Truckload Market Forecast: Q2 2021 Spot & Contract Freight Rate Trends

Sean Fahey

Sean Fahey, Coyote SVP Yield ManagementNow that we are well into the first quarter of the new year, we can officially close the books on 2020 — it was the most volatile year in the history of our index.

Supply chain professionals, from drivers and dispatchers, to load planners and logistics managers, did an incredible job to keep freight moving in very difficult circumstances.

Despite the incredible upheaval, the U.S. truckload market continued to follow the same pattern as it always has. Q4 volumes and spot rates — driven by an e-commerce boom — spiked to new highs.

"How long will we remain inflationary in 2021? It depends how quickly supply catches up with demand."

- Sean Fahey in the Q2 2021 Coyote Curve webinar

But how is the market shaping up in Q1? Will severe mid-February impact the trajectory of the market? Will rates continue climbing, or are we past the peak?

We’ll answer these questions in our Q2 Coyote Curve® forecast.

New to the Coyote Curve?
The Coyote Curve is our proprietary spot rate index built with data from over 10,000 daily shipments. If you want to learn more about the truckload market or how we build the Curve, check out these helpful resources:

Part I: Supply & Demand 101: Basics of Truckload Market Economics
Part II: Understanding the U.S. Truckload Market
Part III: Explaining the Coyote Curve

 

Q4 2020 Truckload Market Performance

In Q4 2020, as the pandemic spiked across the country, millions of Americans opted for shopping online instead of heading to retailers’ brick-and-mortar locations (whether it was Christmas presents or paper towels).

This e-commerce boom drove record-setting peak season shipping in the parcel space (e.g. UPS), but had ripple effects into the truckload market as well.

Year-over-year (Y/Y) spot and contract truckload rates had been trending upwards since Q1, then went into overdrive in the second half of 2020.
 

Q4 2020 Coyote Curve Truckload Market Trends

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Q4 Truckload Spot Rates Hit a Record Peak

  • Q4 2020 spot rate performance: 49.7% Y/Y
  • Trended up from Q3 (35.2% Y/Y)
  • Performance was in-line with our forecast, but once again, the rate of increase was even steeper than we anticipated

Q4 Truckload Contract Rates Trended Upwards

  • Q4 2020 contract rate performance: -0.3% Y/Y
  • Trended up from Q3 (-5.1 Y/Y) and almost hit the breakeven point
  • In-line with our forecast

Takeaway: In Q4 2020, peak season volatility, fueled by a surge in e-commerce, drove Y/Y spot truckload rates to a record high, pulling contract rates upwards.

 

Current State: Inflationary Market, But We’ve (Likely) Passed the Peak

Q4 2020 hit a new record on our contract rate index, but was it the turning point, or will we set a new record in Q1?

At the time of this update, we are not fully through the quarter — we cannot confirm whether or not we’ve hit a peak until all the numbers are in.

That said, it seems like we have indeed passed the inflationary peak, and are heading back towards a deflationary market.
 

Q1 2021 Spot and Contract Rate Truckload Market Trends

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Spot Rate Performance in Q1 (through 2/25/2021)

Quarter-to-date, our index has dropped down to 37.6% Y/Y. To be clear, we are still in an inflationary market — though you should expect spot market rate and capacity volatility, it won’t likely be worse than Q4 2020.
 

Contract Rate Performance in Q1 (through 1/31/2021)

We are just coming the tail end of bid season for shippers with enough volume to secure annual pricing. As we expected, contract rates are resetting at higher levels compared to 2020.

Bid pricing is heavily influenced by recent spot market activity, and Q3-Q4 of 2020 saw rapid increases, helping drive increases in 2021 RFPs.

Through January, the Cass Index, our proxy for contract rates, has increased to 7.7%, entering into year-over-year inflation for the first time since Q2 of 2019.

Once the full February and March figures are in, the rate of increase may drop down some, but this Q1 sneak peek likely indicates that we are back in an inflationary spot market.

This is typical pricing behavior at this point in the cycle, right on track with historical performance.

After very tight capacity in the second half of 2020, many shippers are placing a higher premium on flexibility and stability. That translated into larger investments with core providers in annual bids in an effort to get more consistent capacity.

 

Severe Winter Storms in February: Will They Change the Truckload Cycle?

In mid-February, a series of winter storms hit most of the U.S., bringing ice and snow to regions that rarely drop below freezing. Roads closed, infrastructure failed, power went out and supply chains ground to a halt for a few days. Texas was especially impacted.

