Weather Alert! (How Storms Impact Truck Rates and Capacity)

By | March 31, 2017
Impacts on Truck Rates from Winter Storm Stella

Impacts on Truck Rates from Winter Storm Stella

Not again!

In the third week of March the Northeastern portion of the U.S. was once again paralyzed by an unusual late-winter snow storm, dumping a foot or more of snow on a swath running from West Virginia to Maine. Given the magnitude of this event and its negative effects on trucking, one wonders what will become of truckload service and pricing across the Middle Atlantic and New England Regions. What are the costs? What are the impacts to truck rates and capacity? Fortunately, FTR has the unique tools to conduct such analysis. You can’t find them anywhere else! Here is a first cut estimate of what Winter Storm Stella meant to trucking and its customers.

It’s a biggie

The storm was a combination of two weather events. One is a large, cold front storm moving in from the Midwest. Thanks, Chicago, for your gift! The second is the phenomenon Easterners call a ‘Nor’easter’. That’s a storm system that starts in the Southeast and moves up along the coast, following the warmth of the Gulf Stream. They’re called Nor’easters because the counter-clock-wise winds of the storms just offshore cause winds from the Northeast to pummel the cities near the coast. Nor’easters are significant because the warmth of the Gulf Stream fuels the storm – and – makes it very wet. It has a big engine and an infinite reservoir of water. When a Nor’easter collides with a Midwestern cold front the Nor’easter becomes one of the notorious blizzards that this otherwise relatively warm region suffers from. That’s what is going on right now. Importantly, Nor’easters can range inland all the way to West Virginia and Western PA. When combined with a Midwestern storm the effects can reach into eastern Ohio. So, Stella is a big girl, covering parts of NC, most of WV and VA, parts of OH and all of PA, DE, MD, NY, CT, VT, NH, and ME. FTR’s unique freight flow measurement tools tell us that on any given day, 660,000 trucks (23% of the U.S. total) are operating in that area. That’s why demographers call this region the megalopolis.

What happens to those trucks?

This analysis deals with four major effects of such winter storms. First, is the slowing down of operations that will last for 3-5 days. Such slowdowns involve loading operations as well as the more obviously slow speeds and congestion on the highways. Second, is the suspension of operations that has occurred across much of the region and will last about a day and a half. Most of the big cities in the region have declared non-essential travel bans for, at least, the day of the storm. Third, is the disruption of trip cycles cause by changed truck and supply chain operations. That will last at least four days. We saw high volumes of trucks headed westbound on I-78 out of North Jersey on the day before the storm. That is not normal on a Monday. During the great storms of 2014 such disruptions lasted several months before the system settled down. Fourth is the requirement for extra shipments to replenish supplies. There are, of course, a host of other effects like circuity, worker absentees and accidents not quantified in this analysis.

Our results are presented in the accompanying graph. The analysis looks at effects from a regional and national perspective, quantifying cost increases on a weekly, monthly and quarterly basis. On the left side of the graph one can see how snarled operations in the region are during the week of the storm. When one idles 660,000 trucks for a day or two, then slows them for three or four more days, there are major cost implications. Of course, the effects on the national level are much smaller. However, when a storm affects 23% of the nation’s trucks, there are visible percentages on a national level. One can also interpret these percentages as decreases in capacity. That suggests that many shipments, especially in the affected region, will be late. For instance, the bread and milk shelves (emptied yesterday by worried shoppers) will not be fully restocked for three or four days. Or, try getting some extra road salt for your driveway. (Fortunately, the mild winter has left highway departments with plenty of budget and stored road salt. In 2014 when a similar storm hit, there was no safety stock left.)

Will truck rates increase?

Of course, markets work. There will be four major effects. The obvious one will be a short-term spike in spot rates as shippers scramble to find extra capacity. Spot rates were up 22% at one point during the 2014 weather crisis. We expect must less than that this time, perhaps a 5% increment during the week following Stella’s visit (the initial results from the week that Stella hit showed that van and reefer rates, the main impacted segments, were up 5.5% and 6.0%). The second effect will be a shift of some contract business into the spot market as shippers struggle with decreased load acceptance percentages. The third effect will be the related effect as carriers reserve their scarce marginal contract capacity for shippers willing to pay a higher than normal contract rate – a weather surcharge. Finally, there will be a longer-term effect. Carriers’ baseload business will still move mainly under already negotiated rates despite the temporary cost increases indicated above. As such weather events become more common, carriers are being forced to include small fudge factors in their contracted rates to cover such eventualities. Look at it this way. In a time of crisis carriers give their valuable capacity to their most important shippers. Important can be defined by short-run pricing, as with inflated spot prices (I bet Lowes did not discount snow blowers that week). Important can also be defined as sustained attractive margins with core customers whose contracted prices are sufficient to cover such eventualities. Over time, the second definition of important is ruling for most contract-oriented carriers.

A constellation of market forces

There is a trio of coincidental forces that may work to leverage this external shock into an important turning point in 2017 truckload pricing. The first force is the weather, as discussed above. The second force is the already turning pricing trend as the market recovers from the soft volumes of 2016 and looks forward towards the tightened capacity conditions associated with the Electronic Logging Device (ELD) mandate in December. The final force is simple seasonality. This is the time of year when retailers, regardless of the weather today, are gearing up for spring. Volume, market tightness and rates always begin to move up sharply in March. So, we have three forces all moving in the same direction. Moreover, they may well create a reinforcing dynamic due to the shy nature of truckers. History tells us that truckers become much more aggressive with pricing when market events give them emotional cover. It happened in 2004 and 2014 when a similar coalition of forces pushed prices up. It could happen again in 2017.

 

FTR will be following this matter closely. In the meantime: shippers, accept service problems and higher pricing for the week or so following an event. Carriers, you need to be mindful of the very real cost implications of such disruptions. Pricing and capacity allocations will be very important for the rest of March – and the rest of 2017.

Stay tuned.

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About FTR Experts

FTR's Industry Experts include Noël Perry, Larry Gross, Dick Kloster, and Bill Witte. Between them you get over 130 years of critical thinking devoted to the economy and transportation. Noël Perry - Truck and Freight Transportation Larry Gross - Rail and Intermodal Dick Kloster - Railcar Equipment Bill Witte - Macro-Economy

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