Happy, New Year?

We shall spare you the typical seasonal slang offered up around this time of year. There will be no Merry Christmas metaphors, Hanukkah hyperboles, nor New Year’s nonsenses. Instead, we’ll serve the usual cold truths regarding the freight market and that means here will be one of the likely few places you won’t find blind optimism for 2020. Since we are in the business of dealing with futures, restating the obviousness of 2019 will be traded for a glimpse of what’s to come in 2020.

              First, a brief holiday season and 2019 overall recap: moderate volumes, excess capacity, depressed rates. That’s about everything. Yes, rates in December were up 8-10% nationally but this was already almost entirely priced in by the futures market. December National Futures will go out at $1.53, never once dipping below $1.50 since their inception back on March 29 and sitting between $1.50-$1.53 since September 1. To say this holiday freight season was exactly as expected would be something of an understatement.

Moving on to 2020, some things will change but many will remain the same. The most obvious and potentially impactful change will be “Contract” rates. The quotation marks are necessary as the rates aren’t worth much more than the paper they’re written on, but semantics aside, the ongoing trend of declining contractual rates should accelerate during Q1 2020. We are of the belief that the spread between Spot and Contract rates will narrow to a margin uncomfortable to many freight brokerages, and to a level that blurs the lines between the two. This notion is explored in-depth in our 2020 Freight Rates preview, but the CliffsNotes are that the nearly non-existent Spot market of 2019 has forced a tremendous amount of 3PLs to become more aggressive in their Contract bids in an effort to establish more permanent business. The perceived risks here are muted as the excess capacity currently around absorbs much of the potential for sustained rate increases, making lower Contract rates a tolerable risk to many. The bigger influence in this situation could be the large incumbent 3PLs deciding to defend against the upstart digital freight brokerages and their hypercompetitive rates, with low Contract bids of their own. Freight brokers make a living buying and selling capacity, and you can’t cover the loads without owning them first.

All of that means that as usual, capacity will be the most significant variable in 2020 and one that has no consensus with a wide range of prospects. Some predict a bleed-off, with more truck company failures and idled trucks. Others, and we fall in this camp (which is also elaborated in our 2020 Outlook), see the pool of available capacity settling ever firmer into the levels experienced today. Rarer still are those who believe additional capacity will appear next year, but, that segment of market belief is growing. The abbreviated explanation for a lack of capacity shrinkage is that truck companies exit the marketplace but the trucks they own never really do. Those trucks are just incorporated into better performing organizations that run more efficient operations with leaner balance sheets. One company’s garbage truly is another’s gold.

Where does this leave us? Well, if the entire industry as a whole operates with little wiggle room between Contract and Spot, any change to the status quo in rates via capacity has the capability of serving as the powder keg that ignites a freight market boom. Explosives do not detonate on their own, but they only need a spark.