Noel Perry heads Transport Futures in Harrisburg, Pennsylvania. In addition, he heads Transportation Economics, a consulting company focused on strategy, market research and forecasting for the North American freight transport market. Previously, he was a Corporate Economist at Schneider National, and Director of Market Research at CSX Transportation and Cummins Engine Company.
Broker margins are climbing? FreightWaves published a sponsored article penned by Scott Simanek, Chief Commercial Officer of Unis Fulfillment and Transportation. In that article Mr. Simanek cites improvements in the margins of two prominent publicly traded brokers as evidence of brokers leveraging declining conditions in the spot market to their gain – at the expense of carriers. He attributes the increase in margins to the brokers’ ability to strongarm vulnerable carriers in the soft market. His conclusions are clearly wrong for three reasons:
- What did Adam Smith teach us? The North American brokerage market is as freely open a market as any in the world, regardless of commodity or service. There are no pricing regulations and precious few barriers to entry. If the two brokers cited, or any other brokers, were mistreating carriers (carriers they in many cases have been working with for years), the carriers need simply to shift to another of the 16,000 licensed brokers, most of whom are hungry for business. For Mr. Simanek’s conclusion to be accurate, there would have to be an extraordinary, and illegal, conspiracy involving thousands of brokers.
- What goes up eventually goes down. The arithmetic phenomenon cited in the article is a long-standing and well-known fact of truckload pricing economics. In softening markets, carrier prices always fall moderately faster than shipper prices, with broker margins rising. Of course in rising markets the reverse happens – carriers’ rates rise more rapidly than shippers’ rates and broker margins fall. Using Unis’ logic, brokers must have been scrimping on their profits to help the carriers in 2017 and the first half of 2018. Did Unis sponsor an op-ed praising the brokers to document that phenomenon?
- Accounting 101. The cycle in broker margins is primarily an accounting issue. Market economics tell us that scarcity or surplus of assets affects the pricing of assets and the cost of services provided by those assets. Intermediaries, like brokers, add a relatively fixed cost to facilitate the match of assets and demand and the accompanying transactions. It follows that such a fixed cost will occupy a smaller portion of a total rate, in a tight market with high rates than in a soft market with low rates. A simple calculation using average rates for the period from the second half of 2018 to the second half of 2019 referenced in the op-ed shows an increase in brokers’ margins of 306 basis points using a fixed absolute value for the brokers’ take. This example yields the same internal broker dollar return in both cases – same service, same ‘profit.’ Note importantly that the Unis example cites a 134-basis point improvement in brokers’ margins, just over half of the expected gain. Apparently, the brokers cited are sharing in the market’s pain, suffering about a 10% reduction in their take.
Here’s the point – Generalizing two data points from a pair of SEC filings to characterize the workings and ethics of a $300 billion market has little value.
Under the examination of a skilled financial analyst, those filings may well illuminate the results and strategies of the two companies involved, but they shed little light on the economics of a massive and highly variable market.
Brokers exist and have a growing share of the market because they provide a useful service to shippers and carriers. Those services retain their value throughout the business cycle, even if carriers are happy at the top and unhappy at the bottom.
The notion that an entire group of market participants is operating to the market’s detriment is a preposterous claim that provides no insight to carriers, shippers or any rational actor in this market.
Taylor Hamp
Love that you brought this up. On our most recent episode (06) of The Midnight Freight Broker, we discussed the article you referenced. One of the hosts, Nate, holds the same view as you do, even pointing out DAT’s broker benchmark statistics reported from Q2. https://podcasts.apple.com/us/podcast/the-midnight-freight-broker/id1480003495 We’ll definitely be visiting this commentary in next week’s episode!
Sherrod Blount
If brokers are not gouging carriers. Then what’s reason for negotiating? If brokers aren’t taking advantage of the market, then why don’t they just take their percentage and post what the load is paying? What’s the purpose for truck to load ratio? So they can take advantage of market. It’s all a part of auto programming. You guys plant a seed and watch it grow in the minds of business owners. The rates has never changed. Their was a market scare and they had to protect protect customer relationships. So they paid what they should have paying all along. If brokers are operating at such a low or unpredictable profit margin, then why are companies brokering loads rather than haul it themselves. Taking advantage of the ones who are trying to feed their families. As you stated. It’s a 300 billion dollar industry. So why isn’t everyone getting their fair share? Because of the biblical sin!! GREED!! (Gluttonous) But every action has a reaction. If one continues to pray on the other. Extinction is inevitable. Look at the statistics of companies that has folded. Don’t tell me it was poor management.
Nir udi
I’m a o/o the straggling with the broker is a hell they need to be regulated like us mean on DAT load bord they need replacing the broker spot rate to shipper spot rate and we need to know how mach the shipper pay not how mach the broker take and then we be coming strong again they will not bolling us any more
Colleen
As an o/o who became a broker I never ran or brokered a load under profitable market rated. If the market went up I got more money from my customer. That was my job. I did have other brokers try to take my customers. Keeping my customers was .y job too. If the market is very bad,Florida today, I deadbeat my own trucks. When I drove I started fuel strikes. Today everyone squeezes trucks.
Isabel
How did you become a broker? I’d be interested in doing the same
Ken wakefield
When a broker makes more than a truck on a load,, there’s a problem!!! I have hauled several loads where the amount paid wasn’t redacted,, and the brokers were pulling 35-40% out of the load. So go ahead and talk your mumble jumble about how it would be ludicrous for them to be in a conspiracy,, but bottom line they’re making more than the trucks. I’ve been doing this for 40 years and it’s always been that way and it always will be that way.
DT
We all need to use the available TMS technology so we KNOW if each load is actually making money all in. We use the Ascend TMS software and I can tell every day, week, and month how we are doing and it gives us loads from a bunch shippers and brokers in thier software. you can’t operate anymore with out using proper software if you want to run a real business in trucking. If you are still using pen and paper you will be dead soon.
Don
Carriers extend credit to the broker when they agree to take a load. If they don’t get paid by broker they can file a claim against the brokers bond or trust fund within a 90 days for payment.
Brokers extend credit to shippers. When the broker doesn’t get paid…they have no recourse expect going to small claims court. There is no guarantee on payment by shipper.
Eliminate the broker financial requirement and make the shipper set up an escrow account with a nationwide clearinghouse. If escrow money not in the account then shipper cannot move their freight. When proof of delivery is made, clearinghouse pays carrier agreed amount, and pays broker their agreed amount with the shipper for arranging the movement of the load from point A to point B.
Everyone gets their FAIR SHARE.
Until this happens: Brokers and carriers need to research who they extend credit to BEFORE entering into any agreement. Vet out who you do business with, set credit limits on them. File claims against brokers WITHIN 30 days of late payment.
Patrick
Not linking the article you are commenting around makes this publication less influential. I like some of the things puts out there, but when they publish high school drafts like this it really makes me wonder. Do better and try harder
Steven J
It’s simple supply and demand. Know your load to truck ratio where you are, then post your truck. I usually say no to about 10 loads to the one I accept. The problem is too many small carriers will take a $ losing load to keep the truck moving. I tell them my rate, usually the first call they chuckle and say they always get it run for half of that. So I tell them if those carriers are still in business, call them. When they call me back they are usually within $100 of my rate, and say something like, it’s only $100, you’d let it go for $100, I repeat my rate and wait, sometimes they book the truck then, sometimes they call back and the truck has been booked. Brokers achieve their highest margins on desperate carriers who are afraid to say no and will run it cheap.