From new rules to heavy taxation, the trucking industry does not operate without challenges. Today, motor carriers bemoan new trucking rules, taxes, and other factors that lead to truck driver shortages and rate hikes. Today we will take a look at a few of those factors and how they are impacting the trucking industry, both here and across the border.
If there is one country that is locked together with American trucking companies, it is Mexico. There is so much cross-border freight from the U.S. to Mexico that many wonder how business was done before entities were able to push the supply chain south of the border. Yet, that doesn’t mean they are without problems.
If you talk to many local produce and trucking industries, they will tell you that new regulations have created an environment rife with truck driver shortages, skyrocketing trucking rates, and technical problems. As a result, some American trucking companies are even making the hard choice to move their operations to Mexico.
South of the border, companies deal with rules that prohibit foreign truck drivers from picking up cargo in the U.S. and delivering it within the country. The ELD mandate also presents a unique challenge because commercial truck drivers, no matter where they are operating, must comply with installation of the devices on their vehicles.
The result? Another truck driver employment crunch and several trucking entities being required to replace Mexican truck drivers with U.S. citizens. In some cases, truck drivers are forced to double up on their runs to keep their hours down.
Due to this convergence of factors, the delivered cost of fresh produce has been rising almost by the day. It won’t be long before retailers and restaurants will have no choice but to pass those increased costs on to shoppers. As a rule, if transportation costs rise, inflation will rise with them.
The fact is, even short-term spikes in shipping costs can result in price increases at the grocery store. Consider how easy it is to simply change the sticker price on a product. Shipping and transportation are huge drivers of food costs.
As an example, if one looks at the rates to ship produce from a location like Nogales, Mexico to Los Angeles, California, the increase becomes obvious. Prior to the New Year, rates were around $1,200. Today, rates average around $2,000 and even up to $3,000.
According to a recent USDA Truck Rate Report, some locations are suffering from a “slight shortage” of trucks, as they refer to it. With local trucking rates in many municipalities at record highs, many are wondering when the spike will end. While the ELD mandate and cabotage rule can be blamed for a portion of it, East Coast storms, post-holiday shelf restocking, and a general shortage of truck drivers across the country all contribute to the problem.
Did you know that trucking companies pay one of the highest tax rates of any business sector? A study published by New York University discovered that trucking pays an average of 26.74 percent taxes, second only to the home building sector, at 27.28 percent. If you look at rates for railroads, air transport, parcel and logistics, and even marine – trucking’s tax rates are far higher. To make matters worse, new laws at both the state and federal level are exacerbating the problem. One such example of unhelpful laws is the one put forth by Tennessee Governor Bill Haslam, referred to as the IMPROVE Act.
What is the Improve Act?
In Tennessee, Governor Bill Haslam put a signature piece of legislation to his state house entitled the IMPROVE Act, an acronym that stands for “Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy Act”. The goal of the bill is to raise around $10 billion for state infrastructure projects that currently sit in a huge backlog.
The legislation will impact people in Tennessee who buy food at grocery stores or purchase gasoline or fuel. Individuals and businesses that pay taxes on interest or dividend income will also be impacted. The timeline of the act states that the gas tax would increase by July 1. The bill would be designed to fund over 960 projects throughout the state, addressing badly needed infrastructure concerns. So, why would anyone be opposed to such an act?
Primarily, those opposed to the bill argue that the tax benefits in the package will primarily benefit businesses and other entities, rather than lower or middle-class tax payers. Others state that transportation projects in the state could be funded by shifting money out of the state’s general fund, rather than raising taxes in specific sectors.
Overall, the trucking industry remains opposed to the act for the simple reason that it will result in a significant increase in the cost of diesel fuel, thus directly impacting trucking companies that operate within and through the state.
No Help from a Capacity Crunch
Record freight rates, already under pressure from state legislation like that mentioned above, continue to face pressure as the competition for truck drivers adds to an already tight capacity situation. There is plenty of evidence to show that the supply of available trucks to move freight is far outpacing demand, which is causing rates to rise.
According to ACT Research’s latest For-Hire Trucking Index Report, the for-hire index rose faster than the capacity index in each of the last 12 months, which allowed the supply-demand balance to climb to its highest reading ever recorded. Due to this wide spread between freight and capacity, many industry insiders expect continued strength in freight rates as we move into 2018. This leaves little doubt that truckers and motor carriers are in a great negotiating position compared to years past.
Digging deeper into the survey, it becomes apparent that the recent severe weather events across the United States caused a wide range of productivity problems. Looking at the data from late December into early January, the trucking industry saw a 10 percent utilization drop, at least in regions where inclement weather was a problem. Still, the weather certainly hasn’t put a damper on demand capacity.
In fact, according to many sources, trucking companies are simply running out of capacity at a time when they need it the most. A survey conducted by the Washington Post in late 2017 found that out of over 1,600 shippers surveyed, their number one concern was the capacity problem.
Other trucking industry-related surveys reported the same thing, with one such survey resulting in nearly 1 in 5 survey respondents stating they were the victims of capacity issues in 2017. When compared with 2016, capacity problems for shippers nearly doubled. But what are the reasons a capacity crunch that never seems to go away?
Cause and Effect?
For many, the primary reason is simple. 2017 was a good year for the U.S. economy. In both the second and third quarters growth came in at around a 3% annualized rate. This after an anemic 1.4% growth rate in the first quarter. Yet, an improving economy isn’t the entire answer.
The trucking industry right now is also currently dealing with the fallout from a shortage of trucks related to the ELD mandate. While the mandate sets the playing field even for truckers, it takes time for fleets to make the switch to compliant ELD use, especially for smaller players.
In addition to the ELD mandate, fleets are increasingly dealing with fierce competition to hire and retain experienced truck drivers. As fleets compete, they are more willing to operate at far higher levels of capacity utilization.
Rates are also set to skyrocket, not only because of an increasingly sound U.S. economy, but due to increased global activity as well. With global trade expected to rise by around 4.5% this year, we could see the growth in global trade contributing to increased growth in American trucking usage – thus leading to an even higher rate of capacity crunch.
Now the question is, where do we go from here? If you look at the Cass Freight Index, which takes a separate measure of both shipment volumes and linehaul rates, you’ll see that those rates have jumped as well, with truckload van freight rates up a whopping 30% over the same time the previous year. Could we see these large movements lead to greater inflation?
The trucking spot rate market began to turn around in late 2016 and has since been on a tear. When combined with higher contract rates, it isn’t hard to see which direction all this is going in. As carriers and shippers adjust to the new normal, a robust spot market will continue to translate into higher contract rates.
Quite frankly, there are a lot of moving pieces to consider. As the U.S. and global economy continues to improve, will we see a bubble develop? Furthermore, when can we expect to see the capacity problem begin to ease? At this point, only time will tell.