Carrier Rate Hikes: Supply and Demand’s Perfect Storm

LDL Voice

Estimated reading time: 2 minutes

The capacity crunch of 2017 has arrived. We first discussed this issue in January, anticipating it as one of the major impacts on transportation pricing this year. A strong economy, rising operating costs, and regulatory pressures promised to increase demand for shipping and raise prices. That’s how the economic laws of supply and demand work: as the supply of available shipping capacity decreases, shippers are willing to pay more to secure the capacity they need. Indeed, now that the U.S. has been battered by hurricanes in Houston and throughout Florida, with more on the way, the effects on supply and demand has become even more dramatic.

Harvey and Irma Wreak Havoc on Routes

Transportation supply fell as soon as Harvey made landfall. Houston is home to many distribution centers, but after the hurricane’s widespread destruction and flooding, supply chains were forced to react and shift quickly. Shippers from Atlanta rushed to supply the many retailers normally served by Houston. The Midwest stepped in to cover Colorado. Then, the Northeast filled the gap left in Atlanta (Fleet Owner).

Hurricane Irma disrupted supply chains further, but because Florida has no major distribution centers and the produce growing season has passed, the surge of goods moving into the state is the reason for tightened capacity. While evacuations caused a threefold increase in commercial vehicle activity just before the storm, cargo will now head back into Florida for relief and repairs. With diesel prices of $2.80 per gallon, sketchy post-storm road conditions, and state-wide fuel shortages, the circumstances will repel some drivers, but most will simply demand higher rates.

These shifts in normal supply patterns have left many shippers scrambling to find needed capacity. The capacity crunch will only worsen with the ELD (electronic logging device) mandate’s approaching deadline. Because only about 40 percent of the industry is currently compliant, some drivers and trucks will surely be put out of service come April 1. Some drivers are even expected to quit truck driving altogether rather than comply (Trucks.com).

How Truckload Capacity Moves Price

Increases in demand and shifts in normal freight patterns are reflected in higher spot market rates, which should continue for six months or longer as the affected regions rebuild. By September 9, the four-week national average for dry vans had climbed from a low of $1.60 to $1.93.  Rates for flatbeds, in demand for moving heavy machinery and debris, also rose sharply from $1.89 to $2.24 while reefer rates jumped from $1.89 to $2.18 (American Trucker).

Regardless of the cause, rates are always determined by supply and demand. A higher volume of loads means fewer trucks are available on the spot market, which drives up competition and rates. Other contributing factors include seasonal fluctuations, the pool of qualified drivers, and regional considerations that can make some routes unattractive. In the case of hurricanes, trucking companies typically charge more to move freight in and out of affected areas because they often experience slowdowns. A truck may have to wait several days to get unloaded or refuel, and finding loads for the backhaul can be difficult when businesses are shuttered. Charging higher prices compensates carriers for the extra time and challenges involved.

Getting Around Tight Capacity

Whatever the cause, working with an experienced 3PL can ease the burdens shippers face when capacity dwindles. With a larger network of experienced carriers that fit niche markets, 3PLs are agile and well positioned to manage overflow freight and work with shorter lead times since they don’t have to reposition physical assets. For carriers that have trouble getting out of certain regions and are looking for backhaul opportunities, a 3PL can help source the necessary freight to keep them moving.  

Economic change is inevitable in any marketplace and LoadDelivered has experience helping customers and carriers navigate challenges along the way. Contact your LoadDelivered representative to learn more about the people, processes, and technology that can keep your supply chain moving during this “perfect storm” and whenever you need it most.  

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