 04/2021