Why Spot Rates Are Declining

Why were freight rates so low in 2022?

With supply constraints and consumer demand steadily declining throughout 2022, spot rates have followed suit—making it a shipper's market. Despite currently being in what’s traditionally peak season, the supply of carriers in the market and class 8 truck orders has only increased slightly—thus forcing spot rates to reach new lows, and the gap between contract and spot rates continues to widen.In October, spot rate loads posted on DAT were down by nearly 52% year-over-year. Average rates were also down by about 16% from 2021, and average rates this November were the lowest they’d seen since September 2020.¹Want to dive deeper into spot quote trends? Take a look at DAT’s current national rates. So, what’s been happening around the globe to cause these severe drops in rates?

Dramatically rising inflation.

When the growth of the money supply increases too rapidly or when the Federal Reserve, the central banking system of the U.S., sets too low of a federal fund interest rate, inflation increases.The inflation rate made the biggest jump in the shortest amount of time ever seen—drastically rising from 1.4% to 9.1% within 12 months.Sitting at 2.33% as of September 2022, the current extra-low federal fund interest rate has been a key reason for this high inflation rate.²

Plummeting demand for goods.

With the cost of living skyrocketing in 2022 due to inflation, consumers tightened their spending—causing the pandemic-related surge in consumer demand seen in 2021 to drastically drop off in 2022.³With people buying less, demand for goods tanked—meaning that there’s simply been less freight to move.

Stagnating global trade.

As the amount of global merchandise—and, subsequently, the need for shipping—plateaued, world trade slowed.⁴Container imports from China into the U.S. were down 23% in October from August’s annual high, and the average price of shipping a 40-foot container reached its lowest cost in two years, according to the Drewry Worldwide Container Index.¹Additionally, between the conflict in Ukraine, pandemic-related lockdowns in China, rising inflationary pressures, multiple railroad strikes, and anticipated monetary policy tightening, world trade keeps taking disruptive hit after hit. The halting and detouring of freight in such a volatile global landscape combined with the already low demand has made predictability nearly impossible, causing carriers to bid for loads lower than they otherwise would in order to maintain some sort of profit.

When will freight rates go up?

While carriers who rely on spot freight are expected to face tougher conditions in the coming months, there is a light at the end of the tunnel. Spot rates are expected to turn back towards carrier favor in the latter half of 2023. In the meantime, shippers can take advantage of low spot rates into the first half of 2023—making for less contracted freight and shorter bid cycles. However, while prices are low now, costs will increase in the later half of 2023. This means carriers will go after spot rates to increase profits—impacting those low contract rates.

2023 spot rate forecast.

Historically, the trend of contract rates trails spot rates. Heading into 2023, we'll most likely see an influx of shippers looking to secure contracted rates at these low prices before the market flips. So while it’s likely that we’ll see lower-than-normal contract rates through 2023, expect spot rates to rebound after staying stable through the first half of the year.Chris Pickett—a market analyst with 20 years in global supply chain management and transportation market economics and Flock’s COO—says:“Look for spot rates to begin their recovery higher in the months ahead while contract rates have more room to run lower before breaking year-over-year deflationary as early as this quarter, finding a floor in mid-2023, and breaking year-over-year inflationary once again in 2024.”

How to navigate the 2023 spot rate market.

Tips for shippers.

Lock in 2023 contract rates now.With prices at an all-time low, it’s a great time for shippers to lock in contract rates for 2023 so you can keep reaping the low-cost benefits for as long as possible. Plan for carriers to go after spot rates in the later half of the year, though, as there will be more money to be made.Diversify your carrier mix.If you operate largely on the spot market, then it’s a great idea to expand your carrier network. Carriers want your business right now, so not putting all of your eggs in one basket will help to secure the lowest possible spot rates. Ship more frequent, smaller loads with FlockDirect®.Flock’s patented technology optimizes for efficiency and cost savings. Let our shared truckload service smartly combine your shipments, so you don’t have to wait to fill a truckload to get your goods out the door—and can take advantage of low cost spot rates while they’re still here.

Tips for carriers.

Top off your trailer, especially on backhauls.Look for opportunities to earn more on every load, especially with backhauls. The empty space in the back of your trailer could be earning you extra revenue in today’s market. Search for partials—like the hundreds available daily on Flock's free platform—to top off your trailer and earn extra cash. Just be sure to be mindful of planning because missed delivery appointments or delaying your original shipment can result in unhappy customers.Earn more per haul with shared truckload.Book shared truckloads to secure pre-planned, high-revenue loads that fill your trailer to capacity and place freight on the most optimal route, minimizing your out-of-route mileage.By combining loads from multiple shippers, Flock’s exclusive shared truckloads allows you to earn up to 20% more than a standard truckload—giving you a leg up in today's market.Prioritize providing exceptional service.Take a carrier of choice approach, meaning that you become a carrier who shippers want to utilize. How? Make it easy for shippers to work with you by ensuring on time deliveries with minimal damage, understanding their unique needs, communicating clearly, and more.Developing strong relationships with shippers make it more likely that they’ll stick with you when the market flips, which will help keep your service levels up.Access a wide net of freight opportunities by leveraging a broker or freight expert like Flock.

Stay ahead of future market changes.

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FAQ's

What are contract rates?

A contract rate is a locked-in, guaranteed shipping cost over a predetermined amount of time. Contracted rates tend to be mostly—but not exclusively—utilized by larger companies that have more predictable shipment volumes. For shippers, the benefits of securing contract rates include:

1. Not needing to get a new rate for each shipment
2. Being able to anticipate their shipping costs

For carriers, the main benefits of contract rates are similar, including:

1. Only needing to negotiate an agreed price one time
2. Having better ability to anticipate their earnings

What is a spot rate?

A spot rate is a one-time cost for moving a shipment. While not exclusively, spot rates tend to be popular with smaller shipping operations that have less predictable shipping volumes.Spot rates are low—and, thus, beneficial for shippers—when consumer demand is low. That’s because, with less freight needing to be moved, more carriers are seeking available loads and will competitively lower their spot quote rates in order to secure shipments and earnings.When there’s high consumer demand—meaning there are a lot of goods needing to be shipped—carriers can charge more, so spot quotes become more pricey.

How do spot rates differ from contract rates?

Unlike the consistent pricing of contracted rates, spot rates are volatile—constantly fluctuating with market changes. They’re also dependent on fluctuating driver availability, load-to-truck ratios, fuel costs, origin-destination pairings, and more.