Why freight is a commodity

Transportation remains as critical to the production infrastructure as many of the physical goods “commodities” we rely on today.

Transportation capacity has largely been taken for granted. Deregulation and extreme competition have kept prices relatively low and given the illusion of consistent availability. But over the past five years, volatile economic conditions have exposed just how critical transportation capacity is to the stability of supply chains across the globe and subsequently the economy. Transportation networks are the backbone of supply chains and as they go, so do all of the companies that rely on them. Capacity is a limited resource that is necessary for daily functioning whose value can fluctuate significantly, which is exactly what makes it a commodity. 

 

What is a commodity?

The Oxford English Dictionary provides two definitions:

  1. A raw material or primary agricultural product that can be bought and sold, such as copper or coffee.
  2. A useful or valuable thing, such as water or time.  

 

Merriam-Webster has a few other definitions that expand on those:

  1. A good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (such as brand name) other than price.
  2. One that is subject to ready exchange or exploitation within a market.

 

These definitions are broad and yet still somehow insufficient. They might as well say a commodity is a thing. A combination of pieces of each of these definitions probably gets us to what most of the world considers a commodity is — a valuable good or service that can be bought and sold interchangeably and is subject to ready exchange within a market. 

The services-as-a-commodity concept is probably the most difficult to accept for most. It might be easier to think of transportation capacity as a hybrid of goods and services. It involves a physical space (goods) and an operation to move that space (services). The key is that both aspects can be bought and sold with extremely wide fluctuations in value based on supply-and-demand conditions.  

The freight market — where the cost of transportation is decided — has price fluctuations similar to that of some of the most commonly traded commodities. 

Traditional commodities traded on exchanges are primarily raw material inputs or agricultural products whose value can fluctuate wildly based on volatile supply-and-demand conditions such as oil or grains. Comparing an example of what most consider a traditional commodity will help illustrate why transportation capacity and service have nearly the same exact defining characteristics. 

Commodities exchanges in their rudimentary forms began thousands of years ago. However, the modern domestic versions began in the 1800s with the formation of the New York Mercantile Exchange (NYMEX) and Commodity Exchange Inc. (COMEX) in 1933, where traders would meet to exchange options to buy and sell commodities. Most of the commodities were agricultural by nature at the time but evolved to cover many other items that companies’ or individuals’ day-to-day business depended on. 

Corn is a grain crop that accounts for 95% of the total feed production and use in the U.S. according to the Department of Agriculture. If the supply or demand of this crop shifts too quickly, livestock populations will suffer and so will food production. 

 

The chart for corn futures measures its price fluctuations over five years as commodities traders attempt to hedge their exposure to dramatic price fluctuations. Large-scale manufacturers depend on a consistent supply of grain at a consistent price point in order to maintain efficiency and profitability. This crop is necessary for the operational well being of multiple industries and the population, hence its value can change dramatically at times. 

Transportation services are arguably more critical as they serve nearly every industry on some level. Physical commodities could not be delivered without them and therefore would have no value. Transportation price fluctuations over the past five years reflect just how valuable they are. 

The National Truckload Index linehaul only (NTIL) measures the average price of moving freight in a dry van trailer by truck across the U.S., excluding estimated fuel costs on the truckload spot market in a rate-per-mile format. The index’s purpose is to show how the cost of truckload transportation fluctuates across America on a daily basis. The value of truckload capacity doubled from 2020-2021 and then dropped 40% from January to November 2022. 

Looking at the chart of truckload prices, the value fluctuates more wildly than corn, especially before the COVID-19 pandemic. The reason for this is that other commodities are produced in surplus with fairly predictable demand patterns. 

Though it is difficult to ramp up a lot of grain production quickly, spikes in demand are rare in comparison to supply-side reductions. By comparison, transportation demand spikes beyond available supply nearly every year in seasonal “peaks” — sometimes as the result of spikes of demand in the traditional commodity. So when demand for other commodities jumps, transportation demand does so as well, making it twice as sensitive as a single commodity to market fluctuations.

The bottom line is transportation remains as critical to the production infrastructure as many of the physical goods “commodities” we rely on today. Its price volatility represents the perfect example of this and its price does not include any speculation as with most other commodities.  

Transportation demand accounted for 8.4% ($1.9 trillion) of the final GDP in 2021, according to the Bureau of Transportation Statistics (BTS). That value increased over 9% in 2021 as companies encompassing a wide range of industries from food production to automotive realized how critical of a component this service is to their success.   

If that still is not enough to convince you, here is an AI-generated response to the question from ChatGPT:

“Trucking capacity can be considered a commodity in the sense that it is a finite resource that is in demand by various industries and businesses. Like other commodities, the availability and price of trucking capacity can fluctuate based on market conditions. Factors such as fuel prices, economic activity and regulations can all affect the supply and demand for trucking capacity, which can impact the cost and availability of this commodity.”

Trucking capacity is one of the nation’s most valuable commodities. The pandemic era made this more apparent than ever as the economy continues to recover from its lasting effects. Without it, our ability to produce goods efficiently and in quantity would fade as supply chains would become compressed and localized, limiting our economic growth potential. Possibly the easiest way to understand how valuable a commodity is would be to imagine the world without it.  

 

How you can make FreightWaves National Truckload Index (NTI) to be a reliable source to benchmark your supply chain?

Schedule a free consultation to see how SONAR can provide you with a clear view of market trends and price levels for your management teams.

 

Zach Strickland, the “Sultan of SONAR,” is the head of market intelligence at FreightWaves. With a degree in finance, Strickland spent the early part of his career in banking before transitioning to transportation in various roles and segments, such as truckload and LTL. 

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By increasing the number of loaded miles per day your drivers drive by 1% and your rate per mile by $0.03 you will make more per week #WithSONAR.

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Disclaimer: Every company’s circumstances are unique. Fixed and variable expenses, market conditions and operational factors vary. Unforeseen events may also affect results. Calculated potential results reflect the consensus expectation of FreightWaves’ experts. Actual results may vary.

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