SONAR now has spot to contract rate spread

Scott MallFreight Market Blog

FreightWaves’ National Truckload Index (NTI) is a national (U.S.) spot rate index based on an average of booked spot dry van loads from 250,000 lanes. These transactions originate from FreightWaves Trusted Rate Assessment Consortium (TRAC) and are reported daily.

Following the recent release of NTI, SONAR now contains a spot to contract rate spread index (RATES) to help users understand the short- and long-term relationships between transactional and long-term truckload pricing trends.  

Traditionally, contract rates follow the up or down trend of spot rates after about 90 days. By tracking the direction and velocity of spot rate movements in relation to contract rates, SONAR users can see how supply and demand conditions are changing in the truckload market. This gives SONAR users “early notice” regarding the direction of contract rates for upcoming bids. 

Craig Fuller, founder and CEO of FreightWaves, recently wrote about this as it relates to the current trucking environment

The RATES index displays the difference between FreightWaves National Truckload Index (Linehaul Only – NTIL), which excludes estimated fuel costs, and the Van Contract Rate Per Mile Initial Report Index (VCRPM1) – based on over $80 billion of freight invoices. Since contract rates are reported on a 14-day lag, there is also a 14-day lag in RATES. 

Contract and spot rates

Contract rates are long-term pricing agreements, normally established for a 12-month period, but they can be shorter or longer. Contracts are used to establish an efficient method of communicating the need for and securing capacity between a shipper or 3PL provider and a carrier without negotiating rates on a daily basis. These rates are slow to move because of their extended cycles. However, it should be noted that contract rates are not actual contracts, and can be breached by either party.

When spot rates remain higher than contract rates for an extended period of time, it is a signal that contract rates will also increase in the near future. The other implication of spot rates being higher than contract rates is that carrier compliance should also be expected to deteriorate because there are other shippers willing to pay a carrier higher rates for its trucking capacity. 

However, when spot rates fall below contract rates (as has occurred since early March 2022), it is indicative that either shippers, 3PLs and/or carriers may bid new contracts with long-term rates lower than they are currently. That is beginning with increasing frequency at this time. In addition, because there is less freight on the market, carriers are more likely to increase their contract compliance. 

The impact of fuel on rates

Carriers price spot rates differently than contract rates in regard to the inclusion of fuel (in the form of fuel surcharges). Therefore, FreightWaves has also included two new NTIL variants that remove fuel costs at different levels – NTIL12 and NTIL20. NTIL12 removes fuel costs above $1.20 per gallon, while NTIL20 removes fuel costs above $2.00 per gallon. These are two of the most popular starting points for passing along fuel costs in contract rates.  

Therefore, the NTIL index pulls the entirety of the fuel cost out of the spot rate; NTIL12 and NTIL20 remove less fuel cost from the spot rate – allowing SONAR users to see varying levels of fuel influence. 

The new linehaul-only derivatives (NTIL, NTIL12, NTIL20) give insight into how fuel costs are impacting spot rate movements and carrier margins. 

This is done so that SONAR users are able to compare the spot and contract rate in ways that are more “apples to apples.” In the chart above, RATES reflects the deepest discount to the contract market, while RATES20 shows the smallest.