Chart of the week: Van Contract Rates Initial Report, Outbound Tender Volume Index – USA SONAR: VCRPM1.USA, OTVI.USA
July truckload contract rates are showing the first signs of contraction, according to FreightWaves billing data, which is pulled from a database of $20 billion in annual spend. Van contract rates (VCRPM1) have fallen more than 2% since early July to $2.87, breaching the $2.90 per mile threshold since early March.
The drop in contract rates appears to be caused by a drop in demand for truckload capacity, which persisted through the summer. The Outbound Tender Volume Index (OTVI), which measures shippers’ electronic requests for truckload capacity at previously agreed rates, fell 20% from March 6 to April 21 this year and has had an annual decline of about 18% maintained.
While the spot market for truckloads was immediately impacted by the drop in shipping activity, the contracted truckload environment remained largely unscathed.
The National Truckload Index (NTI), which measures the nationwide average truck spot rate for van loads, had been falling slowly since the beginning of the year but accelerated its decline about a week after the OTVI began its sharp downward slide. The NTI fell 6.3% from mid-January to mid-March and 14% from mid-March to mid-May.
It is important to note the differences between the spot market, which tends to get the most attention, and the contracted freight market. The spot market accounts for about 15-25% of the total truckload volume in the US. Tariffs are negotiated with an average lead time of up to three days and are generally only valid for a few days before they expire. Because of this, interest rates are much more volatile than their contracted counterparts.
Year-on-year (y/y) contract volumes have not deteriorated significantly up to this month. The Contract Load Accepted Volume Index (CLAV), which measures only accepted contract offers, was above or even at 2021 levels through May. June was the first month in over two years to show an annual decline averaging about 2 % was lower than the previous year.
With contract rates up about 11% year over year, heavily contracted airlines have yet to experience a significant revenue hit with only a modest drop in volume. The CLAV shows that things could change as we enter the third quarter.
Since July 1, the CLAV has shown an acceleration in annual decline, widening to 5% from an annual difference of 2%. Combine this with contract rate declines and it shows the first signs of contract market deterioration since early 2020.
How far will interest rates fall?
The current spread between contract and spot rates ex-fuel suggests that contract rates could fall another 14% if the spot market holds steady, but the timing is in question.
The spread between contract and spot rates was narrower than at the start of the pandemic, which was historically low. That begins to correct as contract rates fall.
Contract rates fell about 4-5% from late 2018 to early 2020, after rising 16% since 2017. The point is that contract rates are rising much faster than they’re falling, and they’re unlikely to contract quickly, but the current trend suggests they’ll keep falling.
JB Hunt’s newly appointed president, Shelley Simpson, declared, “We’re having a seasonally normal July,” which may have sounded positive. For those familiar with trucking, July is a slower month compared to June and this may have been a veiled commentary on what is to come.
About the chart of the week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point for describing the state of freight markets. A chart is selected from thousands of possible charts on SONAR to help participants visualize the freight market in real time. Each week a market expert will post a chart live on the front page along with commentary. Thereafter, the chart of the week will be archived on FreightWaves.com for future reference.
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