North American Freight Market Insights

TOP STORY: Plan for the holidays even in a soft market

With today's truckload market over supplied, it is likely that the Thanksgiving and December holiday season will mimic the softer cycle impacts.

While the cycle peaks and valleys through the holidays are likely to be manageable, approaching these cycles with intention will always result in the best performance and highest service.

Below we offer Thanksgiving and year-end holidays. The first visual is Thanksgiving and the second one the period December 15th through January 11th to cover the multiple holidays. Displayed are DAT's spot market LTR (Load to Truck Ratios) for dry van in the USA. The days before the holidays are marked as negative (-) days and plus (+) days are those after the holidays. Only working days are depicted—weekends have been removed.

While predicting precisely when the truckload spot market will turn toward balance is difficult to forecast, oil and diesel pricing might be a helpful lens to the rate of capacity contraction and line of sight to market balance. Below in this report we offer our spot market forecast and the EIA's diesel outlook.

Note the reduced LTR the day before Thanksgiving in the average (blue line) and tight (orange line) years. Take care to assume this is a good day for delivering. The details of the data suggest that both load postings and truck postings are down, leading to a false sense that capacity is readily available the day before the national USA holiday. The spike after the holiday is a product of shippers catching up from being closed for the holiday and a staggard return to work for drivers who took the holiday off.

This is a loose year and, as such, we can expect a spot market experience like the green line.

There are multiple holidays represented in the period shown below, with Christmas and New Years being the most impactful and noted. Consider that a low-tension year like 2023 will have less impact to the spot market LTR than displayed in this national average. It is noteworthy that at year end, the spot market LTR and cost per mile rises to year end. This is a result of drivers’ holidays (slightly lessened capacity) and final year end deliveries to help bolster annual sales (slightly higher volume). The first of the year loosens as drivers return to work and freight volumes are slow in the early weeks of every year.

Key consideration should be given for holiday delivery. Regardless of a tight or loose market, all shippers should consider the impact of delivering on the days just before or immediately following a holiday. The spot market is where some variability in pricing and load acceptance may appear. Contract TL route guides will experience little to no material impact based on other research C.H. Robinson has worked on with MIT's Centre for Transportation and Logistics.

In conclusion, 2023 will likely offer few challenges and strong trucking performance through the holiday season. As 2024 truckload strategies are constructed, consider that the end of year market performance for 2024 will likely offer greater variability and under performance and long-range planning may should consider delivering strategies to mitigate performance and cost variances.

Dry van is the largest segment of the truck market. It is often the primary reference for the U.S. truckload market’s performance. The market of late has displayed some unremarkable changes in tension, as can be seen below in the red line. While outperforming 2019, load to truck ratios (LTR) are still below the five-year averages of ~4:1, but more balanced than they have been for some time.

Week 45 shows a 5-year average of 3.25:1 and a current ratio of 1.8:1.

 

The refrigerated spot market TL shows a similar unchanging pattern to van. The 5-year average for week 45 is 7.5:1 with week 45 offering a 3.4:1 LTR.

 

This years LTR is rather low historically and patterns show very little change. The weekly LTR has been bouncing just above and just below 6:1 since week 29 and since week 40 there has been a continually softening 5-year average. The 5-year average inflects up slightly at about week 48 to end the year, around 25:1. Week 45 this year showed 5.1:1 against the five-year average of 19.5:1.

 

National averages are helpful for aggregate perspectives of the market. Trucking, however, is a very regional business. Each week displays the varying experiences of the trucking market. Shown below is week 45: 5-11 October, 2023.

Some markets are in balance, while others may be over or undersupplied and other markets may have little trade and freight. The freight experience in each market influences truckload capacity strategy and that experience will vary with annual cycles.

Sponsored research by C.H. Robinson, with MIT's Centre for Transportation and Logistics, has shown that there are four primary market segments: 'balanced' trade corridors, 'headhaul' corridors, 'backhaul' corridors and 'sparse' corridors. Shipper freight attributes combined with the market segment capabilities shape capacity strategies from committed to spot market strategies. Connect with your C.H. Robinson representative to learn more about our Procure IQ^TM experience and our researched insights that can help to develop a more capable truckload strategy.

