Chart of the Week: Van Contract iniitial reporting of average base rate per mile – USA SONAR: VCRPM1.USA
The average dry van truckload contract rate trend (VCRPM1) has shifted to slight growth (+1.2%) over the past six months. While this seems like a non-event to the uninitiated, it is a rather significant development in the surface transportation market.
Rates are still down 2%-3% from an annual perspective but have grown since Q2, in an environment where they still have every reason to fall.
The contract rates represented in this week’s chart are representative of primarily pricing agreements that last longer than three months between shippers and carriers.
The average length of contracts declined during the pandemic, which is implied with the strong upward and downward trend lines seen from June 2020 into early 2023.
Prior to 2020, truckload contract rate agreements lasted around a year on average before shrinking during the pandemic spending boom. The trend for annual bids has been returning over the past two years as capacity has loosened significantly.
Truckload contracts tend to lose relevance when capacity becomes scarce. Contract rates do not guarantee capacity, just as shippers do not guarantee volume. This is an important concept to understand for the truckload market as the value of service fluctuates wildly at times.
Tender rejection rates measure carrier compliance (or lack thereof) to their contracted customers. Rejection rates increase when capacity tightens. This subsequently pushes rates higher as shippers bid against one another for the available capacity.
National rejection rates (OTRI) below roughly 6%-7% represent a relatively loose environment where trucks are readily available. Contract rates tend to fall in this type of market. Rejection rates have been on a slow climb after bottoming in May 2023 and have broken the 6% threshold only once in the past two years. That occurred this past June/July and lasted about a week, not enough to put any strong pressure on rates.
The current rejection rate level is just above 5%. While this is still a relatively low figure, it is higher than it was at this point last year, when the OTRI was just above 3.5%.
Hurricanes and the ILA strike have helped push rejections higher, but that has been minimal as rejection rates remain below the 6% threshold and were below 5% through most of the past three months.
The big takeaway is that contract rates appear to be feeling the pressure of changing sentiment for the future state of the truckload market, not necessarily that there is a current strong lack of capacity.