Date: Mar 04, 2015
Magazine:
March 2015 - Low Fuel Rates Welcome

Fuel rates are as low as they have been in years, which will have a positive impact on freight rates as long as the current situation exists.  However, that doesn’t mean freight rates are going to drop precipitously.

“By all means challenge your carrier about the cost dynamics,” said Luke Gowdy, general manager in the Salinas Valley office of C.H. Robinson.  “But we don’t expect a huge (freight rate) decrease because of fuel costs.”

Gowdy explained that when it comes to raw freight costs, there are three main components in the bucket, each with a fairly equal weight: fuel costs, equipment costs including the cost of complying with safety and pollution regulations, and labor costs.  While fuel costs are lower than they have been in many years, both labor and equipment costs are on the rise.

He said labor costs took a big hit last year as, coming out of the down economy, many carriers found it necessary to significantly raise base pay to attract drivers.  Gowdy said construction, manufacturing and many other industries tend to draw from the same labor pool that supplies carriers with their drivers.  When those jobs are plentiful, experienced drivers tend to choose those professions because they can stay at home and have a more “normal” life.  “We heard of carriers giving a 15–17 percent increase in base pay,” he said.

Besides the cost of buying additional equipment to comply with regulations, many carriers and independent owner-operators are also having to replace their tractors and trailers.  During the recession, truck replenishment rates fell significantly, causing the overall age of the U.S. truck fleet to increase to unheard-of figures.  Truck orders are now picking up, but that also adds to equipment costs.

“With two out of the three components going up, I don’t think it is realistic to expect lower freight rates,” Gowdy repeated.

He added that one of the more significant factors in the cost of hauling of perishables is supply and demand.  Demand increases are fairly constant as increased population requires a measurable increase in traffic each year, everything else being equal.  More restrictive hours of service means more equipment and drivers are needed, yet they are not out there.  He said the utilization of U.S. equipment is running at the 98–99 percent level.  That translates to a potential shortage situation most of the time, with very little switch in supply or demand needed to create a shortage.  For example, Gowdy said a holiday period, such as the Fourth of July, which takes some drivers off the road to stay at home with their families, creates a shortage.

“We think the market in 2015 is going to be similar to last year, but we do expect quite a bit of volatility around events of any magnitude,” he said.  “Celebratory weekends will pull drivers off the road.”

Gowdy said the CHR/WG Transportation Partnership continues to provide benefits for Western Growers members both in terms of supplies and cost.  The buying power amassed by the many WG members involved in this program does help create a better supply of transportation at competitive rates.

In addition, the CHR executive said the transportation firm continues to explore and expand creative solutions for the grower-shipper community.  One program involves the use of forward distribution facilities.  CHR has invested in facilities throughout the country that allow for the creation of an inventory of product close to the point of delivery.  He said many receivers would rather get several pallets of a product on a daily basis than a truckload once a week.  The forward distribution solution allows a supplier to ship a load to a warehouse facility near the destination and then provide that daily delivery of smaller quantities.  In 2014, Gowdy said CHR added one new forward distribution facility and it continues to explore opportunities and needs in other geographic regions.  Currently its facilities are strategically located throughout the country allowing it to have same-day deliveries virtually everywhere.

Another transportation solution that is utilized by many WG members is being able to quote a delivered price.  While the produce industry traditionally operates on an FOB basis (product priced from point of origin without the freight rate included), Gowdy said a delivered price has its devotees.  “Like many business options, it tends to go in cycles.  Sometimes retailers wants to go in that direction and other times they don’t.”

When transportation is tight and trucks are hard to find, retailers are often looking for delivered quotes to relieve themselves of that headache.  Or maybe a retail executive needs to get a better handle on his transportation costs and is looking for all FOB buys.  Some end users are open to it, others are not.  In any event, Gowdy said CHR is able to offer this transportation option to shippers looking for it.

Largely because of these many services, he said the CHR/WG program continues to grow and the CHR staff continues to tout it to the association members.  While one might think that after eight years of operation, virtually every shipper would be familiar with the program, Gowdy said that is just not true.  “Things change.  People move from one place to the next.  I’m always challenging the sales executives to check back with the customers.  Just because you discussed the transportation program with a shipper six months ago, doesn’t mean you know their needs today.”

Rail remains an option especially for hardware items such as potatoes, onions and hardy vegetables.  But Gowdy admits the percentage of market share that the rail industry owns is very light.  He said lack of consistent service and cost from the few large companies running the rail programs is the problem.  The equipment is there, but the rail companies control the rail lines, and they don’t seem to be able to create a good, sustainable program for perishable product.  In the past year, a couple of dedicated rail programs have gone out of business for a variety of reasons.  In one case, the business was there, but the rail line had other customers (most notably oil transporters) that it valued to a greater extent.  In the other instance, a start-up had difficulty surviving the initial slow-growth period.

For the long run, Gowdy said it is hard to imagine a future that doesn’t in some way include rail as a transportation option.  There is no doubt it is more fuel efficient to ship product via rail than on individual trucks.  He said at some point it should become a more viable option than it is today.

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