Dry van displays a low level of tension across the United States, with East of the Mississippi and the West showing some balance. Yellow coloured regions are displaying relative balance and markets with warmer colours representing markets with some tension for the week. Week 45 shows a five-year average of 3.25:1 and a current ratio of 1.8:1.

 

Refrigerated trucking offers a portfolio of market environments, with a national average well below the five-year average. The peak produce seasons for much of the USA and Canada have passed. The fall markets, with the Northwest harvesting apples, WI harvesting cranberries and ND offering sugar beetroots, are coming to a close. Additionally, the increase in meat consumption ahead of US Holidays of Thanksgiving and Christmas, originating from IA, WI and NE, contributes to the portfolio of goods that are both refrigerated and van serviced across the northern half of the country. Week 45 shows a five-year average of 7.5:1 and a current ratio of 3.4:1.

 

Today’s flatbed spot market LTR continues to show prolonged regional tension in the South from Louisiana eastward. Broadly, the flatbed market offers plentiful capacity for spot and contract services nationwide. Week 45 shows a five-year average of 19.5:1 and a current ratio of 5.1:1.

 

Contract trucking strategies and agreements are characterised by freight and lanes with reasonably predictable demand patterns. where spot truckload services are typically utilised for lanes with low volume or irregular demand patterns or simply poor economic trade corridors. Transportation budgets are shaped by modelling the plannable and unplannable freight baskets in a shipper's portfolio as well as allowing for some under performance level in the strategy.

Most (75%-85%) of the U.S. for-hire truck market is moved through commitments most often managed via hierarchical route guides and dedicated truckloads. Today's market offers shippers the opportunity to place lanes with less predictable demand patterns into contract awarded route guides, moving closer to or at the 85% of freight in contract.

The majority of shippers' freight portfolio is managed through contracted capacity and pricing arrangements. These truckload agreements are most often managed as committed pricing for six or 12 months at defined load volume awards. Most successful execution of these agreements are in Transportation Management Systems (TMS) where loads are tendered to transportation providers. Those tenders are accepted or rejected. Two key metrics are used to discern the success of the truckload award plan. First Tender Acceptance (FTA) is the percentage of tenders awarded to transportation providers that are accepted. Route Guide Depth (RGD) is an indicator of how the back-up transportation provider strategy works if the awarded provider rejects the tender. A robust trucking budget should plan for less than 100% tender acceptance due the reality of forecasting by the shipper and capacity communities. In today's market, that variance to performance is small and incremental costs for back up strategies are lower penalties than tight years like 2021 and 2018.

The following insights are derived from TMC, a division of C.H. Robinson, which serves a large portfolio of customers across diverse industries throughout the United States.

These insights are from the week of 5-11 November and also reflect on RGD from the month of October 2023.

The regional view of route guide performance displays a pattern of high performance in all regions. The October North America average RGD average of 1.15 (1 would be perfect performance and 2 would be very poor performance) is the lowest/best RGD for October in the last six years. The North American average RGD has been consistent for some months now just above and below 1.15 with October's 1.15 a 2% improvement m/m and 5% improvement y/y.

Week 45 continues to post the national average RGD of 1.12. All regions of the USA experienced similar route guide performance. This view of contract truckload route guides performing exceptionally well is yet another evidentiary point that the truckload market continues its pattern of oversupply.

Overall, route guides are performing very well, with primary service providers accepting loads at pre-pandemic levels and the first backup provider accepting rejected tenders most of the time.  

As we noted in last month’s report the robust balance sheets that are making the economy (both consumers and corporates) more resilient to higher interest rates and we believe this also applies to carriers being more resilient to low spot rates. Carriers did participate in Pandemic stimulus programmes, including the payroll protection loan programme and we believe this helped fortify their balance sheets, but the real driver was the sky-high rates/mile we saw during the pandemic. After a 2-month period starting April 2020 where rates fell sharply below carrier breakeven, rates shot up very quickly, went higher and stayed high for longer than previous cycles. We believe this led to windfall profits for all carriers. We think these windfall profits enable many IOOs and very small carriers to pay off equipment loans. They also allow larger carriers to increase their tractor counts and accelerate their tractor upgrade cycle. We have noted elevated OEM class-8 tractor production levels numerous times as a key driver of cuts in our 2024 truckload cost forecast.

