Supply and demand are fundamental principles in economics, but what do they have to do with truckload market economics? As it turns out, quite a bit!
Truckload supply and demand are important concepts for shippers and carriers to understand since they explain the relationship between each party in an ever-fluctuating market.
How Supply and Demand Works
Before getting into the specifics of truckload market economics, it is best to have a basic understanding of supply and demand. Fortunately, supply and demand are not concepts you need a degree in economics to understand. At its core, this concept describes the relationship between the goods and services available (supply) and the number of people who want to purchase them (demand).
The Law of Demand
The law of demand states that people buy more of a good when prices are lower than when prices are high.
The Law of Supply
The complementary law of supply states that, when all else is equal, the price and quantity of a good are directly related to one another. Economists generalize that, as prices of a good rise, suppliers increase the supply of that good in hopes of earning a profit.
Market equilibrium describes the state of supply and demand being equal. The quantity of goods supplied balances the quantity buyers demand.
How Supply and Demand Work in Trucking
While supply and demand are basic economic concepts, they have presented logistical challenges in truckload markets. In the ever-volatile truckload market, equilibrium is rarely achieved.
In truckload markets, supply refers to carrier capacity. That is, it encompasses trucks and truck drivers. In the U.S., the truckload carrier base is expansive with millions of trucks in operation, but it is fluid. Barriers to entry are low enough that the majority of the trucking market is dominated by companies that operate fewer than 6 trucks. This means that as demand rises, capacity increases to match it. When the market is poor, capacity decreases.
Demand in the truckload market can be understood as the shipper base. Because this encompasses any and all companies with physical goods to move, demand can be as fluid as supply. As each shipper changes its shipping practices to meet its customers’ desires, it demands something different of its carriers.
Freight rates are driven by supply and demand. Low carrier supply and high shipper demand lead to price increases. Inversely, high supply and low demand lead to price decreases. In the logistics industry, these conditions are referred to as tight and soft markets.
Multiple factors, including truck driver availability, consumer behavior, and seasonality, affect whether freight markets tighten or soften. Low truck driver availability is currently contributing to a tight freight market. Consumer behavior changes in the last year have encouraged this trend. As more consumers turn to e-commerce retailers, the demand for carriers increases.
Factors That Drive the Freight Economy
Despite the seemingly unpredictability of the truckload market, there are patterns forecasters can identify. They are based on seasonal demand, annual procurement, and market capacity.
Seasonal demand is relatively predictable from one year to the next. Some products ship during a set season rather than year-round. Produce in the U.S. South, for example, begins in March, whereas retail peaks around the winter holidays. Carriers move trucks to where they are needed each season. Because the seasonal demand cycle is so similar each year, it does not cause major disruptions to the freight economy.
The annual procurement cycle also affects the freight economy. Since freight rates rise annually, many shippers participate in bidding to establish new contract rates each year. Shippers hope to avoid market volatility and mitigate financial risks this way, but the annual procurement cycle does not stabilize the market.
The third cycle affecting the freight economy is market capacity. Freight budgets may be set during inflationary or deflationary markets. During inflationary legs of the cycle, shippers incorrectly forecast rate environments and end up paying more than they expect. The same happens to carriers during deflationary markets.
Seasonal demand, annual procurement, and market capacity are unstable cycles that can lead carriers to make unwise business decisions, such as over expanding their fleet. On the other hand, shippers may find themselves locked into paying rates that no longer reflect the realities of the market.
Less predictable events that affect the freight economy include catastrophic weather, such as tornadoes or hurricanes. They can create short-term disruptions that typically do not last very long.
Like the rest of the U.S. economy, truckload market economics are impacted by the COVID-19 pandemic. Overall, the truck driver shortage continues, but demand for drivers keeps increasing. Consumers have turned to e-commerce in unprecedented numbers, boosting the demand for carriers. Disruptions to the supply chain also have occurred periodically throughout the pandemic, adding to the market’s volatility.
Despite these issues, the boom-bust cycles typical of the freight market seem to be on hold in 2021. Due to an unusual combination of circumstances, the freight market continues to thrive. While other industries have struggled during the COVID-19 pandemic, shippers are in as high demand as ever. If analysts are correct, the freight economy will continue to evade its usual volatility for quite a while.
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