This time of the year, many of us are trying to plan ahead to next year. For shippers, that means figuring out your transportation expenses — which will be even more challenging than usual this year. Please note, your planning will vary based on the type of market you service, but here is a broad stroke into some of the things to consider when making your transportation plans in 2021.
To cut to the chase, freight rates are high right now and you can expect them to stay that way at least through the first half of 2021. But let’s take some time to break down why things are the way they are.
The Economy’s Impact on Freight Costs
First and foremost, the economy is a major driver of the transportation industry. And two-thirds of the economy is driven by consumer spending. Throughout the pandemic, people were — and still are — spending money. However, they’re doing it differently than we usually see.
A year ago, we were traveling and taking vacations. Now that we’re restricted in that area, many people are taking on home improvement projects, buying furniture, appliances and other tangible items. The things people are spending their money on now end up on a truck at some point in the process.
How the Lingering Effects of the Pandemic Play a Role
But with the effects of the pandemic still lingering, whether it’s manufacturers not running at full capacity or not running at all, the inventories are struggling to keep up with the demand. Some products are seeing 10-12 week delivery windows. With that in mind, you can expect a good amount of freight to continue moving through the United States through the first half of next year (it’s hard to gauge too far beyond that with all the variables in the coming months).
We’re also in the busiest time of the year for dry van freight — retail peak season. And you can only expect the demand for trucks to go up as more people buy online this year. The retail market already soaks up a lot of capacity, so it will likely only become more difficult to secure the trucks you need.
What Makes 2020 Different Than 2018?
So we’ve already determined capacity will be tight due to freight demand, but here’s another wrench: the supply of trucks to pull that freight. Let’s go back to 2018, which has a lot of similarities to this year from a freight demand standpoint. Some of the medium to large trucking companies took advantage of the high freight rates and bought more trucks for their fleet. That’s not happening this year for several reasons.
The biggest reason is there aren’t enough drivers to fill those new trucks. There was a large drop-off in the number of drivers in the spring and they aren’t coming back as quickly. Part of the reason for that could be the unemployment benefits during the pandemic led to a lot of people making more money not working compared to if they were — so they weren’t in a rush to get back to work. The Federal Motor Carrier Safety Administration’s (FMCSA) Drug and Alcohol Clearinghouse is operational and estimates are that nearly 40,000 drivers are impacted right now. The supply of new drivers to the industry is also hampered by the pandemic, with driving schools being shut down completely or operating at 25-50 percent capacity.
Another reason is the increased amount of nuclear verdicts — or verdicts greater than $10 million — over the past decade. Carriers are taking significant rate increases and that is putting some smaller carriers out of business.
What Does This Mean for Your 2021 Transportation Planning?
Expect capacity to get tighter before it loosens again. That means the spot freight market will continue to remain high at least through peak season. And if the past is an indicator, you can expect contract rates to follow.
As in any market, it’s best to try and plan ahead and keep your transportation provider in the loop. The more notice they have and the more efficient the freight, generally the better rates they’ll be able to offer you.