As stay-at-home orders in response to the COVID-19 pandemic took hold across much of the country in the latter part of March, the level of freight available dropped rapidly. By the second half of April, spot-market rates were so low that independent truckers were staging protests in Houston, California, and Washington, D.C., many blaming brokers.
According to DAT Solutions, spot rates for dry van, refrigerated and flatbed loads hit five-year lows in April. “We have been hearing from some carriers that they cannot afford to run at these rates, thus choosing to sideline their equipment and wait for rates to rise,” said Ken Adamo, chief of analytics.
DAT reported that the national average dry van rate in April, just $1.64 per mile, was the lowest since September 2016. Flatbed and reefer rates hit their lowest points since early 2017.
KeepTruckin, which has seen a 25% decrease in fleet vehicle activity across its network due to COVID-19, estimated as of April 23 that revenue across its fleets was down 31% since the beginning of March. This is a combination of drop in rates per mile and overall reduction in activity – fleets are driving less per week and getting paid less per mile.
Owner-operators and the small fleets that make up the vast majority of motor carriers tend to rely heavily on the spot market, and they were seriously hurting.
“I’ve been hearing [from members] that people are being offered things for literally less money than it takes to drive the truck,” Norita Taylor, spokesperson for the Owner-Operator Independent Drivers Association, told HDT. “It would cost them to take that load.”
“It's obviously pretty tough times out there, especially obviously on the driver and carrier side,” said Drew McElroy, co-founder and chairman at digital freight broker Transfix. “You know, those poor folks not only are putting themselves in danger, but they're also having a tough time of it with from a rates and revenue perspective now.”
But while some small carriers feel like they are being taken advantage of, from a big-picture view, it appears to be a classic case of supply and demand – plus a factor of how brokers’ contracts with shippers work.
“The reality is, though rates are down, it's not because brokers have suddenly decided to take a larger percentage of the transaction,” McElroy said. “If anything, brokerage margins have been in pretty significant decline over the last 24 months. You can look at the publicly traded [brokers] and see that happening. The true reality that is affecting the market is the same thing that that it always is – it's supply and demand.”
Supply, Demand, and Spot Freight
The low rates were triggered by a supply and demand situation driven by the unprecedented economic shutdown caused by the COVID-19 pandemic.
DAT’s Adamo worked in the retail energy market before getting into the trucking industry, and he said both the energy market and the spot freight market are "kind of those near perfect markets, if you will, where supply and demand almost instantly and rapidly drive price changes.” When there’s a heat wave, energy prices are more expensive because there’s no demand. When there’s a coal or natural gas shortage, supply dries up and drives prices up as well.
When it comes to freight rates, he said, it's the same thing. “We saw in March the demand for truckload freight, especially on the spot market due to restocking the shelves with all of the consumer essentials, drove spot rates up, north of 10% in some segments – in some lanes as high as 15% – over the course of one month. What's happened since then is social distancing has largely taken over nationwide. People have stocked up; there's been a bit of a pivot to e-commerce. As a result, the demand for full truckloads for dry vans and reefers has plummeted in the spot market. And there's not nearly as much contract freight to help balance that side of the market, either. So it's kind of a double whammy driving down demand. And as a result, prices collapse.”
“Brokers don’t set prices; the market does,” explained Transportation Intermediaries Association President and CEO Robert Voltmann in a video. “We shut down a $22 trillion economy overnight…. When there are too many trucks chasing too few loads, rates go down. Shippers, like all buyers, want to get the lowest price possible.”
According to the most recent TIA 3PL market report, Voltmann said, brokers’ average margin was 16%. That means if a shipper pays $1,000, the broker keeps $160 to cover their costs.
There are, of course, unscrupulous brokers out there. Transfix’s McElroy grew up in the brokerage business and said that kind of bad behavior is one reason he started his business. But, he told HDT, “a lot of the bad things that brokers do is sort of a bait and switch,” such as saying a shipper will load you in 20 minutes and in reality it takes eight hours – or not paying altogether. But the rate itself, he said, is driven by the market. And “oftentimes, the sort of bearer of bad news is the broker,” leading to a blame-the-messenger situation.
Some owner-operators say brokers have actually told them, this is their turn to make money. And in fact, that’s true in a way, explained Adamo. But that’s because back in March, when spot rate were skyrocketing, it was the carriers’ turn.
He explained that while some spot freight is offered up by shippers as an actual spot load, other broker freight is done under contract. “So let's just say [you’re a broker] and you had a shipper that you contracted with to haul bottle water at rates that you signed 12 months ago. You could have conceivably been paying double to move that shipment in March” over that contracted rate paid to the broker.
