Which way are Truckload rates moving?

A little more than a month ago I shared with you some feedback that I got from some truckload carriers about how they were looking at the market. The tea leaves said that they were looking to let some tractor attrition happen and tighten up on capacity. Tractor orders are down, partly due to the big buy’s that carriers did to beat a engine change, and partly due to some indecision to the future of emissions regs that happen next year.

In the supply / demand balance, the sure recipe for increased costs is for supply to shrink and demand to go up. I think that there is a slight whisper in the wind that says that while capacity is going to shrink or stagnate, that demand is going to go up.

Demand is going up? With the economy in a recession? No, I have not gone “around the bend”.

Think this through with me. I am looking at different indicators that are telling me a slightly different story from what the “retail” economy as reported by the mainstream media is doing.

First, let’s look at demand. The American Trucking Association reported in late February that tonnage in January ’08 was up 5.3% above the same period in ’07. That was the third consecutive month of year on year tonnage increases. It is still too early to tell, and the next two or three months will be interesting to watch.

Second, where is tonnage going up? I look at the global economy to take stock of that, and to understand where business is growing and thriving. There is a worldwide demand for agricultural products and materials. Not only is the demand in the “finished product”, the food, but in the things that improve productivity. While the railroads will win with the growth of grain stocks as they move from the farms to the factories, I think that trucking is going to see demand driven by the Agriculture market.

This demand growth is not going to be in the finished product, but in the productivity segments. There is an increasing demand for seed, fertilizer, fuel and equipment that all drive the production of food.

Monsanto, which is a seed company reported a 16% volume growth in seed sales. Corn was up 57%. Monsanto also reported that sales volume in the Agricultural Productivity segment of their business increased 6%. This is mainly the sales of Roundup and other glyphosate-based herbicides. The rest of the seed companies are also seeing increases in demand, not only here in the US but across the world.

How about fertilizers? Sure, they move in bulk on the rails and in barges, but the final steps are over the road. And even as the raw stock commodity moves in bulk there is a fair amount of support materials needed to support manufacturing that move over the road. And each of the major players is reporting that they have to grow production and delivery operations. Look at how Potash and Mosaic are growing, for sure outside the US, but they are each increasing production capacity in North America.

Now think about the equipment. Deere reported a record year. They announced that they are investing $90 million to expand the production capacity for high horsepower tractors made in the Waterloo, Iowa factory. There tractors are exported to over 130 along with the rising demand for them here in the US. While the finished product may move on specialized carrier or via rail, there is a great deal of components that go into the manufacturing mix.

My final point is not as much demand driven as much as it is price driven. The Federal Reserve and our Congress will continue to work to “stimulate” the economy. Rates will drop again, further devaluing the dollar and the buying power of the American consumer. It is election time, and every one of the congressional districts have a contest. So the “chicken in every pot” election year pandering will happen, at worst holding consumer spending level, and perhaps springing it up a bit. But the cost of every raw material is going up. Fuel, metals, chemicals, oil, grains, all are going up. Wages may not go up, but all of the other costs will. The carriers will work hard to reduce fuel consumption and improve fuel efficiency, but there are hard limits on what they really can do.

Are rates going up? It’s not a matter of if, but when.   If tonnage continues to improve year on year over the next few months, what do you think?