- After months of declines, truckload contract rates see minor growth, signaling shifts in the freight market landscape despite ample capacity.
The surface transportation industry, the average dry van truckload contract rate has shown a slight upward trend of +1.2% over the past six months. To the uninitiated, a minor increase in truckload contract rates may seem inconsequential; however, for industry experts, this change in trend marks a key shift in the freight market dynamics. Although annual contract rates remain 2% to 3% lower than last year, the recent uptick from Q2 underscores a market recalibrating itself in response to shifting demand, tightened supply, and fluctuating economic conditions. This article explores the factors behind the recent rate trends, their implications for shippers and carriers, and the potential for further market tightening in the coming year.
Truckload contract rates are agreements between shippers and carriers, generally lasting three months or longer, and are essential in stabilizing transportation costs over fixed periods. During the pandemic, the average length of these contracts shortened, with fluctuations reflecting the unpredictability of freight volumes and pricing from 2020 through early 2023. Prior to the pandemic, contracts lasted an average of one year, offering stability for shippers and carriers alike. However, as economic conditions evolve and capacity in the truckload market fluctuates, we see a return to longer contract periods. This trend aligns with reduced capacity in the market, helping to create a more balanced freight landscape.
After bottoming out earlier this year, contract rates have shown a modest uptick, climbing 1.2% since May. However, the broader picture reveals that rates are still 2%-3% lower year-over-year. While rates have stabilized, the environment remains conducive to further drops as the freight sector contends with excessive capacity, low tender rejection rates, and changing operational trends.
Tender rejection rates, which track a carrier’s adherence to contract commitments, remain low, hovering just above 5% compared to a low of 3.5% last year. A rate below 6%-7% signals ample capacity, as shippers are less likely to face rejections on their loads. The impact of hurricanes and labor strikes, such as the recent ILA strike, has slightly increased tender rejection rates, but not significantly enough to push rates upward. This lack of scarcity highlights the subdued demand for freight transport relative to the high supply of available trucks.
Spot rates—rates negotiated for individual shipments outside long-term contracts—have increased by approximately 13% since May 2023. Excluding fuel cost influences, this rise suggests that the lowest rates on the market are on the ascent, although they still trail behind standard contract rates. This slight narrowing between spot and contract rates provides some upward momentum to the average truckload contract rate, as carriers begin to push back against unsustainable low pricing levels.
The spread between spot and contract rates has historically influenced the market’s direction. When the difference is too vast, it indicates an oversupply in capacity, but as this gap narrows, shippers can expect potential upward rate adjustments. Currently, the reduced spread hints at a rising “floor” price for transportation, which may encourage rate stability or slight increases moving forward.
Hurricanes, natural disasters, and labor strikes disrupt trucking capacity, creating short-term supply constraints that can influence market rates. Recently, hurricanes in coastal regions and the ILA strike brought a slight lift in tender rejections, pushing the OTRI (Outbound Tender Rejection Index) slightly above 5%. However, these events’ limited impact emphasizes the freight market’s ample supply and stability. Unless external pressures further restrict supply, the freight market is likely to remain relatively loose, keeping rates steady and preventing significant upward pressure.
In an interview with Freightonomics, Zac Rogers, Associate Professor of Supply Chain Management at Colorado State University, shared insights from the Logistics Managers’ Index (LMI), which gauges industry sentiment regarding freight and logistics trends. Rogers highlighted that the transportation pricing component of the LMI is expected to jump from 58 to 76 within the next year. Such an increase would represent a robust expansion, indicating that supply chain and logistics professionals foresee significant tightening in the truckload market by September 2025.
The LMI uses a diffusion index format, where values above 50 indicate expansion and those below 50 signify contraction. A forecasted rise above 70 aligns with robust market growth and potential strain on capacity, which could lead to substantial rate increases. This sentiment is spurring interest in longer-term contracts as shippers anticipate future constraints on truckload availability. Those with low-cost contracts risk suffering from service failures and inventory shortages, making strategic rate adjustments and longer contracts prudent measures to mitigate potential disruptions.
- Rising Value of Long-Term Contracts: With industry expectations of tighter capacity, long-term truckload contracts offer more security against potential rate spikes in a constrained market.
- Tender Rejection Rates as a Capacity Indicator: Tracking tender rejections offers insights into market trends, with low rates indicating a surplus of trucks and stable rates. An increase, however, could signal tightening conditions and prompt carriers to renegotiate contracts.
- Contractual Flexibility: In times of surplus capacity, shippers have leveraged shorter contracts to capitalize on lower spot rates. As market conditions shift, we may see a return to traditional, one-year contract terms as carriers aim to secure more predictable revenue streams.
Cost Implications for Low-End Rate Shippers: Shippers reliant on lower-cost contracts may face challenges if capacity tightens, as carriers prioritize higher-paying loads to offset increasing operational expenses. Failure to secure competitive rates could lead to service failures and supply chain disruptions.
A critical factor influencing these trends is the rate at which capacity is leaving the truckload sector. Over the past year, active operating authorities tracked by the Federal Motor Carrier Safety Administration (FMCSA) have declined by approximately 5%. This exit rate is anticipated to accelerate seasonally, potentially reducing competition and placing upward pressure on contract rates as remaining carriers leverage decreased capacity.
The gradual contraction in capacity, coupled with expectations of market tightening, suggests the freight sector may be entering a transitional phase. Although conditions have not drastically shifted, the slow reduction in available trucks could be a precursor to more significant changes within the next 12 to 18 months. Should this trend persist, shippers may face increased competition for reliable carriers, and rates could steadily climb as capacity constraints amplify.
FreightWaves’ SONAR platform has played a pivotal role in offering real-time data insights that allow market participants to anticipate shifts in the freight sector. SONAR’s weekly “Chart of the Week,” sourced from a database of thousands of data points, helps industry professionals stay informed of the market’s current state. This week’s highlighted chart, showcasing the slight growth in contract rates, underscores the nuanced changes underway within the transportation industry.
SONAR’s utility extends beyond historical data by integrating current events, economic indicators, and supply chain metrics to paint a comprehensive picture of the market. By consolidating data from hundreds of sources, SONAR provides shippers, carriers, and logistics professionals with a real-time snapshot of freight trends and the ability to respond to emerging market pressures proactively.
