Supply Chain Digest: March 2021

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INDUSTRY NEWS

• At the top of the list this week is the cost of fuel. The Rockfarm FSC index shows diesel now at $3.14 per gallon midway through March, a 16% increase in expense since the beginning of the year.
• As we can see by the chart below, the cost of crude has risen above $60 a barrel. Leading indicators include increased economic activity, diesel output slowing due to the recent impact of winter storms on refineries and oil producers maintaining output even with the global economy picking up steam.
• The West coast ports continue to be backed up with ships waiting at anchor to get offloaded. Recent visuals show over 20 container ships waiting to get into the ports of LAX and LGB.
• With continued port congestion, retailers are turning to the skies to place product on the shelf. Demand for air capacity is outstripping available capacity at a 2 to 1 ratio. Wide body passenger planes still remain sidelined due to travel constraints from COVID-19. The TSA recorded its highest traveler throughput for week ending 3/12/21 with1.3 million passenger screenings illustrating positive momentum for air cargo capacity to increase for domestic shipments.
• Amazon continues to increase its air capacity with Amazon Air and the recent stake in Air Transport Services Group. The stake aligns to Amazon’s continued strategy to strengthen its assets within Air Freight adding to its purchase earlier this year of 11 Boeing 767-300 jets.
• Old Dominion reported a 9.2% increase in revenue in February as tonnage increased 5.9 percent despite the colder weather and winter storms.
• U.S. truck trailer orders rose 82% in February to over 24,000 units compared to 2019. Trailer manufacturers are telling OEMs and fleets that capacity for this year is already maxed out with orders now pushing into a 2022 delivery cycle.
• The CVSA has announced dates for several truck inspection campaigns to be held in 2021. The international road check is set for May 4th thru 6th. The expectation is to have 72 commercial vehicles inspected per minute for the 72-hour blitz. In addition to the international road check is safe driver week, July 11th thru 17th; brake safety week for August 22nd thru 28th and lastly, a one day brake safety inspection to be held at some time during the year.

The Avalanche of Higher Freight Expense: GRI vs Contract

You do not have to go far in the industry news to quickly catch up on rate increases. The Less than Truckload carriers initiated a host of General Rate Increases (GRI) in the early part of this year. GRIs ranged from 4% upwards of 6% on average. Many of the LTL carriers will implement a GRI once or more during a calendar year. The GRI typically impacts smaller shippers that do not have a negotiated contractual rate and shippers that have rates negotiated on the carriers current tariff.

Implementation of a carrier’s GRI is fairly seamless with the only notification being the announcement of the GRI. Typical shipper agreements subject to the GRI illustrate verbiage identifying the carrier’s rate base to be used to calculate the rate as “at the time of shipment.” This allows the LTL carriers to streamline tariff adjustments across a large swath of customers by eliminating numerous administrative touch points in contract adjustments. The same adjustments can also occur on changes within the carriers rules tariff.

The challenge for shippers is understanding the exact impact to their costs when a GRI is implemented. The GRI is an overall average adjustment that may have wide variances depending on the carrier’s lane adjustments for head haul and back haul markets. The truth is, the GRI may adjust a shipper’s rates into the double digits depending on their lane activity and shipment characteristics.

The advantage in having LTL pricing contracted on a named rate base is that a carrier must place an effective date and a termination date on your pricing. This allows for the carrier and your traffic team to engage and negotiate next year’s pricing and perhaps subsequent rate increases, eliminating the GRI process enabled through the carriers “at time of shipment” rating clause.

Quick Pulse Market Check

We’re midway through March and the market continues to illustrate a great deal of strength. Load count in the Rockfarm index will match and likely exceed February’s high. In addition, the number of carriers givebacks remains elevated, likely exceeding February’s count. The other leading indicator illustrating that Q1 will end with a bang is the tender reject percentage, exceeding even the percentage seen during the port congestion seen in late August.

ROCKFARM INDEXES

Forecasts on fuel and freight costs should all be thrown out for the next couple of quarters. There is certainly room for improvement in the forecasting models. As recent as last month, forecasts on the price of crude were way off from where it has risen today. What certainties do we have?
1) We know the U.S. economy is gaining steam every day.
2) The global economy is following right behind.
3) The Q1 push to get inventories built up has been well underway, driving capacity challenges in all trade lanes that include ports and rail hubs.

Where does this lead us? Fuel and freight prices have not stabilized with demand growing stronger as the economy continues to recover.
The Rockfarm truckload index hit an all time high in February at $2.85 cost per mile, an increase of $.28 cents per mile. There is little doubt fuel is responsible for some of the
increase, accounting for $.045 cents of the $.28 cent increase in the Rockfarm truckload fuel table. The overall contributing factor is the lack of truck capacity and the need to buy additional capacity on the market, which is creating a seller’s market for truckers.

