The average length of contracts has decreased during the pandemic, which is implied by the strong up and down trend lines seen from June 2020 to early 2023.

Prior to 2020, truckload contract rate agreements lasted an average of a year before shrinking during the pandemic spending boom. The trend for annual offers has reversed over the past two years as capacity has weakened significantly.

Truckload contracts tend to lose relevance when capacity becomes limited. Contract rates do not guarantee capacity, just as shippers do not guarantee volume. This is an important concept to understand for the cargo market because the value of the service fluctuates wildly at times.

Bounce rates measure carrier compliance (or lack thereof) with their contract customers. Rejection rates increase when capacity narrows. This subsequently drives up rates as shippers bid against each other for available capacity.

National rejection rates (OTRI) below about 6%-7% represent a relatively free environment where trucks are readily available. Contract rates tend to fall in this type of market. Rejection rates have been on a slow climb after hitting a low in May 2023 and have broken the 6% mark just once in the past two years. This happened last June/July and lasted about a week, not long enough to put much pressure on rates.

The current bounce rate is just over 5%. While this is still a relatively low figure, it is higher than it was at this time last year, when OTRI was just over 3.5%.

The hurricanes and the ILA strike contributed to the rejection increase, but this was minimal as rejection rates remain below the 6% threshold and have been below 5% for most of the past three months.

The main takeaway is that contract rates appear to be feeling the pressure of changing sentiment about the future state of the trucking market, not necessarily that there is a severe shortage of capacity today.

Spot rates, excluding a level of fuel cost influence comparable to a standard fuel surcharge implemented for a contract, have been on a similar trend line to OTRI, increasing by 13% since May 2023. This trend suggests that the level of the market has increased for 18 years. months, but it is still well below the carrier-to-shipper contract. The spread is still too wide to provide strong growth in long-term rates, although lower low-end prices may help push the average higher.

Zac Rogers, associate professor of supply chain management at Colorado State University, spoke about the perspective component of Index of logistics managers (LMI) enabled Freightonomics a few weeks ago and noted that supply chain professionals are expecting a strong shift in the transportation market in the coming year.

The the transport price component is projected to increase from 58 to 76 in the following year, according to the survey results. This means that transport procurement teams are preparing for a very strong tightening until September 2025.

The LMI is a diffusion index based on survey results, where values ​​above 50 indicate expansion and values ​​below 50 indicate contraction. Values ​​above 70 are strong expansion.

That sentiment is likely helping to boost the value of the 12-month or longer truckload contract. Shippers who have low rates will be the first to suffer the consequences of a tight market in the form of truckload service breakdowns and the loss of revenue that comes with insufficient inventory levels.

It is a well-known fact that capacity is leaving the truckload environment at a rapid rate. Active operating authorities managed by the Federal Motor Carrier Safety Administration have declined 5 percent over the past year and are expected to accelerate seasonally in the coming months. While this data is behind us, the trend is the most important thing to watch.

The trucking market may not have had a major turnaround, but it is coming back, just more slowly than many service providers would like.

About the chart of the week

FreightWaves Chart of the Week is a selection of charts from SONAR which provides an interesting data point to describe the state of freight markets. A chart is chosen from thousands of potential charts 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 weekly chart will be archived on FreightWaves.com for future reference.

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