Truckload freight rates poised to rise in tandem with hectic holiday season, reports Coyote Curve

Trucking freight rates are expected to see gains heading into the peak holiday months , according to the most recent edition of the Coyote Curve, which was issued late last month by Chicago-based transportation management services provider Coyote Logistics, a subsidiary of freight transportation and logistics services bellwether UPS.

Coyote Logistics defines the Coyote Curve as a proprietary forecasting model that helps shippers and carriers position themselves for success regardless of market conditions. And it measures three concurrent cycles-seasonal demand, annual procurement and more elusive market capacity–to help supply chain professionals identify recurring patterns that can lead to better informed supply chain and logistics decisions.  The Coyote Curve made its debut in March 2018, and Coyote officials noted that it has “proven accurate in forecasting trucking freight rates and has correctly predicted the current deflationary market.

The main findings from the third quarter edition of the Coyote Curve stated that the market is continuing to decline, with the Spot Market Index closing at -24.9%, which is 2.4% below Coyote’s second quarter forecast projected. And it added that the third quarter Coyote Curve is projecting a coming inflection point, in which demand is increasing and driving spot market rates up higher, in advance of the hectic fourth quarter months. 

“The 2017 and 2018 market caused a lot of pain for many truckload shippers as rates jumped to historic highs. We believe 2020 has the potential to create very similar challenges for shippers,” said Coyote Chief Strategy Officer Chris Pickett in a statement. “This year, we’ve seen a complete 180 from the market, leading to difficult times for many carriers who may have overshot their truck orders and plans based on the previous year’s more favorable economic conditions. Coyote’s goal with these quarterly market updates is to help both shippers and carriers understand where we are in the market cycle, where the data shows us it’s headed in the near future and what they can do to position themselves for success no matter the market condition.”

In an interview with LM, Pickett provided a deep dive on the current state of trucking freight rates and the spot market, as 2019 hits its homestretch.

LM: What are some of the key drivers for a projected return to the inflationary YOY spot truckload market environment for 2019's peak holiday season and beyond?

Pickett: In terms of Y/Y pricing (which is what our framework attempts to understand and predict), we believe that the rate of spot market deflation actually rebounded in Q2. That just means that, when compared to last year, the rate of decline will likely decelerate from here until actually flipping inflationary on a Y/Y basis in early 2020. That said, we also believe that contract rates, which have actually remained Y/Y inflationary to date, will go Y/Y deflationary this quarter and draw down to ~5%. They will then inflect back towards inflationary territory by middle to late next year – depending primarily on how overall TL demand evolves from here, which is tied to general economic activity.

And what drives all of this is the fluctuating balance in TL Demand vs. TL Supply. In this particular period of transition, we believe that the sheer magnitude of additional TL supply that came into the market is the primary driver. Supply has well overshot demand and now the excess supply is correcting lower as suppliers re-calibrate or exit the market altogether. And this has all happened over a tepid but stable demand environment, which has bounced along at roughly flat Y/Y levels most of this year. At this point, we believe any material changes in the demand environment from here will only impact the shape of the upcoming inflationary leg of the cycle.

LM: What are some basic examples of how the supply-and-demand indicators are demonstrating the market is at an inflection point, with demand heading up and subsequently driving spot rates heading into Q4, etc.?

Pickett: The most direct indicator is the behavior of the Coyote Spot Market Index itself, or the green line shown on most of the Coyote Curve charts. As the Q2 read came in at -24.9% vs. Q1’s -20.4%, it becomes the next eligible inflection period which can only be confirmed if Q3 comes in somewhere north of -24.9% - which is so far trending that way. The only things that can cause a deflationary inflection point is demand suddenly surging relative to recent history, or enough of the supply side either throws in the towel and exits the market or collectively holds firm on the lowest spot price it is willing to haul for and a floor is set. Given the lack of observed demand surge, which is further confirmed by most of the leading indicators for TL demand like industrial production, imports, and inventory levels, we believe that it must be an accelerated rate of supply shrinkage that has put in this particular floor in place – if the Q2 inflection point is indeed confirmed.

LM: What will be some of the biggest challenges for truckload shippers in 2020?

Pickett: Given the current trajectory of the market, we believe most Shippers should look back to 2017 as a model of how 2020 could unfold. In the initial stages of an inflationary leg of the cycle, Shippers that are big enough to have both contract and spot market exposure tend to struggle with primary tender acceptance, on-time performance, and transportation budget compliance. As routing guides begin to break down, unplanned spot market exposure builds, and bad things tend to happen from there if shippers haven’t prepared themselves. Shippers that tend to be more biased to the spot market will likely see rates go up in general while experiencing some of the same service level issues if they are forced to broaden the network of carriers they use to support their business.