So far, 2021 has been favorable for carriers. First-quarter demand for trucking has been high and capacity remains tight due to elevated shipping needs, government stimulus payments, winter weather, and more. Here’s what shippers can expect as the season unfolds.
Capacity and Volume Fluctuations
According to the DHL Supply Chain Pricing Power Index, carrier key performance indicators (KPIs) are unusually strong. Given a 25% increase in spot market rates, many carriers have been selective and rejecting contracted freight in favor of spot market loads. Scarce capacity is impacting some regions, particularly the Midwest. The West Coast, however, is seeing improved capacity as carriers have realigned to address rising tender volumes in the region.
An extreme semiconductor shortage is also impeding new truck production. The COVID-19 shutdown caused a surge in demand for home electronics in 2020, leaving a supply backlog for truck manufacturers, who need semiconductors to build today’s technology-dependent trucks.
Meanwhile, retail sales jumped 5.3% in January, far higher than expected, reversing three months of decline. The surge is likely fueled by the second round of government stimulus checks distributed to consumers in late 2020. Spending should get another boost from stimulus payments coming this month. Economists expect a spending shift from products to services later in the year due to consumers receiving COVID-19 vaccinations, which will likely bring a decline in shipping. However, brisker economic growth, lower unemployment, and a $2 trillion stimulus package should moderate the impact this will have on freight demand.
Produce Season Update
Domestically, produce season has gotten off to a stronger start in some parts of the US than others. Due to severe crop damage from February’s polar vortex, weekly truckloads of domestic produce are down 18% year over year. The Rio Grande Valley freight market in Texas expects only three of 40 crops to survive: onions, cabbages and potatoes. Only 45% of the current grapefruit crop and 5% of the Valencia orange crop are expected to make it to market.
However, while domestic produce volumes have shown some initial slowness, overall volumes have been on the rise since February with imported volumes (mainly coming from Mexico and South America) up 30% year over year. Produce volumes are currently about 60% imported and 40% domestic, but those numbers are expected to reverse this summer, with domestic produce expected to make up 65% of truckloads by July.
Outbound reefer spot rates in Fresno, the largest produce market in California, have been climbing for the last four weeks, now up 11% month over month, and the USDA has reported a shortage of trucks in California, Washington and Florida. With capacity tightening quickly, expect spot rates to continue to rise in the coming months.
Flatbed Transportation Shifts
The flatbed sector is tied closely to industrial production and construction. Industrial production has yet to fully recover from the pandemic, leaving steel in short supply due to a lag in getting idled furnaces up and running again. As a result, the automotive, appliance, and aerospace industries are having difficulties procuring cold-rolled steel.
The construction industry has been far more resilient during the pandemic, especially the residential segment where urban dwellers are flocking to rural communities. A 29% increase in demand for single-family homes has produced greater demand for transporting building materials and lumber, and a busy year for the flatbed industry. Industrial construction demand is low currently, but flatbed expectations are high for 2021 overall. Once COVID-19 abates, businesses will likely begin construction on paused projects that require more economic certainty.
Contract Rate Outlook
March is shaping up to be a better month for contract freight. As the US recovers from February’s extreme weather, piping-hot rates on the truckload spot markets have begun to cool. During the first week of March, reports show that spot load posts on DAT Freight & Analytics and Truckstop.com have decreased 12.4% and 9% respectively. Despite this change, overall volumes remain very high, which indicates that contract carriers are taking on more freight. Given the dry van freight cycle, and the historical lag between spot and contract markets each year, active contract rates should peak by the end of Q2.
Mini-Bid Trend
Last year’s volatility has led to a new trend in transportation: mini bids. When tight capacity drives up spot market rates and carriers reject loads, shippers must contend with budget overages. Mini bids are opportunities to re-assess transportation spending based on changing market dynamics in specific areas of your freight network. Used to address new or problematic lanes within a network, mini bids enable shippers and carriers to renegotiate rates for the lanes. This helps shippers avoid costly spot market rates.
Mini bids work like a reverse auction, covering runs on a small number of lanes where capacity imbalances are prominent and primary carrier rejection rates are highest. The result is better rates and found capacity, even during the toughest conditions.
Shipping Capacity When Demand Peaks
The first quarter of 2021 has challenged shippers, but a shift should bring relief later in the year. Shippers facing capacity constraints can consider mini bids to find extra capacity at more affordable rates as needed. Capstone Logistics runs mini bids on a weekly, monthly, or quarterly basis, focusing on new or existing lanes. Contact your Capstone representative to learn more.