With spot rates slipping further in March and April — resulting in a historically large spread between spot and contract rates — experts say that shippers, carriers, and third-party logistics companies (3PLs) should carefully consider which rates work best for them.
“The market has softened and there are more trucks available than there are per loads,” Aaron Angus, general manager and partner at RCT Logistics LLC, a Rocky River, Ohio-based 3PL, told Transportation Today. “That in turn means that people are paying less to transport their goods.”
If a company is using rates for 2021 or 2022 versus where rates are at now, then they are paying over current market value, Angus said, noting that rates were at their highest in 2021 so any contract rates from that time are going to be higher than current spot rates.
In fact, national average rates in April for contracted freight were lower compared to March but the spread between contract and spot rates rose to near all-time highs: 62 cents for van freight, 60 cents for reefers, and 66 cents for flatbeds, according to DAT Freight & Analytics, which operates the largest truckload freight marketplace in North America, as well as DAT iQ, an industry-leading source of market analysis and truckload pricing data.
Ken Adamo, chief of analytics at DAT, also said that spot rates decreased in March for shippers, carriers, and 3PLs. “It’s not unusual for spot rates to decrease in March compared to February, but this year the decline was steep,” he told Transportation Today.
One reason involves demand, Adamo said. Shippers turn to freight brokers and the spot market when they need to move freight they had not planned for or that their contracted carriers cannot cover.
“Right now, contracted carriers are meeting shippers’ needs for capacity,” said Adamo.
Another reason is the supply of trucks, he said. While March was the strongest month for van and refrigerated freight volumes on the spot market since August 2022, more trucks were available to haul those loads.
“The national average van load-to-truck ratio — which measures the number of van loads on the DAT network relative to the number of trucks — reached its lowest point since May 2020,” Adamo said. “Shippers have had no shortage of capacity to choose from.”
Adamo called the spread between spot and contract rates “an indicator of where we’re at in the freight cycle — the balance of bargaining power among shippers, brokers and carriers.”
And for the gap to close, two things need to happen, he said.
“One, the supply of trucks on the spot market needs to diminish, which unfortunately means more carriers exiting the market,” Adamo said. “Two, there needs to be higher demand for trucks — in other words, shippers with more loads than they planned for.”
In 2016 and 2019, it was precisely the third week in May when the spot market entered a recovery phase after prolonged declines and stagnation, according to Adamo, who said seasonality kicked in and shippers needed more trucks to move fresh produce, construction materials, imports and summer and back-to-school retail goods.
“If we see an uptick in demand before Memorial Day, it will be a welcome sign for owner-operators and small carriers as we head into the summer and fall,” he added.
Rates: Pros & Cons
RCT Logistics’ Angus outlined the advantages and disadvantages of spot rates and contract rates for both customers and brokers/3PLs, and said companies should determine which option is best for them depending on their makeup.
For example, “a company that has a lot of service offerings of different types of transportation like we do prefers to have a good mix of both,” said Angus.
Here’s how he views the rates:
Advantages of spot rates for customers:
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They represent the current market conditions and usually you pay less.
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You can receive spot rates back usually very quickly.
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Most of the time rates are all in so you don’t have to worry about calculating fuel prices.
Advantages for spot rates for brokers/3PLs:
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You can get pricing back to customers quickly and efficiently.
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You can win freight faster and usually book freight the same day.
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You have more flexibility to adjust rates as the market shifts.
Advantages of contract rates for customers:
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You are able to project your transportation cost more accurately.
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Most of the time you are utilizing the same carriers so you can build a better relationship.
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You don’t have to spend time day to day looking for trucks.
Advantages of contract rates for brokers/3PLs:
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Having consistent freight allows brokers to build up a more reliable carrier base.
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With contracted rates you can better forecast your earning potential for the year.
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When market conditions soften you can usually see an increase in gross margin percentage.
