The years 2017 and 2018 were incredibly profitable for transportation companies, but the increasing transportation rates that made these years so profitable for carriers also tightened profit margins for manufacturers. Many increased product prices to cover the high cost of freight rates. The boom showed no sign of stopping at the end of 2018. In fact, this very blog predicted that a truck driver shortage in 2019 was a near certainty. In defiance of predictions, however, freight rates began dropping in 2019 and now, halfway through the year, it looks unlikely that rates are going to recover.
Why Freight Rates Are Dropping in 2019
Understanding the current decline in freight rates requires understanding a bit of the recent history of freight transportation. According to the CASS Truckload Linehaul Index, the amount of freight being shipped has been growing overall since 2008, and the infamous “transportation recession” of 2016 looks more like a flattening of the market overall when seen on a decade-long timescale. It was immediately followed by sharp growth in the amount of freight transported in 2017 and even more precipitous volume growth in 2018, with all indicators suggesting that this growth would continue.
In order to capitalize on the unprecedented number of goods being shipped, many freight concerns invested heavily in purchasing vehicles and training drivers to meet and capitalize on the surge in demand. Heavy-duty class 8 truck orders surged in 2017 and 2018 set a new record for sales. Notably, several major analytics outfits predicted and currently report a truck driver shortage, even though the industry is adding truck drivers.
However, the volumes of freight being shipped in 2019 have gone down. Owner-operators and freight companies with more trucks than they can use and more drivers than they need are struggling to compete for fewer contracts that pay less. The reduced volumes are the result of several factors outside of manufacturing companies’ or the freight industry’s control.
The Many Market Challenges of 2019
Industry and manufacturing have faced, and continue to face, many challenges in 2019. Changing policies have made it harder to trade across borders. Uncertainty is causing businesses across the board to hedge their bets. And environmental factors specific to 2019 have compounded these issues.
Anticipating Tariffs
Economically, the years since 2016 have been dominated by talks of a trade war between the United States and China, which has come to fruition with the mutual imposition of an escalating series of tariffs over the course of 2018. Inventories were built up in anticipation of these tariffs being imposed—this build-up may have been one of the reasons for the record freight demand in 2018—and inventories are now slowly being liquidated. Certain supply legs are running less often, or not at all, as companies work through stockpiled components. Due to caution about how the trade war will develop in the future, the number of outgoing shipments has also been lower in some industries. The current trade war, along with other developments, has also deeply affected U.S. farmers and the bulk freight they normally ship.
Fewer Bulk Crops
China is the world’s largest buyer of soybeans and the U.S. is the world’s largest grower. Counter-tariffs imposed by China on U.S. soybeans have resulted in farmers planting less and needing to move far less soybeans, contributing to less demand for bulk freight. Torrential rains and flooding across the midwest during the spring and early summer of 2019 delayed the planting of soybeans and many other crops. The result is even fewer bulk crops in need of transport and an overall decrease in the amount of freight needing shipment, which have brought down freight rates in 2019 even further. A growing number of additional trade issues may also cause slowdowns in other industries that are not already affected.
Trade Uncertainty
The disputes between the U.S. and China dominate headlines, but trade protectionism in other markets is also a concern. The question of Brexit has yet to be settled and could have widespread repercussions if the United Kingdom exits the EU on October 31st without a deal. In Asia, a recent trade dispute between Japan—the world’s largest manufacturer of semiconductors and electronics materials—and Korea—the world’s third-largest manufacturer of semiconductors and electronics—could have an equally wide-ranging effect, raising the cost of consumer durables, which may cause further volume reductions in freight rates in the coming months and possibly even years. Uncertainty about suppliers, supply levels, and the associated costs seems likely to continue into 2020, making it difficult to predict what the effects on volumes will be and whether or not freight rates will continue dropping in the future.
Taking Advantage of Freight Rates Dropping in 2019
The obvious course for manufacturers and producers of consumer packaged goods is to take advantage of freight rates dropping in 2019 to maximize profit margins. At present, consumer confidence is fairly high and the U.S. economy is growing at a steady rate in spite of woes in farming, heavy industry, and manufacturing. Maximizing profits now will help to offset potential future cost increases. Due to the poor crop yields in 2019 and the costs associated with tariffs, operational costs—if not transportation costs—are likely to rise in the future. Freight rates may also increase again as farms recover and new component suppliers come online. Maximizing operational efficiencies now will help to maximize profits in the present and offset any future cost increases.
One of the easiest ways to improve operational efficiency in the supply chain is by choosing a better shipping platform. Plastic pallets have many advantages over wood pallets, including a significant weight savings which can increase the average fuel mileage for trucks. Their durability and strength can lower product damage and reduce supply chain interruptions. Plastic is also a reusable and recyclable material, which makes plastic pallets the best choice for companies looking to build a closed-loop supply chain that supports the circular economy. Plastic pallets are easy and fast to clean and sort, which reduces the space needed to manage them and reduces trips to depots for inspection and repair. Shipping on lightweight plastic shipping pallets makes sense no matter what freight rates are as they offer savings and cost offsets regardless of market climate.
iGPS rents light, durable, GMA spec plastic pallets through a pallet pooling system to save your company the administrative hassle of managing an internal pallet pool. To maximize the savings created by falling freight rates in 2019, give our team a call at 1-800-884-0225, email a specialist at switch@igps.net, or visit our contact page.
