Why trucking rates frequently change

Figuring out how trucking spot rates change isn’t too tricky. If the number of trucks entering city A increases at a slower rate compared to the load volumes moving out of city A, then the spot rate goes up. On the other hand, if the number of trucks entering city B increases at a higher rate than the load volume, spot rates go down. If the spot rates are staying relatively constant, it is a signal that real-time demand and supply are in harmony with each other and increasing or decreasing at approximately the same rate.

The market for trucking spot rates is quite volatile. The rates change throughout the day, in the same way that rates for securities move in a stock market. It is interesting to note that the trucking spot market accounts for only one-fifth of the truckload volume. However, the spot rates determined in this market are often the predictors or basis of deals being struck outside the market. If there is a 10% sustained decrease or increase in the spot market, it is usually preceded by a 3-6 months change in the contract.

As mentioned above, the spot rate market is pretty volatile. There are many reasons for this. Weather events or any other catastrophe can cause sudden changes in the market. Certain times of the year bring in large shippers, which moves the market as well. Other factors include unexpected demand for rush shipments, missed deliveries, or large changes in demand for frequently shipped products.

Due to the big impact on costs, shippers have to keep a close watch on trucking rates, which in some cases can be a resource-intensive activity.

Forecasting trucking spot rates isn’t so easy. But there are some freight indexes that give a good idea of the trucking rates, almost in real-time. These indexes give an indication of or are affected by, tender reject rates, tender volumes, and other variables.

Let’s take a look at some of these variables in detail.

Tender Load Volumes

This refers to the electronically registered incoming and outgoing truckloads. If the value of registered tenders is declining with the trucking capacity staying constant, it results in the spot rates going down. Since the market considers both incoming and outgoing truckloads, if there are more trucks coming in but less going out, it means the demand is less whereas the available trucking capacity is increasing. This again results in the spot rates going down.

Tender Reject Rates

This refers to the rate of rejection of tenders in the market. A typical rejection rate could be 10% as an example. This means that out of every 100 truckloads, 10 are being rejected because there aren’t enough load carriers. This means the demand for truckloads is greater than the availability of carriers. This usually results in the spot rate increasing to adjust the resulting imbalance between supply and demand.

Headhaul/Backhaul markets

These refer to freight indexes that gauge the outgoing/incoming volumes ratio. A headhaul market is when outgoing shipments are greater than incoming shipments. Spot rates for incoming loads go down as more and more shippers want to enter such a market where outbound spot rates are high and they can return with a well-paying shipment.

A backhaul market is the other way round. In such a market, incoming loads are much greater than outgoing loads. This means fewer people want to enter this market, increasing the incoming spot rates. Since the demand for outgoing loads is lesser, the people entering this market will have to return with a low-paying load.

Tender Market Share

This is a measurement of the market size for load volumes that are tendered. This is generally an indication of market liquidity. Higher the liquidity, lower the volatility in the market. If two cities have a very high load movement between them, the spot rates will not change as dramatically as they will between two cities where loads arrive less frequently. A rarely traveled shipping route will not be preferred by most shippers resulting in dramatic day-to-day changes in the spot rates.