Disadvantages of spot rates for shippers:
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If the market adjusts upward, then you are paying more than anticipated.
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Going with a low-cost provider means you don’t build up the best relationships with carriers.
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You spend more of your day-to-day time looking for equipment.
Disadvantages of spot rates for brokers:
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You spend more time looking for the most cost-effective carrier.
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You don’t have enough consistent freight to offer carriers.
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You have to continuously be attuned to the market because it can change on a day-to-day basis; if you don’t adjust your rates, then you can lose freight opportunities.
Disadvantages of contract rates for customers:
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It is a very timely process to put together a complete bid for a customer.
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If you put in contracted rates and the market softens, then you could be overpaying for your freight.
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You essentially put all your eggs in one basket with your contracted carriers. If new lanes come available, then you have to start the whole process again or do a “mini” bid.
Disadvantages of contract rates for brokers:
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It can be very time consuming and labor intensive to do a large RFP for a customer.
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If the market tightens, then your rates may be too low to make a profit so options might be to turn down freight or take freight for a loss.
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If contacts are too long, then it might not reflect the current market conditions and a contract that was profitable could become unprofitable after a period of time.
In his opinion, Angus said that during the current market, more customers are looking at “spot” or “all in pricing” because it’s easier for them to pass that cost along to their customers.
“We feel that a good mix of contract rate and spot rates is about 60/40,” Angus explained. “We like to have a majority of our freight on what we call ‘short term’ contracted rates. We typically only try to hold rates for one year or less because of the volatility in the marketplace.”
Additionally, he said, RCT needs contract pricing to have a solid foundation to build its business. “We feel that RCT being a broker gives us an advantage over asset-based carriers in the fact that we don’t have as much overhead,” said Angus. “That allows us to be more flexible to the market and to make decisions that will help us maximize profitability.”
RCT also thinks that when the market fluctuates more rapidly like it has in the past few years compared to what the industry is used to seeing, then spot rates become essential in helping both customers and carriers in getting their freight moved.
“Contract rates are good for building the foundation of your company. In terms of projecting growth they are a much better indicator,” Angus said. “They also are better for building and forming lasting relationships with customers and carriers.”
More insight
Rachael Willis, who handles inside sales and customer service for Ohio-based River City Wood Products, one of the nation’s leading pallet supply and management companies, thinks that the advantage of spot rates in a loose market means that the best rates are available.
“The con to that in a tight market is that the rates are extremely high,” she said. “A contract rate advantage is we always know what we are paying. The disadvantage would be if the market softens, we might be overpaying.”
At River City Wood Products, Willis said the best option is determined on a lane-by-lane basis.
“If we have a lot of volume for the same lane, we tend to utilize a contract rate,” said Willis. “If it’s a random lane, then we utilize the spot market.”
And because of the volatility of the market lately, Willis said “it seems like it has been more spot rate or shorter-term contract rates. For example, instead of the same rate for the entire year, it might be for a quarter.”
Adamo at DAT Freight & Analytics pointed out that for years, spot van rates oscillated around $1.50 a mile because that was about break-even for a trucker when fuel was stripped out of the equation.
“There were bumps here and there but no structural inflation in the truckload freight market. This has changed significantly,” Adamo said. “After a long decline, spot van rates flattened out during the latter half of April and have been steady entering May.”
Adamo added that spot and contract rates need to converge before the next cycle can start. The gap between spot and contract rates for van and reefer freight was near all-time highs in April and while contract rates have a lot of room to fall, “shippers remain in an exceptionally strong negotiating position with their brokers and carriers,” he said.
“There’s always the prospect that some outside event could kick-start demand for trucks on the spot market. A port strike, for example, or an active tropical storm season,” Adamo said. “That’s when shippers’ networks become imbalanced, and they turn to freight brokers and small truckers who have the expertise and network to keep supply chains moving.
“The ripple effect on supply chains can last well beyond when the event occurred,” he added.