This created a shipping backlog, which — especially for more complex LTL and intermodal networks — takes several days (sometimes weeks) to fully restore service.

As freight networks were disrupted, capacity tightened and spot rates went up, acutely in affected markets and with a muted effect elsewhere.

Will this be enough to change the trajectory of the market cycle? History tells us that is not likely. Again, we won’t know for sure until we are fully past Q1, but at most, the storm-related volatility will create a kink in the line before the cycle continues it’s course.  

 

Key Economic Indicators Driving the Truckload Market

Let’s dive a little deeper into supply and demand trends that are driving current activity in the truckload market. 

Demand Trends (Shippers)

As it stands today, it looks like we’re getting some version of a v-shaped recovery in the wider economy.

Looking at some key economic indicators we use to determine demand trends (Consumption, Industrial Production, Inventory-to-Sales), all of them are still in year-over-year negative territory, but trending in the right direction.
 

Truckload Market Economic Indicators Q1 2021

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Consumer spending (which drives Industrial Production, which in turn drives truckload shipping) is up to -3% Y/Y from a trough of -10% in Q2 2020.

Industrial Production (IP) is up to -5% Y/Y, from a trough of -14% in Q2.

Inventory-to-Sales ratio dropped down to 1.32 from 1.51 peak (also in Q2 of last year). Lower inventory levels compared to overall sales means that shippers have less product sitting in their warehouses.

As consumer spending (aka consumption) picks up in 2021, shippers will have to produce more (aka IP) to restock shelves and meet demand. The more shippers produce, the more freight will need shipping.

In short, lower inventory-to-sales is a catalyst for increased truckload volume.

Takeaway: shipper demand is increasing as several indicators point towards a V-shaped recovery in the wider economy.

 

Supply Trends (Carriers)

The two main indicators we track to monitor the health of the supply base are fuel (diesel) prices and Class 8 truck orders (semi-truck purchases).

Fuel Rates

Fuel, which represents ~30% of a carrier’s overall cost, can have a huge impact on profitability if it rises or falls faster than rates.

Currently, fuel has been stable, with truckload rates rising faster than fuel costs. This has allowed carriers to enjoy larger profit margins, which many are reinvesting in new capacity.

Class 8 Truck Orders
Insofar, we’re seeing Class 8 truckload orders continue to spike. This is very typical at this stage of the cycle.
 

Q1 2021 Class 8 Truck orders vs. truckload market cycles

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Carriers that made it through the very tough Q1 & Q2 2020 market conditions have been able to take advantage of higher rates in the back half of the year. We are seeing them invest in adding more capacity.

However, with the rate of truck order fulfillment, this new capacity won’t hit the road for several months. As capacity floods into the market later in 2021, it will likely push Y/Y spot rates down into deflationary territory.

This is the same pattern of overshoot and collapse we’ve observed in the previous four market cycles.

Takeaway: carriers are adding capacity though spot rates have already peaked, setting up the over-capacity that will pull the market towards deflation.

 

Q2 2020 Truckload Market Forecast

Heading into Q2, we expect spot truckload rates to continue declining, getting back to equilibrium, then crossing into Y/Y deflationary territory in Q4 of 2021.

We anticipate that contract rates will continue to rise as 2021 bids go into effect and shippers favor flexibility and peace of mind over rate reductions.
 

Q2 2021 Truckload market rate forecast - Coyote Curve

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But how does that make sense? Shipper demand is rising, the economy is recovering, and we’re predicting a deflationary spot truckload market?

Because it’s all about the demand relative to supply. Carrier capacity exited the market in Q2 and Q3 of last year due to:

  • The worst economy since the Great Depression creating a collapse in volume
  • Rates taking a nose dive (see the kink in our index line)
  • Expanded unemployment benefits amid COVID-19-related safety concerns incentivizing drivers to stay at home

Then the economy started to lift off of the bottom in May and June. With less capacity to service fragmented and volatile supply chains, spot rates shot up.

Carriers began buying trucks, and that capacity is starting to enter the market (and importantly, will continue to do so throughout 2021).

This will pull down spot rates, as enough capacity will enter relative to the increasing demand, until we overshoot, and dip back into a deflationary spot rate environment.

 

Watch the Webinar & Download Your Copy of the Forecast Slides

You can watch Sean Fahey, Coyote’s SVP of Yield Management discuss our Q2 Coyote Curve forecast in the on-demand webinar. In the recorded panel, you can also watch industry experts discuss insights from two upcoming original studies on the driver shortage.

Want to download the slides to use in your next presentation?
You can access high-resolution Coyote Curve graphs right here.

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