Breakdown of spot to contract rates now in SONAR
Following the release of the National Truckload Index (NTI) a few weeks ago, FreightWaves developed the Spot to Contract Rate Spread (RATES) to help users understand the short and long term relationships between pricing trends transactional and long-term.
Traditionally, contract rates follow the spot market trend after about 90 days. Knowing the direction and speed of spot rate movements relative to contracted rates can tell you how supply and demand conditions are changing in the truckload market and give you advance notice of what to expect in regarding future offers.
FreightWaves CEO Craig Fuller recently wrote about this as it relates to the current trucking environment.
The RATES index displays the difference between the FreightWaves National Truckload Index (Linehaul Only – NTIL), which excludes estimated fuel costs, and the Van Contract Rate Per Mile Initial Report Index (VCRPM1) – based on over $80 billion in freight bills. Since the contracted rates are reported with a 14 day lag, there is also a 14 day lag in the RATES.
The formula is NTIL-VCRPM1. See an explanation of how NTIL is calculated.
Contract rates are defined as long term rate agreements, normally set for a 12 month period, but can be shorter or longer. The main idea is to establish an efficient way to communicate the need and secure the capacity between the 3PL shipper/provider and the carrier without negotiating the rates on a day-to-day basis. These rates are slow to change due to their extended cycles.
When spot rates remain above contracted rates for an extended period of time, this indicates that contracted rates will also rise. The other implication for spot being higher than contract is that carrier compliance should also deteriorate as they have shippers always willing to pay higher prices for trucking capacity.
On the contrary, when spot fares fall below contract, it indicates that carriers may begin to offer lower long-term fares with increasing contract compliance.
Since carriers set spot fares differently than contract fares when it comes to the inclusion of fuel (in the form of fuel surcharges), FreightWaves has also included two new NTIL variants that remove fuel costs at different levels – NTIL12 and NTIL20. These remove fuel costs above $1.20 per gallon and $2.00 per gallon, respectively, which are two of the most popular starting points for passing on fuel costs to the contract side.
In short, NTIL removes the entire fuel cost from the spot rate, while NTIL12 and NTIL20 removes less fuel cost from the spot rate, allowing you to see different levels of fuel influence.
The purpose of this is to be able to compare the spot rate and the contract rate in a more apples to apples way. In the chart above, RATES reflects the largest discount in the contract market, while RATES20 displays the smallest.
Click here for a detailed explanation of the calculation of RATES.