Chart of the Week: Van Contract Rates and Tender Rejection Index
The post-pandemic trend of pricing long-term or contract rates to the floor is slowly coming to an end, according to recent data. When analyzing the past six years of dry van contract rates (VCRPM1) and van tender rejection rates (VOTRI) in the United States, a lagging correlation between the two can be observed. Tender rejections typically lead changes in contract rates, with higher rejection rates indicating a tighter market.
Tender rejections are a measure of carrier compliance or adherence to covering freight under a previously agreed-upon price. When the Outbound Tender Rejection Index (OTRI) is above 7%-8%, rates tend to increase, whereas rates tend to fall when rejection rates are below 5%.
Historically, the transportation market has gone through four distinct cycles in the past six years. The most recent cycle, which began in 2017 and ended in 2022, was characterized by high rejection rates and a rapid increase in contract prices. The pandemic era that followed saw overwhelming demand and historic capacity growth, which eventually led to a bubble bursting in 2022.
Currently, contract rates have been falling since July 2022 but have stabilized in recent months. Tender rejection rates have been slowly trending higher, indicating a potential shift in the market. For carriers, survival is key, while shippers must focus on risk management. Brokers and 3PLs need to strike a balance between the two.
The key to success in the freight market lies in preparation. Shippers should aim to maintain service levels and diversify route guides to navigate a tight market. Service providers must remain vigilant and adapt to market changes to stay competitive. As the market cycle approaches a turning point, being prepared is crucial.
In conclusion, monitoring market trends closely and being proactive in decision-making will be essential for all parties involved in the transportation industry. As Louis Pasteur famously said, “Fortune favors the prepared mind.” Stay tuned for more updates on the changing dynamics of the freight market.
The FreightWaves Chart of the Week provides valuable insights into the state of the freight markets, with real-time data and expert commentary. To stay informed and make informed decisions in the industry, request a SONAR demo today.