Chart of the week: Initial Van Contract Reporting Average Base Rate Per Mile – USA SONAR: VCRPM1.USA
The average trend in dry van contract rates (VCRPM1) has shifted to slight growth (+1.2%) over the past six months. While this may seem like a non-event to the uninitiated, it is a fairly significant development in the surface transportation market.
Rates are still down 2% to 3% year-over-year, but have risen since the second quarter, in an environment where they still have every reason to fall.
The contract rates in this week’s chart are representative of primarily price agreements that last longer than three months between shippers and carriers.
The average duration of contracts has decreased during the pandemic, which is implied by the strong upward and downward trend lines visible from June 2020 to early 2023.
Before 2020, truckload contract rates lasted an average of about a year before shrinking during the pandemic spending boom. The trend for annual bidding has returned over the past two years as capacity has declined significantly.
Truckload contracts generally lose their relevance when capacity becomes scarce. Contract rates do not guarantee capacity, just as shippers do not guarantee volume. This is an important concept to understand for the truckload market, as the value of service sometimes fluctuates wildly.
Tender rejection rate measures the carrier’s compliance (or lack thereof) with its contracted customers. The rejection rate increases as capacity decreases. This then drives rates up, as shippers bid against each other for the available capacity.
National rejection rates (OTRI) below approximately 6%-7% represent a relatively loose environment in which trucks are readily available. Contract rates tend to fall in these types of markets. The rejection rate has slowly increased after bottoming out in May 2023, crossing the 6% threshold only once in the past two years. That happened last June/July and lasted about a week, not enough to put strong pressure on rates.
The current rejection rate is just above 5%. While this is still a relatively low figure, it is higher than at this point last year, when the OTRI was just above 3.5%.
Hurricanes and the ILA strike have helped increase rejections, but that has been minimal as the rejection rate has remained below the 6% threshold and has been below 5% for most of the last three months.
The big takeaway is that contract rates appear to be feeling the pressure of changing sentiment about the future state of the truckload market, and not necessarily that there is currently a strong shortage of capacity.
Spot rates excluding a level of fuel cost impact comparable to a standard fuel surcharge applied to a contract are on a trendline similar to OTRI and have increased 13% since May 2023. This trend suggests that the bottom of the market has been rising for 18 years. months, but is still well below the contract between carrier and shipper. The difference is still too big to provide a strong upward boost to long-term interest rates, although the reduction in low prices may push the average higher.
Zac Rogers, associate professor of supply chain management at Colorado State University, spoke about the forward-looking component of the Logistics Managers’ Index (LMI) at Freightonomics a few weeks ago and said supply chain professionals expect a strong shift in the transportation industry. market in the coming year.
According to the results of the survey, the transport prices component is expected to increase from 58 to 76 in the coming year. This means that transport purchasing teams are preparing for a very strong tightening by September 2025.
The LMI is a diffusion index based on research results where values above 50 indicate expansion and values below 50 indicate contraction. Values above 70 indicate strong expansion.
This sentiment is likely to help increase the value of the twelve-month or longer truckload contract. Shippers who charge the low rates will be the first to deal with the consequences of a tight market in the form of truck service disruptions and the lost revenue associated with inadequate inventory levels.
It is a well-known fact that capacity is rapidly leaving the truckload environment. Active operating authorities, managed by the Federal Motor Carrier Safety Administration, are down 5% over the past year and are expected to accelerate seasonally in coming months. While this data lags, the most important thing to keep an eye on is the trend.
The truckload market may not have seen a major turnaround, but it is changing, just more slowly than many service providers would like.
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