Rates Can't Go Any Lower, Right?

All things being equal, this market would look fairly normal to an economist. Rates are low so volumes are high. Since this is freight, it’s not normal and it doesn’t work that way. Shippers do not have the luxury of waiting to ship goods based on price and an increase in loads typically brings a pickup in rates as getting shipments moved is in high demand. Right now, however, capacity is the overwhelmingly dominant factor in price. September 9 marked the highest volume output of 2019, yet rates didn’t move at all. That level of demand should be enough to illicit even modestly higher prices, and while the national average for all loads did increase $.03 according to DAT, the current long-haul rate is not only below last year’s levels, it’s below 2017 rates and marginally above 2016 and 2015, as well. Some of that long-haul weakness can be attributed to the Carriers’ desire to maintain optimal truck utilization and keep the wheels spinning during depressed market conditions but mid-range rates are not offsetting the drop. Short and mid-range loads are keeping things from completely unraveling but those rates are a manifestation of HOS and paying for time rather than distance. Overall, this spot on the calendar is not meant to bring this level of weakness, especially given just how firm volumes remain.

What gives then? It’s the same old story of 2019: trucks, and trucks, and trucks. Contrary to public opinion and newsworthy reports, we continue to add more capacity to an already oversaturated marketplace. Yes, Carrier bankruptcies are escalating and becoming more frequent, but those trucks never truly leave the pool of available supply. Whether those trucks and their drivers are owner-operators or company contracted, they simply shift gears and sign-on with a different, likely more efficient, company. According to newly available data, the marketplace continues to add more capacity each and every month. While you may think rates are too cheap to profitably run a business, there are other businesses out there obviously running under different metrics.

The good news is that there is no shortage of available loads and that looks to be the case for at least the foreseeable future. Railcar volumes are down 5% YoY while truckload volumes are up 5% YoY. That is not a coincidence. OTR is an easier transportation solution and rates on average are presently cheaper. The cheaper rates aspect is the bad news. Though positive from a transportation preference perspective as far as maintaining old and enticing new business, the current rate environment is a risky one for the undercapitalized and less efficient providers, and it’s an environment that may render even more companies extinct.

Seasonality is a major component in freight rates and plenty of companies are banking on this quarter, and especially the holiday season inside of it, to spread a little cheer on the corporate balance sheet. Unfortunately, the likelihood of a sustained increase in rates is becoming more and more doubtful with each passing day. Though not quite as directly tangible as its common thought applications, the Lindy Effect has some applicability to freight rates; the longer rates remain depressed, the longer it seems low rates will persist. The “Summer Peak” never materialized. A Santa Claus Rally doesn’t necessarily have too either.