Chart of the Week: Spot to contract rate spread (excluding estimated fuel costs above $1.20/gal, Van Outbound Tender Rejection Index – USA SONAR: RATES12.USA, VOTRI.USA
The difference (spread) between dry van truckload spot and contract rates has risen to its most balanced level since the holiday season last year. While the weather has certainly played a role in the near term, there are long-term takeaways when we compare the spread to van tender rejection rates (VOTRI) — which are also on the rise.
Definitions
Contract rates are based on an ongoing agreement between a shipper and a transportation service provider such as a carrier or a 3PL in which the service provider agrees to move freight in a given lane for a set rate if the provider has availability. These agreements tend to last for a year but can be shorter and longer.
Spot rates, just like many other commodities, are truckload rates negotiated on the spot and are not generally expected to be consistently adhered to by the requesting party. These are much more volatile and reflective of the current market conditions.
Spot rates tend to average lower than contract rates in most lanes as most of the volume tends to lean toward third-party providers or brokerages scouring the nation for relatively inexpensive capacity and carriers trying to find backhaul loads or freight that moves their trucks into an area where contract customers have freight.
The rate spread, which is calculated by subtracting the average dry van contract rate from the average spot rate excluding estimated fuel costs comparable to a common surcharge, has been historically low for nearly two years. Spot rates have averaged roughly 60 cents per mile lower than contract since May 2022.
For context, spot rates were 22 cents higher from July 2020 to February of 2022 — the pandemic era. Spot rates averaged about 24 cents lower than contract in 2019.
This data point should be viewed more as an indicator of market conditions than at pure face value. The values of the spread are not applicable to every lane in the country, rather as more of an indicator of how aggressive companies have to be to find short-term and long-term truckload capacity.
When the spread value is negative, capacity is relatively easy to find. When it is positive, it is challenging.
The spot rate also tends to lead the contract rate in terms of movement, which can lead to short-term contractions around seasonal or temporary events like the weather that influence capacity’s availability. The current trend appears to have a combination of both long- and short-term influences.
Spot rates increased around the holidays as they typically do but had not quite fallen back before winter weather pushed them higher once again.
The above map shows markets where lanes were moving significantly higher (orange) or lower (blue) on a four-day rolling average as of Jan. 17. Looking into the background TRAC data that makes up the national average, most of the rate increases occurred in the Upper Midwest, where temperatures were in the negative degrees Fahrenheit.
Since then, spot rates have not retracted as quickly as some might have expected. Shippers having to play catch up and carriers’ networks being disrupted are the biggest issues with weather events. The length of time it has taken to recover may be a tell that the freight market is closer to supply-and-demand equilibrium than we think.
About the Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
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