By John Stenderup
Director of Business Management, Sourcing, C.H. Robinson.
It’s about that time of the year again…time to gear up for peak season on the West Coast. Despite some recent rain delays, let’s assume that most of your crops are planted and you are in the stages of finalizing pricing with your customers. What is left to be done? Have you considered recent trends in the freight industry? Over the past two years, depressed pricing and an overabundance of supply has caused transportation to become an afterthought, but it shouldn’t be in 2017.
The domestic trucking industry is primarily driven by the laws of supply and demand, and after a very profitable 2014—when truckload rates spiked and fuel prices plummeted—many carriers’ overinvestments resulted in an oversupply of equipment. In its current state, the freight industry is a buyer’s market and has been for almost two years, after an extended period of depressed pricing. The compression of margins caused carriers to focus on cost management, cutting costs by limiting investment in tractor units and drivers. With any cyclical industry, it’s not a matter of ‘if’ the conditions will tighten, but rather ‘when.’
Based on some key industry indicators, many experts anticipate 2017 to be the answer of ‘when.’
• FTR Intel’s “Active Truckload Utilization Rate” is the percentage of the population of active trucks that is required to move U.S. truck freight. In Q1 of 2016, the percentage hovered around 93 percent but has increased by more than 4 percent, at nearly 98 percent, over the past 12 months.
• DAT Solution’s “Load-to-Truck Ratio” represents the number of loads posted for every truck posted. Comparing January 2016 vs. 2017, the national reefer ratio has increased by 62 percent, which demonstrates a shift towards a seller’s market.
So what does this mean?
Nothing immediately, but, we can clearly see that the nation is using a higher percentage of available trucks, demand from shippers is increasing on internet truck boards, and the price of diesel has increased over the past 12 months. So why does truckload pricing remain depressed? The phrase “No Pain, No Gain,” refers to the pain that shippers must experience for there to be a gain or increase in truckload rates. That pain comes in the form of challenges in locating the capacity necessary to get our product to market. When we as shippers feel the pain of a difficult truck market, we are inclined, and in some cases forced, to pay more for freight to ensure timely pickup and delivery.
While it is impossible to predict how much rates will increase in 2017, it’s a safe bet that shippers will face two significant challenges if these trends continue:
• Delays in Getting Product to Market: Periods of surge demand will result in capacity shortages and the potential for delayed deliveries.
• Increased Freight Costs: Will occur as a result of capacity shortages but the severity of which, depends on how much pain is felt by the shipper community.
How will this impact your business?
Make no mistake, the market is tightening and that pendulum is loading. Your customers, the retailers and foodservice companies know this and are expected to take advantage of the depressed market conditions. In fact, many are already considering a tightening market and increased truckload rates a forgone conclusion which is demonstrated by the sharp increase in demand of transportation procurement activities for product purchased on an FOB basis. In the event that they are unable to secure favorable pricing or predict severe volatility, they are likely to pass the buck to you, through purchasing product on a Delivered basis.
What should you do?
Be Aware: “Don’t be a frog in boiling water.” What does that even mean? The frog that is dropped in boiling water, is immediately aware and hops out. The frog that is placed in lukewarm water just to have it slowly heated to a boil, will become comfortable and complacent, eventually boiling to death.
Be a “Shipper of Choice”: A phrase that is making a comeback within the industry is “Shipper of Choice.” What does it mean? It refers to shippers that demonstrate consistent industry best practices at origin that are perceived as favorable by over the road carriers. It means, making your freight more desirable than the shipper down the road, who is competing for the same capacity. Do you consider yourself a Shipper of Choice?
Understand Contract Terms & Pricing Strategy: Be cognizant of contract terms when you submit “Delivered Pricing” during this bid season and DO NOT simply resubmit the same freight costs as 2016. Work closely with your partner carriers to establish mutually agreed upon rates and to secure capacity commitments for any business that has the potential to be sold as “Delivered.” Talk to your teams about how they are managing their freight procurement, bids, surge strategy and contingency plans for a volatile market.
Over-Communicate: Discuss current and future market conditions with both your customers and your carriers. In most cases, your customers are already aware of truck market volatility, and it’s in your best interests to help them understand how that may impact your Delivered Price.
Leverage Resources: Work with your carrier partners to gain a better understanding of movement in the market, so that all parties are on the same page. We recommend regular business reviews with your partner carriers and score carding their performance. Does your team use technology to optimize your supply chain, monitor freight spend and manage service levels?
Remember, it is impossible to predict precisely when transportation markets will become volatile, but through use of these best practices, you can ensure that your company is prepared to navigate any obstacles down the road. Our team of perishable transportation experts on the Western Growers Transportation Program would be more than happy to review with you and help you set up pricing that fits your program needs. We are always here to support your business.
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