Understanding freight rates: the impact of economic cycles

Freight rates are the main source of revenue for this industry, reflecting the health of the market

Freight rates are fundamental in the truckload transportation industry, as they reflect the current market conditions and are subject to numerous fluctuations. Carriers constantly adjust these rates in response to changing industry conditions. A recent article by FleetOwner explores how these rates function and their importance within the sector.

Typically, shippers pay carriers a rate per mile, supplemented by a fuel surcharge. Thus, freight rates, which constitute the main source of revenue for this industry, not only determine operational costs but also reflect market health. These rates fluctuate based on market conditions and vary significantly between different segments, such as spot rates and long-term contract rates, offering key insights into the economic dynamics of the transportation sector.

Differences between spot rates and contract rates

To understand freight rates, it is essential to know that there are two types of rates in the sector: spot rates and contract rates. Spot rates refer to those applied to short-term or immediate payments. In truckload transportation, a spot rate is the cost of moving a specific load quickly, as opposed to contract rates, which are established for longer terms.

Spot rates are agreed upon between fleets and brokers or carriers for immediate loads and are negotiated in the spot market, where shippers and carriers interact on load boards. These rates reflect real-time market conditions and are influenced by supply, demand, type of load, weight, route, fuel costs, driver availability, and urgency. When there are more loads than available trucks, rates typically increase.

On the other hand, contract rates are based on long-term agreements with fixed rates throughout the contract’s duration. Although less flexible than spot rates, they offer stability and are often lower, including additional services such as tracking and insurance. These contracts are negotiated directly between shippers and carriers and are adjusted based on market conditions at the time of negotiation, not in real-time. The duration of contracts can vary, influenced by various external factors.

Fluctuation of freight rates

Freight rates for truckload transportation vary based on the type of load and equipment. For example, dry loads, which use standard containers, have lower rates because they require less specialized handling. In contrast, refrigerated loads require equipment to maintain temperature, which increases rates. Flatbed loads, which are typically large and require securing equipment, also have higher rates. Additionally, rates for hazardous loads or those requiring special care are higher due to additional regulations and restrictions.

The economic cycle, with its phases of expansion and contraction, significantly affects freight rates. During periods of high seasonal demand, transportation rates tend to rise, whereas in times of crisis, they decrease. These cycles are driven by the same supply and demand factors that affect individual rates, with an excess of carriers or capacity being major contributors to price fluctuations.