In the end, he said, “regardless if it's a spot or contract load, their goal is to cover it as cheaply as possible.” That’s the broker’s job.
In his video, Voltmann said, “No one is getting pre-virus rates… Shippers, like all buyers, want to get the lowest price possible. They know there’s not enough freight to fill all the trucks," he said, so they offer the lowest rates they think they can get away with. If no one bites, they raise the rate until someone does take it. "Who does set the going rate? Like it or not, it’s the motor carriers that accept it… that’s the free market economy.”
OOIDA said it has always advised members against accepting cheap freight.
That dynamic, however, has been complicated by the fact that large carriers have seen their amount of contract freight drop and their lanes and networks scrambled. As a result, they are more likely to take those cheap rates just to help them get their equipment and drivers repositioned for the contract freight they’re still running, further driving down the spot rates.
McElroy said that’s nothing new, but it’s just been magnified by the crisis.
“I remember, all the way back in the 90s when I was a kid, and my dad was a broker running the brokerage out of the house, and one of his rules was, you never bid on freight to Arkansas… J.B. Hunt would across the board issue these incredibly low rates, to move their equipment back into Arkansas to get their drivers home.”
Lack of Transparency
One problem is that carriers, despite regulations that require it, don’t have transparency into what shippers are actually paying brokers, according to critics.
OOIDA contends that brokers often find ways of avoiding federal regulations (CFR 371.3) requiring them to keep records of transactions and make them available to motor carriers.
Many carriers, including owner-operators, sign contracts with brokers that waive Part 371.3 requirements, the association explained in a May 6 letter to Congress.
OOIDA discourages this, but the practice is so prevalent that truckers often have no other choice if they want to haul a brokered load. Even many of the most reputable brokers use these clauses to avoid complying with the requirement, the association said.
The association’s letter to Congress urged immediate action to help truckers know they are being compensated fairly. Brokers should have to immediately provide an electronic copy of each transaction record once the contractual service has been completed and be prohibited from waiving 371.3 requirements, it said in the letter.
OOIDA shared an example it said came from one of the nation’s largest brokers: “Carrier shall not claim or demand, in whole or in part, broker's commissions earned by [redacted] on shipments tendered under this Contract. [Redacted] shall not be required to disclose the amount of its broker's commission to Carrier, and Carrier expressly waives its right to receive and review information, including broker's commission information, pursuant to 49 CFR §371.3.”
“In effect, brokers are exempting themselves from federal regulations,” the letter said.
The few brokers who do provide transaction records usually put in place hurdles they know will prevent a carrier from ever seeing them, OOIDA said, such as only allowing a carrier to access records at the broker’s office during normal business hours.
“Further, when a carrier tries to assert his/her right to review this information, the broker is unlikely to contract with them again.”
The Small Business in Transportation Coalition petitioned the Federal Motor Carrier Safety Administration to add a new provision to the broker regulations:
(d) Brokers may not coerce or otherwise require parties to the transaction to waive their right to review the record of the transaction as a condition for doing business. No stipulation or clause in any contract shall exempt any broker from having to comply with this rule, upon demand, by a party to the transaction.
To avoid bad brokers, Voltmann suggested that carriers use brokers who are members of TIA. OOIDA has warned members to be cautious before taking loads for brokers they haven’t worked with before.
The Freight Market Should Start Looking Up – Slowly
The good news is that as states started relaxing stay-at-home orders in late April and into early May, combined with seasonal increases in spring produce, some freight will start to return.
A new COVID-19 Truck Freight Recovery Index from FTR and Truckstop.com showed refrigerated freight the last week of April was starting to tick back up. Although total spot load volumes remain far below average, they rose nearly 22% during the week ended May 1 from volumes the week before, FTR reported on May 4.
DAT reported in a May 4 Market Conditions report that activity is finally picking up in states that have begun to reopen (Missouri, Tennessee, Texas, Georgia). Demand is also heating up in produce regions (Florida, California, Texas and Georgia again). Carriers are also hoping that the resumption of import traffic will bring some relief, and DAT said it is seeing some early evidence of that in Los Angeles; Houston; Savannah, Georgia, and Elizabeth, New Jersey.
However, DAT’s Adamo cautioned, with schools and large events still closed until the fall, it won’t be a total recovery, and flatbed freight will take even longer to recover.
“May is often when we start to see the spot market gaining steam, said DAT’s Matt Sullivan in a blog post. “Spurred by harvest season and the urgency to get produce to market, truckload rates start their climb to their June peak. This isn’t going to be a typical May, though. While we’re seeing many of the usual seasonal patterns emerge, we’re starting from a mighty deep hole.”