We will take this one step further and look at Independent Owner Operators (IOOs), that is one truck carriers where the owner is also the driver. Most owner operators have no fixed overhead, that is no employees or premises. They are jack-of-all trades entrepreneurs, some do their own maintenance and even rebuild their own trucks. However, the flipside is they haven't got any benefits of scale and they tend to run more deadhead miles than larger carriers. The trucking industry is highly fragmented, the majority of carriers in the US are one-truck owner operators. The U.S. trucking capacity is skewed toward these very small carriers and owner operators, many of which are our contract carriers.

In the chart below we show DAT broker-to-carrier spot rates (left axis- blue) and our estimates of the weekly economic profit of an owner operator (right axis) over several truckload rate cycles since 2014. By economic profit we mean the profits after the owner has extracted salary/benefits equivalents. We have been driving home that the amplitude of the cycle has been increasing, that is spot rates move much faster, driving higher peaks than the rate of underlying truckload cost inflation. We have noted this is driven by several factors, but probably the most important is faster price discovery driven by technology and electronic linkages. We based the owner operator breakeven on the ATRI Operational Cost of Trucking annual survey and made some assumptions (miles/day, per cent deadhead miles etc.) however it’s really the magnitude of the profits generated vs previous cycles that we are focused on. We estimate that in the 2014/15 cycle owner operators generated around $400/week of peak windfall profit, this jumped to $600 in the 17/18 cycle. Weekly windfall profits then exploded to $1500/week during the peak rate weeks of the Pandemic cycle. We believe that this increasing carrier profitability across cycles, which we also observe in public carrier earnings reports, is driving the increase in new carrier formation we have seen in recent years.

Source:Evercore ISI

If we look at this same owner operator economic profit model from a cumulative perspective, we can see that the owner operator earned more than enough in cumulative economic profit during the Pandemic upcycle to pay off their truck. We show this in the chart below, replacing DAT broker-to-carrier rates with used truck pricing for 4-year-old trucks from ACT Research and replacing the weekly profits with cumulative profits. According to data from ACT Research, the 4-year-old used class-8 tractor prices averaged $52K in the 4-year period from 2017-2020 (with lows of $37K in 2017 to highs in the $65K range in 2019). Of course, older trucks could be had for less and vice versa. We estimate the cumulative profits owner operators had amassed went higher than the $52K average truck price in 2Q21. Furthermore, we estimate that peak owner operator cumulative economic profit reached $93K 1Q22, almost double the $52K average cost of a 4-year-old truck in the 4-years leading up to the pandemic. This analysis tells us that if the average owner operator saved at least half of their economic profit in this period, they had the means to pay down their equipment loan and purchase their truck outright.

Source:Evercore ISI

We had also noticed a discrepancy in the 2023 ATRI Operational Cost of Trucking benchmarking survey that showed carriers with <26 trucks had a truck financing cost/mile of $0.22 while carriers with 26-100 trucks were paying double this cost/mile in equipment financing. Larger carriers generally get lower interest rates and volume discounts on equipment. A thesis emerged from this that these very small carriers or owner operators had paid off their equipment loans and owned their trucks outright. The above owner operator cumulative economic profits model validates that owner operators had the means to pay off their trucks, so we kept in touch to the carriers we work with via survey to confirm if this was the case. We surveyed just over 200 owner operators that work with C.H. Robinson and just over 50% of them had paid off their truck loans in full. In addition, the majority of owner operators that had not fully paid off their truck loans had paid off at least half the balance. We think that these high rates/windfall profits realised during the pandemic upcycle fortified balance sheets of all carriers and that this is the primary reason that carriers can operate with rates below our breakeven estimate of $1.55-1.60/mile for an extended period vs previous cycles where breakeven created a “hard” floor in spot rates.

