As Chief Strategy Officer, Chris Pickett helps Coyote customers — both shippers and network carriers — navigate the volatile U.S. truckload market.
With Chris' experience in architecting, implementing and managing diverse supply chains for a variety of global market leaders, he is able to distill and identify underlying patterns from what most others might see as a market in chaos.
Since joining Coyote in 2006, Chris has been able to pair proprietary insights with key market indicators to identify how the market may shift. Coined the “Coyote Curve,” Chris first published his theory in the Journal of Supply Chain Management in May 2018.
We sat down with him to learn more about the Curve and what this deflationary market cycle means for shippers and carriers.
Here’s what he had to say.
Coyote: Tell us how you started to develop the Coyote Curve.
Chris Pickett: Coyote has proprietary truckload data that dates back to August of 2006 when we started brokering freight in the U.S. In addition to the actual price charged and the price paid, we store additional data points that describe the shipment itself, as well as, the market and economic environment at the point in time that it moved.
As that mountain of data has accumulated, we had a lot to work with when looking for interesting or otherwise meaningful patterns across our business.
As our business grew and evolved beyond the transactional freight brokerage, we began entering into longer-term contracts with many of our shippers, some stretching beyond the typical one-year commitment.
To properly account for volatility over a long-term agreement, we needed a pricing mechanism that would fairly and objectively account for market fluctuations and relative risk for both parties.
That search for an index mechanism to support multi-year freight contracts is what ultimately led to the discovery of the market patterns that have since evolved into the Coyote Curve.
After identifying the initial spot market patterns in 2015, we spent another two years developing the general cause-and-effect hypothesis, validating and modifying it based on other market and economic data, and testing outcomes against forecasts to build conviction in the market model.
Keep in mind these are 2-4 year cycles and every data point equates to a quarterly average, so it takes some time to see how right or wrong your forecast is.
Once we gained confidence through a couple of cycle inflection points, we began sharing the work publicly as a way to bring more transparency to the market and help drive better overall long-term decision making by both shippers and carriers.
C: Got it. So how many cycles have you observed?
CP: Over the past 13 years, we have observed three full market capacity cycles—each spanning 7 to 14 quarters in duration, peaking as high as +37% Y/Y, and troughing as low as -16.7%.
And I propose that as long as the fundamental structure of the U.S. truckload market persists, the market capacity cycle is likely to repeat. For further insights into the market capacity cycle, click here to read our Understanding the US Truckload Market paper.
C: Where we are in the market capacity cycle today?
CP: Right now, we are in the deflationary leg of the 4th such cycle, which kicked off Q1 2017, climbed to a record inflationary peak of +39.4% in Q1 2018 (partially fueled by Hurricanes Irma and Harvey in late 2017), and reached deflation territory for the first time in Q4 2018.
Now that we are into the deflationary leg, we are looking for our next inflection point signaling the path back to equilibrium to close this cycle and initiate the next one.
C: Can you explain the actual market activity that drives the Curve? What are shippers and carriers doing?
CP: In an inflationary market, the truck is the scarce commodity (not the load), which gives carriers more choice and therefore the ability to be more selective in which shippers they work with and which loads they haul for what rate.
When this happens, depending on the relative spread between spot rates negotiated at current market conditions and contract rates that were negotiated at some point in the past, there can be a strong short-term financial incentive to reject contract freight tenders to expose fleet assets to opportunities in the spot market.
Routing guide compliance erodes, and more volume finds its way into the spot market to secure increasingly scarce capacity. Additionally, overall service levels tend to suffer as well.
To combat this, we tend to see Shipper of Choice initiatives launched (or reinforced) in earnest and a variety of creative operational measures taken to mitigate exposure to the spot truckload market — growing dedicated fleets, shifting to intermodal, etc.
This will persist until enough additional truckload capacity (both trucks and drivers) comes to market, lured by the relative attractiveness of current market conditions and the false confidence that good times will continue to roll, to restore equilibrium and set up the imminent deflationary leg. This was the story of 2018.
"Regardless of where we are in the cycle, just remember that this too shall pass."
- Chris Pickett, Chief Strategy Officer, Coyote Logistics
C: You’ve presented the Coyote Curve at multiple conferences. What has been the response?
CP: I presented the Curve during Q3 2018 at Armstrong & Associate’s 3PL Value Creation Summit. At the time, the market was firmly inflationary, so presenting a theory that the market had already turned and would run deflationary through 2019 was definitely a counterintuitive narrative.
The audience was very polite though and didn’t laugh out loud, but I don’t think I left the room with too many believers.
More recently, I presented once the market had reached a deflationary state (as projected) and the reaction was a little different. However, it takes time to digest the framework and track observed outcomes compared to public forecasts.
And folks should be skeptical. Without a demonstrated track record based on actual market data, I’m just another guy with an opinion as to why things happen the way they do.
The actual forecast and timing also make a big difference as to how each audience responds. If you’re on the buy side (i.e. shippers, 3PLs, etc.), I’ve noticed I get much more interest and enthusiasm when the guidance is deflationary, which you naturally like a lot better than the alternative.
But then the sell-siders (i.e. asset-based carriers, 3PLs, etc.) get really upset and call me mean names. I imagine I’ll get the opposite when the guidance flips inflationary (spoiler alert: 2020 will be inflationary). You can’t please everyone I guess, at least not at the same time.
C: Thank you for your time. Any closing comments?
CP: In summary, depending on where we are in the market, we tend to forget how good—or bad—things were. It can be eye-opening to see how consistent these cycles have been when presented this way, as well as the sheer magnitude of the peaks and valleys between each shift.
For those responsible for making short and long-term decisions in the transportation and procurement fields, I believe the Curve can help insert some logic and consistency into what can often feel like an incredibly chaotic and unpredictable market environment.
For a more in-depth feature on the Curve, click here to read our Explaining the Coyote Curve paper.
We’d like to thank Chris for sharing his feedback and congratulate him on being named a 2019 Supply & Demand Chain Executive Pro to Know. As an expert within the field, there is plenty of additional guidance Chris has shared around the market cycles.
To see Chris present the most recent market update and forecast, visit the Coyote Curve stream in our Resource Center.