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We have seen in the past several years a direct correlation between the freight tender rejection rate and the influence it has on spot market pricing. Makes sense, if carriers are accepting a high percentage of the freight tendered to them, that would mean less freight hitting the spot market and putting downward pressure on those spot rates. If you look at figure 1.1 you will see how this has played out over the past year, until recently.
So why is this trend not playing out over the last few months? Several factors are influencing this.
First, let us remind ourselves that a rejection rate of over 20 percent is still high when we take a longer view. Yes, carriers saying “no” to a shipment 20 percent of the time is far better than the almost 30 percent plus rejection rates we experienced since the latter part of 2020. However, in comparing prior years (Figure 1.2), we have seen rejection rates in the low single digits, and in a more balanced market, 12-15 percent would be the norm. So, at 20 percent-ish, shippers are still experiencing service challenges and thus relying on the spot market. And typically, that need for spot service happens less than a day prior to the shipment being picked up, so with little lead time, available carrier capacity will be less, and rates will reflect that urgent need for service.
Secondly, the mix of freight has changed. Load tenders for freight that is either local or shorter haul, overall, anything less than 250 miles, have seen an increase in volume by 10 percent since March of this year. Much of this increase is driven by the American consumer reliance on e-commerce. Those shipments are more desired by carriers. It provides an opportunity to get drivers home each night, is consistent, and is comparable from a daily rate perspective. Shipments that are more mid-range, 450-800 miles, are least desirable seeing a rejection rate in the high 20 percent range. So, while you have a low rejection on those shorter shipments, those two-day runs are being rejected more often, hitting the spot market, and keeping the overall spot rate elevated.
Two other factors are also influencing the continued elevation of spot market rates.
While the number of new authorizations of authority will well outpace 2020 (projecting 100k new issues vs. 59k in all of 2020), this is not necessarily new capacity in the market. Many of these are one or two-person operations, so you have a shift from a driver being on a company payroll to now being an independent operator. This has a net-zero impact on overall capacity, but it does create more instability as the independent operators are free to chase high-paying freight and are not constricted by lanes from a company directive.
Additionally, many shippers have moved from the annual pricing model to bi-annual or quarterly pricing. This has allowed carriers to better align with market pricing conditions and accept freight more often than the price is right. Typically contract freight is more stable, so it makes sense for a carrier to accept that freight when pricing is comparable versus dealing with potential uncertainty on the spot market.
When you boil all of this down, the short-term outlook is that rates will remain elevated, but consistent. And rejection of freight will overall be in the low 20 percent range, although more pain will be felt for those shipments that require a greater length of haul.
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