However, we do believe carriers are starting to struggle here due to the following dynamics:

1. Carriers formed at the peak of the market paid much higher truck prices.
   • Tractor costs increased significantly from pre-pandemic levels. Used truck prices doubled but have given back some of their gains, while new truck prices increased less but have remained at high levels.
2. Interest rates have more than doubled since rate hikes started in March 2022
   • Adds expense to trucks financed at higher purchase prices (see #1) and not paid off in full.
3. Blended contractual rates continue to move down towards spot as higher rate legacy commitments roll off and are renewed at lower rates placing pressure on margins.
4. Truckload down cycles have been deflationary, that is we observe y/y declines in at least some carrier cost line items. This can include the larger line items such as driver wages & benefits (over half of linehaul), maintenance & repairs, equipment financing and insurance. However, this cycle has been an anomaly vs previous cycles as inflation has been running so high in the broader economy. We think all these cost items mentioned above are flat at best in 2023 vs 2022 with some likely posting smaller increases. This means apples-to-apples carrier breakeven cost (normalising for carriers who paid off their trucks) will be increasing in the second year of this downcycle.
   This is somewhat offset by the below two dynamics- the first is a secular shift that has been going on for some time, it does not apply to owner operators and most smaller carriers generally, but it does have legs. The second is more short-term in nature and could reverse quickly.
5. We have observed a significant shift in tractor counts in the public asset carriers from their One-way/Over-the-road segments to their Dedicated segments. This helps insulate these carriers in a downturn because it provides them with a higher rate-structure and these rates get renegotiated over a multi-year timeframe as opposed to annual RFPs, shorter term mini-bids and transactional rates carriers see in the One-way/Over-the-road segments. We believe that this also applies to larger non-public fleets.
6. The recent drop in crude oil prices from as high as mid $90s entering October to current mid-to-high $70s. This is starting to be reflected in diesel prices and will at the very least give carriers some near-term relief from high diesel prices. Our view on oil/diesel is that an economic slowdown will place some downward pressure on oil prices, however we do think years of underinvestment in supply means that the longer-term trajectory of oil is upwards.

We are raising our Linehaul 2023 carrier breakeven band estimate from $1.55-1.60/mile to $1.65/mile to reflect continued inflationary pressures in the 2nd year of a downcycle. This breakeven estimate/band is proving less useful in this cycle due to many of the dynamics that we have noted in the above paragraphs. However, it is still important to estimate these breakeven levels, even if they differ significantly for different carrier segments, as they do ultimately set the floor for how low rates can go over the medium to long term. While we do not yet know where this breakeven estimate goes in 2024, if we assume it remains flat with 2023 at $1.65/mile, this represents an almost two-fold increase in the annual rate of truckload operating cost inflation from a low 2% CAGR in the 10-year pre-pandemic period to a 4% CAGR from 2020-2024. (The breakeven estimate is a product of ATRI (American Transportation Research Institute) 2022 cost per mile operations cost and our analysis of the first three quarters of 2023 operations costs of public trucklines.)

As a result of robust carrier balance sheets and continued elevated supply we are cutting our Dry Van truckload cost forecast again, from +9% growth in cost in 2024/2023 to +3% growth. The owner operator that has paid off their truck likely has a breakeven cost that is $0.20 - 0.30/mile lower than those that did not, depending on the age of the truck. Of course, there are other factors to consider such as trailing equipment, however we note the trailer could be paid off also and of course older trucks require more maintenance. We think the breakeven cost/mile for owner operators that have paid off their trucks is likely in the $1.30 - $1.40 range. In addition, we think some smaller carriers are experiencing similar dynamics to the owner operator from these windfall economic profits. However, there is also a smaller proportion of carriers that were formed at or near peak spot rates when truck prices were also very high and we believe those are the carriers that are currently struggling the most or already have left the market. However, on balance, we think carriers are more resilient this downcycle due to these dynamics we’ve discussed and this will likely slow the exit of excess capacity and keep rates at lower levels for longer than we previously thought.

Source:Evercore ISI

Our temperature control truckload cost forecast is being reduced again, from +8% growth in cost in 2024/2023 to +2% growth. Refrigerated truckload transportation tends to have greater volatility than dry van. The carrier community is smaller and more fragmented to the smallest of carrier fleet sizes. Additionally, fresh products (which are key to this transport segment) tend to have supply chains that with much less inventory, thus keeping a rather steady flow of replenishment and transport demand vs. dry van freight which can carry various levels of inventory that influences supply chain flow and freight volumes. These demand/inventory factors combined with less dense refrigerated supply (some fleets potentially operating mode agnostic to procure awarded freight given the lack of spot volume available) mean that when seasonal pockets flare up, they do so with a higher level of velocity.

DAT Rateview national dry van and refrigerated linehaul cost per mile is the broker price paid to carriers per mile, which excludes fuel surcharge. The C.H. Robinson forecast is an extension of that cost.

