Michael Feig, chief operating officer of Capital Logistics, spoke to an audience of brokerage executives on how to bid for contracted freight in volatile markets at the Transportation Intermediaries Association (TIA) conference in Orlando on April 12. Capital Logistics is a mid-sized freight brokerage based in White Plains, New York, that had 2018 gross revenues of about $49 million.
Feig’s principles – “have a strategy and believe in it,” “don’t chase the market,” “price in volatility” – sounded like investment advice, and indeed, Feig was a Wall Street equities trader for years before entering the logistics industry. Feig explained how to approach bid season and negotiations with shippers over contracted freight.
“Think about risk versus reward,” Feig said. “If you’re pricing something for a year, you have to factor in risk and the unknowns in a year. A lot of can change – a hurricane like Harvey could affect rates, but if it hits someplace like Wilmington [North Carolina], will it affect things the same way?”
Brokers should study historical rate data and understand the volatility of the lane they’re bidding on, Feig counseled. Not only that, but ideally a brokerage bidding on contracted freight will know how its customers’ volumes are distributed through the year.
“Volatility can be your friend,” Feig said, “but you have to be prepared and have the stomach for it. If you want consistent earnings, freight from Philly to Miami is not for you.” Feig displayed a chart showing a 100 percent upward move in spot rates from Philadelphia to Miami from May to September 2018; he also discussed outbound from Southern California as an example of a volatile market in the second quarter.
“We haul a lot of produce and we’re pretty active in the California markets,” Feig said. “We saw a significant rate increase out of California; off the top of my head, increases of about 20 percent on certain lanes from Wednesday to Friday. Now, that’s Easter, we expected it. We expect rates to come back down after Easter – Florida is a different story – but in California, the general trend is an Easter spike, then it settles down in May. Maybe it’s different this year because Easter is late, but the point is in that kind of market you can have a 20 percent move in a week, but you can’t let it change your strategy.”
A member of the audience asked the question “How can I price for the ups and downs of a whole year when everyone else is pricing for now?”
“I don’t believe that you should just sort of get rid of principles and price something for right now,” Feig responded. “If someone else is pricing something, they may be wrong, you might be right, but if you lose the freight, you have to be okay with that. We were of the opinion before the [electronic logging device] mandate that it was going to be tight; we lost freight, then saw it come back because people were getting destroyed and couldn’t keep up.”
The wide range of shipper expectations and approaches to contracted freight was another thread that went through several respondents’ comments. A foreign shipper looking for capacity to move its domestic freight in the United States asked a brokerage to price lanes for three years. A different broker said that one customer encourages data-driven repricing on a quarterly basis. Feig said that the key is communicating with the shipper, articulating a coherent thesis about the market, and letting the shipper know that the more data it has about where and when its volumes will hit, the tighter the rates can be.
“You’ve got to have a strategy you believe in that doesn’t change,” Feig said. “The more data they give you, the tighter your rate can be, and the more you articulate it and show them, the better. But if someone’s asking you to take year-long pricing, you’re going to have some volatility risk priced in.”
Feig also addressed the current freight market’s very loose capacity, which he described as an unsustainable race to the bottom in the spot market. He cautioned brokers in the audience against letting the shipper drive prices down and compress margins.
“We’ve had situations where we’ve abandoned customers when it’s a race to the bottom,” Feig said. “You get offers so bad, if you win, you lose. That’s not good freight. All you’re doing there is helping some guy get a piece of paper off his desk so he can go home at 5 o’clock.”
Pricing volatile freight lanes is a science and an art, Feig concluded. The ‘science’ is an understanding of historical data and current market conditions, while there’s an art to inferring the effects that external factors may have on freight markets. As an example, Feig said that for the first time in many years there was no drought in California, and he speculated what effect that might have on reefer markets.
“If there’s a bumper crop, maybe there’s more freight demand,” Feig said. “We might make predictions and take our chances; that’s the art of it.”