Guest Commentary: How to Get a Read on Truckload Prices

Everyone wants to know where truckload prices are headed in 2012. To get closer to an answer, there are several factors to consider that may—or may not—affect pricing this year.

For much of 2010 and 2011, the industry anticipated a “perfect storm” of regulation and legislation that would hit the market simultaneously, subsequently raising rates through the roof. But although rates have risen more than their historical average for the last two years, the perfect storm people predicted has not come to pass. Why? Because the government moves forward slowly—and sometimes, it doesn’t move at all. Take these major issues, which were supposed to combine to form the perfect storm:

• Hours of Service. This perennial issue has been on everyone’s radar for the last two years. A final rule was recently issued, but it has already been challenged in court. Even if the rule stands, it will not become final until 2013. So what impact will this have on 2012 rates? Probably none.
• CSA (formerly CSA 2010). Currently, it doesn’t look as though a final rule will be completed before the end of 2012. Even when BASIC data is finally linked directly to the safety rating, there is significant speculation on how much it will shrink the driver pool, and therefore, raise rates. Most major carriers that I’ve talked to have already gotten their house in order when it comes to removing drivers with poor driving records from the road.
• Electronic on-board recorders (EOBRs). The FMCSA has indicated that they will not even issue a proposed rule until late 2012 or early 2013, meaning that any new rule in this area will not go into effect until at least 2013, if not later.
• CARB regulations. These California requirements for carriers continue to kick in over time. Responsibility to hire CARB-compliant refrigerated carriers will be extended to shippers, receivers, and brokers, but not until January 2013.
• Heavy Trucks. This appears to be a dead issue for 2012 and possibly beyond.

All in all, none of these issues are likely to move rates significantly in 2012, although 2013 could be another story, depending on how these issues move forward.

If government regulation is unlikely to have a major effect on rates, what should you watch in 2012?

On the demand side, watch for economic growth—especially how fast the non-service part of the economy is growing, since this is predominantly where freight comes from, and where the level of demand for truckload service can be seen.

On the supply side, there are a few indicators to watch.

• Driver wages. Typically wages go up as a result of a driver shortage and higher truck rates.  This chart from FTR Associates provides a reference for driver shortages and surpluses.

So far, driver wages are still below their pre-recession 2008 levels. Second, watch for major carriers to announce significant pay increases as a way to gain access to more drivers. However, as long as unemployment remains high in the construction industry, don’t be surprised if driver wages continue to move up at a very moderate pace.

• Truck Supply. As for the trucks themselves, there are several indicators that rates may rise or fall.
• Watch the Class 8 truck sales figures. There are many research firms and industry organizations that publish estimates on where sales need to be to replace older equipment. Recently, carriers have started to add trucks at a rate that would meet the industries potential replacement needs. If carriers stop using these trucks as replacements for older models and start expanding their fleets, it could exert downward pressure on pricing.
• Deadhead percentage and weekly miles per tractor provide insight into the operational efficiencies of truckload carriers. When a carrier’s deadhead percentage goes up, it means that they must move their empty equipment further before they can pick up their next load. This can be a sign that there are too many trucks chasing too little freight—particularly if it occurs at the same time as a carrier’s loaded miles per tractor goes down—and that rates could be headed downward.
• Various demand indexes can also help you gauge the general balance of supply and demand, with a corresponding effect on rates.

• The price of oil. On the oil front, it is anyone’s guess as to what will happen. The good news is that while pricing did rise in 2011, it has remained relatively steady for the last 12 months.

So knowing all of this, what is realistic to expect regarding rates in 2012?

Here is what I can tell you. Over the 14 years between 1998 and the present, the Stephens Index, which aggregates the published rates of the large publicly held carriers, shows that the average rate per mile (RPM) went up just over 2% a year for a select group of publicly-held truckload carriers, not including fuel surcharges. Of course, this increase has not been a steady one; on a year over year basis each quarter, it has been between -2.5% and 2.5% about 49% of the time. For all of 2010 and the first three quarters of 2011, the range of increase has been from a low of -3.11% in 1Q 2010 to a high of 6.09% in 2Q 2011. Based on earnings releases from J. B. Hunt (a 4.1% RPM increase) and Werner (4.6% RPM increase), we would anticipate the Stephens Index increasing somewhere between 4% and 5% for 4Q 2011. Based on that estimate, 2011 will end with a 5% to 6% increase for the whole year, compared to a 1.9% increase for all of 2010 over 2009.

So, while regulatory and legislative actions will not have a major effect on the supply of trucks in 2012, there still could be significant pressures that could move truckload rates up or down more than has been the norm historically. So far, carriers have resisted growing their fleets faster than freight has grown. If they continue to show this kind of willpower—and if the economy continues to grow—there will be above average pressure on rates. Conversely, if truckload carriers show a lack of restraint, they could find themselves in the same place they were in 2009, with too many trucks chasing too little freight.

Kevin McCarthy works for C.H. Robinson as a Director of Consulting Services. Kevin has over 25 years of experience in the logistics industry working for a service provider, a small food manufacturer, and a large retailer (Target Stores). Kevin has an MBA from the University of Minnesota Carlson School of Business with an emphasis in Management Information Systems and an undergraduate business degree with an emphasis in Marketing. Kevin speaks on a regular basis at industry events, has written numerous white papers, and is a frequent contributor to C.H. Robinson’s Transportfolio blog and TMC’s Managed TMS blog.