When it comes to freight, there are two primary ways in which shippers and carriers negotiate pricing: contract rates and spot rates. And, anyone who’s been involved in the trucking industry over the last few years knows that COVID created a highly volatile rate market for shippers around the world.
So, what exactly are contract rates and spot rates, what can you expect in the future, and how can your business stay prepared in such a volatile market?
Contract Rates
In the context of freight transportation, contract rates refer to long-term pricing agreements between shippers and carriers. These agreements typically extend over weeks, months, or even years and are characterized by a committed volume of shipments within a specified timeframe. Shippers and carriers negotiate these rates in advance, taking into account various factors such as specific shipping lanes, distances, commodity types, and prevailing market conditions.
Contract rates provide both parties with price stability, ensuring that shippers can budget effectively and carriers have a predictable stream of income. Shippers know their rates, carriers can plan their routes, and brokers can forecast. These long-term commitments foster a mutually beneficial relationship, as shippers secure reliable transportation services while carriers maintain steady business.
In less volatile markets, contract freight benefits both the customer and carrier by allowing for consistency in who the drivers will be as well as a predictable cost on both ends. But in a volatile market (like the one we’re in right now), contract rates struggle. A shipper may try to chase lower rates, a carrier may try to chase higher rate paying loads, or a broker may give up because they cannot meet the contracted price. This volatility is why you see more mini bids and quarterly instead of annual RFPs recently.
Spot Freight
In contrast, spot rates are short-term pricing agreements for freight services. Spot rates are influenced by immediate market conditions, and they are used for one-off shipments or short-term transportation needs. Shippers often turn to spot rates when they require quick, flexible solutions or when their contract commitments are insufficient to meet sudden spikes in demand.
Spot rates are typically subject to competitive bidding, with carriers providing quotes for specific shipments. This competitive environment can lead to price variations, as carriers compete for the business.
This is particularly advantageous when quick adaptation to market dynamics is necessary, but it also carries the risk of price volatility, making spot rates only suitable for businesses that can accommodate fluctuations in shipping costs. Market factors such as demand, capacity, fuel cost, and seasonal variations can lead to large swings in spot rates.
In addition to price volatility, spot rates lead to more transactional relationships between carriers, shippers, and 3PLs, leaving little room for building strong, reliable relationships found in established contracts. Since everyone just bounces to the lowest bidder, building trust is nearly impossible in the long run.
Looking to the Future
So, where are truckload rates now and, perhaps more importantly, where are they headed?
Spot rates have absolutely plummeted since 2020, sitting roughly 75 cents per mile cheaper than contract rates. While we haven’t seen significant compression in the margins yet, the industry is on the cusp of a bid cycle which may be the push large asset carriers need to drastically cut their contract rates.
Once contract rates drop, spot rates are predicted to continue climbing until the margin between the two is minimized and the market is stabilized.
At this point, the smartest move a shipper can make is to align themselves with partners that are focused on growth and sustainability. Chasing bottom-of-the-barrel spot rates may be attractive in the short term, but building reliable partnerships with trustworthy freight brokers and 3PLs is what leads to long-term value for an organization through efficiency and reliability..
What is HPL doing to help?
“At HPL we try to build trust with our shipper partners AND our carrier partners so that they don’t feel like they need to shop rates. We also take an active view of the market and continually review rates and have conversations with our customers. Sometimes we lower rates and sometimes we have to raise them. Having those fluid conversations around competitive rate value shows our customers that we not only care but that we are looking out for their interests no matter the market that day, week, month.”
Adam Ferguson
President and CEO
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