Time For Some Basic Accounting Lessons

Its drivers stupid
It’s drivers stupid! Who wants to sleep in a truck even if it is a shiny new Peterbuilt? That’s what most people think. How does one recruit people to do that? It’s no wonder contract prices are up 28%. Spot prices peaked at 56% above the starting point. 

SURE HAS BEEN tough being a shipper recently! The accompanying chart tells us what has happened to rates since the start of these crazy times back in early 2020. After an initial dip during the COVID-19 lockdowns, rates have spiraled upward, especially spot rates. Now, spot rates are falling, but not contract rates. What the heck is going on? Is it a market force like a lack of drivers, or something else? To answer that question, we have to go back to our managerial accounting classes in college.

Not so fast! What about inflation? That’s the first accounting adjustment we need to make. Economists call the prices in the Spot & Contract Price graph nominal prices. They include inflation. To get a better idea of the market forces inside a sector like trucking, they subtract out inflation, creating real prices, prices reflecting the real conditions within an industry. I have done that for these numbers. Of the 28 percentage points of contract price increase, inflation has accounted for nine percentage points, more than a third. So we can quickly see that inflation is a big deal in truck pricing.

Is it that simple? Of course not. This is your friendly economist writing. It has to be complicated. Maybe not. We only have to make one more accounting adjustment to get an accurate picture. Anybody who has bought fuel recently knows what that adjustment is. It turns out that trucking handles most changes in fuel prices through fuel surcharges that take fuel costs off the negotiation table. When we do that for the above numbers, we subtract an extra eight percentage points from the contract price index. That subtraction leaves us with a 12% increase due to market forces, important but not as important as we thought at 28%. I have summed up these three forces in the Influences On Contract Prices chart. Early on, the increases were dominated by market forces. Then inflation took over, and now fuel adds its ugly influence.

But wait a minute: If I take out those two accounting adjustments, I still get a funny picture. The Market Force Influence graph shows the spot and contract movements without inflation and fuel. What does this picture tell us? Well, it tells us two things, one for sure. Obviously, spot prices are much more volatile than contract prices. The historical data make that clear, and this time the difference was very large. We know the spot market, by definition, is the place where surges in demand get handled first. We had this type of surge in the middle of 2020, and people looked to the spot market to find capacity. That’s also where all the new capacity went—right where the prices were best.

Something has recently changed, Noël. What’s going on? I’ve been saying for a year now that peaks like this don’t last. It didn’t. Spot prices are almost back to normal. If you don’t believe me about the declining strength of the freight surge that caused this peak, just talk to Amazon about their excess warehouse capacity and bloated inventories. Waves go up—then they go down.

contract price levels

No cycle for contract rates? That’s what is most interesting about this cycle. Although contract rate cycles are always smaller than those cycles for spot rates, they have cycled less than historically normal this time. Among several explanations, I suggest that shippers, and carriers, are increasingly segregating their business into stable flows that are easy to handle via contracts, and the unstable flows they kick out to the contract markets. “We’ll let the brokers and owner-operators handle that nutsy stuff while we concentrate on moving our regular flows as efficiently as possible.” Both shippers and large carriers want this to happen. We saw this in the expansion of dedicated contracts between 1995 and 2015. It is apparently happening in the rest of the non-contract inventory.

influences on contract prices

The picture tells us, or suggests, something else about contract rates. They tend to change six to nine months after spot rates change. That’s what happened in 2018. I expect it to happen again in late 2022 or early 2023. The big fleets are loudly saying that their prospects remain bright. That may be true in the rest of 2022—not so in 2023. What goes up must go down, even if the amplitude for contract rates is less than that of the spot market.


One more thing. Although it is possible to understand these dynamics, they make truck pricing more difficult. One aspect is simply the complexity. Shippers and carriers have to keep in mind inflation, fuel and market conditions. Just as important is the cyclicality of this market. What worked in 2021 is not working in 2022 for spot markets. What is working in 2022 will not work in 2023 for contract markets. Managing through such cycles, even while everybody else is stupidly looking backward has become a critical management skill. How does one survive in the spot market when prices are tanking at the same time costs are going up? Not easy. However, this data does tell us one reassuring thing. Spot prices are still roughly 10% above the level of 2020.1, before this cycle started. Did they not make at least some money in that market; why not in this market? If, however, a trucker or broker is still managing as if things were the same as they were a year ago? That is a BIG problem.

Image Credit: Graphics courtesy of Noël Perry. RAWF8/SHUTTERSTOCK.COM.