The full load contract market shows early signs of deterioration
Chart of the week: Pickup Truck Contract Pricing Initial Report, Outbound Tender Volume Index – USA SONAR: VCRPM1.USA, OTVI.USA
According to FreightWaves billing data, which comes from a database representing $20 billion in annual spend, rates for full-truck contracts began showing early signs of contraction in July. Van (VCRPM1) contract rates have fallen more than 2% since early July to a value of $2.87, which exceeded the $2.90 per mile threshold in place since early March.
The decline in contract rates appears to be due to a decline in demand for truckload capacity that has continued through the summer. The Outbound Tender Volume Index (OTVI), which measures shippers’ electronic requests for truckload capacity at previously agreed rates, fell 20% from March 6 to April 21 this year and maintained an annual decline of about 18% throughout the summer.
While the spot truckload market was immediately impacted by the decline in shipping activity, the contracted truckload environment was largely unaffected.
The National Truck Loads Index (NTI), which measures the national average truck load spot rate for pickup truck loads, had been falling slowly since the first of the year, but accelerated its descent about a week later. that the OTVI has started its strong downward push. The NTI fell by 6.3% from mid-January to mid-March and then by 14% from mid-March to mid-May.
It is important to note the differences between the spot market, which tends to get the most attention, and the contract freight market. The spot market accounts for approximately 15-25% of total truckload volume in the United States. Rates are negotiated with delivery times of up to three days on average and are usually valid only a few days before expiration. For all these reasons, rates are much more volatile than their contract counterparts.
So far this month, contract volumes have not deteriorated significantly from a year-over-year (y/y) perspective. The Contract Load Accepted Volume Index (CLAV), which measures only tenders accepted, was above or even with 2021 levels through May. June was the first month in more than two years to show an annual contraction, on average around 2% lower than the previous year.
Given that contracted rates have increased by approximately 11% year over year, heavily contracted carriers have not yet felt a significant drop in revenue, with only a marginal drop in volume. The CLAV shows that things could change to start the third quarter.
Since July 1, the CLAV has shown an acceleration in its annual decline, going from an annual differential of 2% to 5%. Couple that with falling contract rates and it shows the first signs of deterioration in the contract market since the start of 2020.
How low will rates go?
The current spread between contract rates and non-fuel spot rates suggests that contract rates could fall another 14% if the spot market remains stable, but the timing is in question.
The spread between contract rates and spot rates was lower than at the start of the pandemic, which was historically low. This is starting to correct itself as contract rates drop.
Contract rates declined by around 4-5% from late 2018 to early 2020 after gaining 16% from 2017. The fact is that contract rates are rising at a much faster rate than they are falling and ‘rapid contraction probably won’t happen, but the current trend suggests they will fall further.
JB Hunt’s new president, Shelley Simpson, said, “We have a normal seasonal July,” which might sound like a positive. For those familiar with trucking, July is a slower month compared to June and this may have been a veiled commentary on what’s to come.
About the chart of the week
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FREIGHTWAVES’ Top 500 list of for-hire carriers includes JB Hunt (#4).