KANSAS CITY — The March Logistics Managers’ Index that measures logistics and transportation health in the United States was at an all-time low in March, illustrating the slowdown in freight demand since the spikes in rates experienced during the COVID pandemic. Truck freight rates, which were severely affected by the pandemic, remain well below historic highs, but logistics challenges for carriers may well be opportunities for shippers in the form of lower rates and greater availability of freight.
Three years after the pandemic dropped a big stone in the supply and demand pond, ripples continue to emanate through the US truck freight market. Shippers planning logistics for 2023 can expect ample trucking capacity and increased demand. Millers, bakers and food manufacturers can expect less volatility than in other freight segments but should strategize the timing of their procurement events, be selective in choosing carriers and keep watch on diesel fuel prices.
Those are the recommendations of transportation analyst Jim Ritchie, president and CEO of RedStone Logistics, Overland Park, Kan., and an instructor of supply chain management at the University of Kansas School of Business.
He broke down the recent tumult in global supply and demand channels.
The outbreak of COVID-19, the ensuing precautionary lockdowns and the unprecedented stimulus payments threw consumer demand into hyperdrive, overwhelming supply chains based in many cases on just-in-time inventory management. With US warehouse supplies quickly depleted, orders were placed for restocking to be imported, mostly from China. That in short order overwhelmed some US ocean ports, especially in Long Beach and Los Angeles in southern California. Receipt of partial shipments or worse had some retailers quickly doubling and tripling orders in desperation to take advantage of the demand spike.
“Demand had reached over to the soft supplier base, and now it was working its way through the entire supply chain and so we had this huge spike,” Mr. Ritchie said. “Retailers didn’t know what the change in demand was going to be long term. Was it sustainable? Was it going to last much longer? What were the impacts going to be? All I know is that I have this huge demand that I’m not able to fulfill because I’ve got all my product moved out, and so I’d better double, triple, quadruple down on my order. The next upstream node, whether it’s a raw material supplier or a distributor, can’t supply it for the same reason, the spike, so they quadruple the order, but they’re only able to fill half of what a normal order would have been because they too have had the same phenomenon occur. The retailer says ‘I doubled my order and I got nothing. I’d better quadruple my order or multiply it times 10.’ They go into panic mode.”
The outbound tender rejection rate, a measure of how often US carriers turn down loads due to higher-priced offers elsewhere, spiked in March 2020 and plunged the next month before soaring again in July 2020 for what would be a multi-year plateau where 20% to 25% of all tenders were turned down.
“A lot of that is the big carriers because they were managing the yield and their pricing, but they didn’t add a bunch of capacity,” He said, referring to fleets with 1,000 or more tractors. By contrast, small (20 to 100 power units) and mid-sized carriers (101 to 999 power units) went a different direction, adding capacity at a rapid clip. As that capacity came into the market, demand began to soften, and “the laws of supply and demand took hold again, we’re seeing pricing drop back down,” he said.
As a result, big carriers remained on relatively stable economic footing when consumer demand waned from the lofty pandemic heights. But “I worry the small and mid-sized fleet operators are entering bankruptcy season instead of summer season, especially the smaller ones,” he said.
In the ensuing years, demand leveled off and declined and port congestion cleared. Consumer economic sentiments shifted from buoyancy backed by stimulus dollars from the US treasury to one of uncertainty on a variety of topics such as inflation, interest rates, war in Eastern Europe and the ramp-up of presidential campaigns ahead of the election in November 2024.
“It’s just a moment of uncertainty for everybody, so people will start to be a little more cautious, a little more conservative,” Mr. Ritchie said. “It’s just human nature. When things go crazy, like COVID and lockdown, the mindset is ‘I’ve got to protect my family so I make sure I can get as much as I can so that we’re safe and secure.’ That shifts to ‘let me be conservative so I can protect the things that I have,’ and that human nature aspect flows down through the trucking industry and the transport industry overall.”
The outbound tender reject index shared by Freightwaves indicates the level at which carriers pass on a load had dropped to 2.98% this month, nearly an all-time low, Mr. Ritchie said, after beginning a steady decline in early 2022.
“Talking to a customer today at lunch who said right now 97% of everything they tendered to the carriers that they’ve got under contract is getting accepted,” he said. “So they’re picking everything up. They don’t have to go to the spot market hardly at all, which helps the shipper manage their costs, but as demand comes back up, you’ll see tender reject rates start to come back up.”
Mr. Ritchie’s pricing outlook for 2023 sees no return to pre-COVID levels or lower. That’s partly on the increases in truck driver pay, which has gone a long way to staunch the flow of drivers out of the industry for retirement or work that keeps them close to home.
“Driver employment has increased even above pre-COVID levels,” Mr. Ritchie said. “We absolutely can see there are more drivers than we had before. Now obviously there’s also increased capacity. So, you need people to drive it. So that helps. There’s still a way to go, but it’s on the right track. The hardest thing about the driver piece is the lifestyle, especially for younger people. What was really interesting and backs up the lifestyle piece is the response of the smaller fleets, the owner-operator, or the guy with five trucks, guys you would think would want to make hay while the getting was good, make as much money as we can, work as much as we can because we’re getting paid sometimes twice as much as what we got paid a year ago. When the rates went through the roof as demand outstripped capacity, they opted to actually work less.”
The increased capacity and driver count will make it easier on US shippers when demand begins to rebound. Food industry shippers should keep an eye out for signals such as increases in the tender reject index and keep watch on the price of diesel fuel, which has softened.
“Diesel fuel at one point was almost a dollar a mile, but has continued to drop,” Mr. Ritchie said. “That’s going to help mitigate any potential price increases from where we’re at now and in some cases could continue to show a little bit of price contraction.”
Because it’s a relatively specialized segment, the food industry should continue to see less volatility than competing sectors, he said.
“They should know that,” he said. “The carrier will never voluntarily come in and drop their prices. There has to be some sort of a trigger event, and even though you’re in a specialized segment to be able to have your eye on the market to know where the market is going and to be able to come back and talk about keeping in sync with where the market is at.
“Although it may not be as pronounced, that volatility swing is something that I think will have a big effect, but just as prices have come down in the overall industry on transportation, they should be looking to trigger some sort of an event, whether it’s a procurement event or something along the lines of where we sit now, I believe we’re at a low point on transportation pricing, and I think if demand picks up, we’re going to see rates start to creep up.
“Right now what I would be thinking about is ‘is now the right time for me to put together a procurement event.’ I would look at the carriers that I have, look at how they performed during the high demand-low capacity environment of COVID. Did they raise a lot of the rates or did they maintain? And I would be selective in my procurement event if I had carriers that didn’t overreact and didn’t try and take advantage of me when capacity was short and demand was high. I would reward them and not necessarily include them in a procurement event in the lanes that they’re in.
“But what most shippers will find is that there will be not a broad-brush procurement event, but a targeted procurement event in those lanes where they have seen more volatility in rates and more volatility in tender rejections and take advantage of that and say, ‘That’s a lane where I need to be now while demand is low, to seek out good carriers I can contract with for the long term.’”
As the year progresses, the transportation picture may begin to clear as the recessionary environment is sorted out, labor issues are dealt with on the West Coast, the war in Ukraine continues, among other major domestic and global events, and grain and food shippers can better manage logistics after COVID ushered in what has likely been the most tumultuous period in the industry.
This article is an excerpt from the April 18 issue of Milling & Baking News. To read the entire feature on transportation and distribution, click here.