In addition to the Rockfarm Truckload Index rate, all market indexes tracked within Rockfarm are illustrating large increases in March since a downturn in rates in February. All indexes, with the exception of our National Outliers, illustrate average rate indexes close to or over $3 per mile midway through March. According to Sea-Intelligence, low US retail inventories will drive strong U.S. import demand through the remainder of 2021. Sea-Intelligence data is showing inventory levels are their lowest since they began tracking 28 years ago. Couple demand with increased freight activity, and we are sitting on the perfect storm as ports become bottlenecks that are pushed outward through the U.S. network.

What can we expect moving forward? More of the same as Q1 comes to an end.

The Generational Impact to the Driver Shortage

Since the late ’90’s there has been a constant barrage of news on the subject of “Driver Shortage.” The subject is certainly not breaking news. So here we are over twenty years later taking yet another view to understand what is driving the ongoing driver shortage and what events lay ahead that will determine the factors used to recruit new drivers. One of the latest initiatives has been to recruit young people to the industry. The challenge lies in the competition for young workers with other jobs that pay more, have better working conditions and allow for a steady home life.

In reviewing the generational demographics, the challenges are broken down into key points:

• The Millennial generation has the largest population that now surpasses the Baby Boomer generation.
• The Baby Boomers have been and are transitioning into retirement, and have been selling their Boomerowned businesses which includes trucking companies.
• The Baby Boomer kids in the Generation X demographic are more educated, fewer in number and not wanting to take on the rigors of their parents’ businesses.
• The buyers of Boomer-owned businesses are competitors or larger companies.
• Increased regulations within the trucking industry are actively being reviewed; that includes driver classification and raising the minimum liability coverage.
• Average driver age has varied over the years ranging between 46 and 52 depending on your source.

Where does the above lead? There is certainly continued concern as Baby Boomers continue to reach retirement and step away from the truck. However, there are bright spots to report on several fronts. The first is the renewed focus on the driver and the job at hand. Autonomous driving technologies are making it safer and easier to do the driving. Couple in new technologies such as ELDs, digital load boards and the continued digitization of driver’s responsibilities, and we begin to create a work environment that appeals to younger generations. What we do not know is if the preferred work environment will be as a company driver or as an owner-operator.

Today, there are over 274,000 for-hire motor carriers in the U.S. with 59% of the for-hire capacity being an owner-operator. According to the Owner-Operator Independent Driver’s Association Foundation (OOIDA), the typical owner-operator is 58 years of age and has been driving for over 30 years. Twenty of those thirty years has been as an owner-operator. The question at hand is whether younger generations will fill the void of an owner-operator and begin owning their own trucking company or work for midsize to larger fleets. Increased regulation and expenses, such as insurance, will surely dampen some entrepreneurial spirit. How much will be known shortly.

FOR MORE INFORMATION, PLEASE REACH OUT TO INFO@ROCKFARM.COM.

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Resources

Macrotrends, (2021 March). Crude Oil Prices – 70 Year Historical Chart https://www.macrotrends.net/1369/crude-oil-price-history-chart

Eustance Huang, (2021 February). JPMorgan says two facts could drive up oil prices by another $5 to $10 per barrel https://www.cnbc.com/2021/02/19/jpmorgan-says-two-things-couldpush-up-oil-prices-by-another-5-to-10-per-barrel.html

Sea-Intelligence, (2021 February). Low US retail inventories could fuel strong US container demand through 2021 https://www.sea-intelligence.com/press-room/52-low-us-retailinventories-could-fuel-strong-us-container-demand-through-2021

Justin Ho, (2021 March). L.A.’s latest traffic jam: Dozens of container ships waiting to be unloaded https://www.marketplace.org/2021/03/08/dozens-container-shipswaiting-unloaded-port-los-angeles/

Greg Knowler, (2021 February). No seasonal slowdown for air cargo demand https://www.joc.com/air-cargo/no-seasonal-slowdown-air-cargodemand_20210216.html

Statista, (2019). Number of person obtaining legal permanent resident status in the United States in 2019 https://www.statista.com/statistics/200037/main-countries-of-lastresidence-for-us-green-card-recipients/

James Jaillet, (2021 January). Trucking regs in the fold in 2021: Carrier’s insurance minimums, driver classification, speed limiters and more https://www.ccjdigital.com/regulations/article/14940233/truckingregulations-to-watch-for-in-2021

Jennifer Cheeseman Day and Adrew W. Hait, (2019 June). Number of Truckers at All-Time High https://www.census.gov/library/stories/2019/06/america-keeps-ontrucking.html