Like others, this forecast has been and will continue to be amended as economic forces shape freight volumes and the capacity community responds.

• The lighter blue line is representing dry van cost per mile
• The darker blue line is representing refrigerated cost per mile
• The solid blue lines are DAT Rateview’s broker cost per mile paid to carriers without fuel
• The dashed lines are the C.H. Robinson forecast for 2023
• Forecast change Y/Y is full year average cost/mile vs. full prior year average cost/mile

A final note on contract pricing
Contractual pricing remains low. If a shipper's contract pricing is exceptionally low, it is possible to experience some first tender rejections during the seasonal moves and higher backup pricing as the market experiences seasonal and regional pressures and year end market evolution.

The large portfolio of deliveries C.H. Robinson handles is just one of the reasons carriers choose to haul for us. With so many load options, carriers can more easily find loads that decrease operating expenses. This in turn creates more capacity options for shippers that work with C.H. Robinson.

Diesel fuel retail pricing
Retail diesel's national USA average price per gallon has moved from $3.86 in June to $4.52 in October, with recent softening.

In their 7 November 2023 Short-Term Energy Outlook, the EIA estimates 2023 (real retail diesel pricing) average price of diesel at $4.265 and 2024 annualised 2024 forecast at $4.253. For perspective, September of 2022 was at $5.17. The report also decreases its December 2023 average from $4.52/gal last month to $4.41/gal in this latest report.

This forecast offers a maintained higher diesel price than the years of 2015-2021. While elevated from those years, this is well below the peaks of 2022. Should global market influences to the price of oil amend this forecast and diesel rise, perhaps the owner operator carrier community will experience a more accelerated contraction of capacity which would accelerate the return to a balanced market.

Market insights

• Carriers report pricing pressure that is forcing tough decisions to pass on some opportunities that are not beneficial to financial results.
• Current spot rates are nearly impossible to be profitable for fleet carriers interviewed.
• Costing pressure is persistent from driver wages, new equipment and fuel.

Equipment and terminal insights

• Equipment and parts orders are being fulfilled, but new equipment costs are still high and continue to increase. Meanwhile used equipment prices continue to fall.
• Several fleets are taking advantage of the low market valuations and are making thoughtful investment such as opening/acquiring terminals. This is to help best position themselves for the long-term and the upswing in the market.

Drivers

• Continued conversion of drivers to short haul, regional networks getting them home more often. Length of haul continues to shrink in most networks.
• Continued conversion of owner operators to company drivers. Shifting capacity vs. reducing active capacity when this occurs.

A key value proposition of C.H. Robinson to our contract carriers is aggregating lane volume and demand pattern variability to a more predictable experience. Our carriers have more predictable volume from C.H. Robinson and as a result are interested in and able to offer consistent capacity and market pricing with high performance.

Places where the global supply chain meets North American supply chains—like ports and airports—are also affected by the cyclical market and other disruptors. Below we offer some of the notable current situations.

Most market ramps offer available chassis, containers and operating with good turn times. Below are locations with environments that can benefit from additional attention or are making notable investments.

• Savanna, Charleston and Jacksonville have a portfolio of projects that include lifting bridges and power lines so as to accommodate larger vessels.
• The SACP (South Atlantic Chassi Pool) 3.0 chassis pool will be launched in October of this year. The administrator of a new chassis pool covering the ports of Jacksonville, Savannah and Wilmington, NC.

• NY/NJ - There was a water main break that occurred last week causing major congestion in Elizabeth and Newark ports that could linger through this week (12-18 Nov.).

• Cleveland Chassis availability is critically low for Exports in the Cleveland market. The wait time overall is better, but still seems to be worse at the NS than CSX terminals.
• Columbus has some sporadic export chassis deficits. Overall wait times are improving and capacity is largely available.
• Memphis, TN A crane is down and currently there is no estimated return to service. This could affect deliveries and appointment times. There is also a potential for increased driver wait time.
  • New chassis pool is open that is designed to improve service due to use ability across rail roads.

• ITS Terminal/Long Beach is no longer receiving vessels
• Pier Pass charges increased November 1st
  • 40' = $71.14
  • 20' = 35.57

For a full market report on global forwarding, visit the C.H. Robinson Global Freight Market Insights.

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