From shipper clients, a common question is “If we move contract freight exclusively, why should spot prices matter to us?” To answer this, let’s define both terms. Both spot and contract freight are essential to the full truckload market, with shippers depending on factors such as volume density, geography and load characteristics. Asset-based trucking companies and 3PLs also deal with a mix of both, influenced by similar criteria.
Contract freight involves a preset agreement between a shipper and a service provider with agreed-upon pricing, volume, service levels and contract duration. While it sets binding terms for accepted loads, it does not oblige the provider to take every load, only ensuring compliance with contractual terms if they accept the volume.
Spot freight is negotiated on an ad-hoc basis for unique or project-based shipments. Spot rates are influenced by the current market conditions more so than contract rates, offering flexibility but often with rate volatility.
To answer the initial question, both contract and spot rates are driven by market conditions, impacting service quality and price. As such, paying attention to one with no regard for the other is essentially the difference between being reactive or proactive.
Contract rates don’t shift significantly without changes in market conditions, which first manifest in spot rate changes. For instance, contract rates rose in the summer of 2020 due to a sustained increase in spot prices. By August, spot prices exceeded contract rates, and both continued to rise until March 2022, when spot rates fell and crossed below contract rates, causing both to trend downward. With contract rates dropping much more slowly than spot rates, a large gap emerged between the two.
White Line: National Truckload Index (Linehaul Only): National Spot Price Average
Green Line: Van Contract Rate Per Mile (Linehaul Only): National Contract Price Average
A contract-focused shipper ignoring spot rates would face service issues and price increase requests during these fluctuations when prices were rising. By March 2022, they might feel they found an equilibrium, unaware of gained pricing leverage. Monitoring spot rates helps shippers proactively manage service failures and adjust rates strategically, ensuring they pay fair market prices and maintain high service standards.
On the service provider side, both 3PLs and asset-based carriers have a vested interest in spot rates versus contract rates for simpler reasons. For 3PLs, contract rates are essentially their “sell rate” benchmarks to be competitive with asset-based carriers. Markets where contract rates are higher and spot rates are lower are where they have more margin potential and/or can be more competitive than asset-based carriers. Also, markets with high volatility make a 3PL more of an asset to shippers as they have more diverse networks of spot-focused asset-based carriers.
For asset-based carriers, not every load is contracted freight. Often, contract freight serves as the head haul, requiring spot freight to get positioned for the next contract run. Blindly moving into poor spot markets directly impacts the operating ratio. Understanding spot price volatility in the market is beneficial for better negotiating with contract shipper customers. Service quality speaks to shippers more often than they acknowledge. Recognizing the service risks faced by shippers due to aggressive price negotiations can provide a strong point of leverage in an RFP.
To “dock the trailer” on this, contract rates are extremely important for the supply chain to operate as it does today, but contract rates are tied to market conditions. Spot rates react to market conditions very quickly and are a good forecast for contract service quality. Using contract rates alone to benchmark, analyze, monitor and forecast the supply chain will result in a very reactionary approach. Understanding spot rates in the relevant markets allows for more proactive, accurate and agile management of supply chain operations.
If you’re interested in learning more about how to leverage spot rates in a contract-driven supply chain or would like to learn about the data that SONAR provides that even precedes spot rates in identifying market conditions, please reach out to [email protected]. Our team will be more than happy to connect with you!
