The 2:00 Minute Warning

Folks, let’s be blunt. The last couple of years, it’s been easier to predict hurricanes and tornadoes months in advance than it has been to accurately forecast freight budgets. Perhaps that is why we have been receiving a bunch of calls and emails from shippers asking for insights on the things that could have an impact on their 2023 freight budgets.

In preparing your 2023 freight budget, there’s both good and bad news. On the good news front, there are signs that rates – especially ocean rates for containers – are coming down for shippers. We’ve also seen signs that motor carriers are being less aggressive in seeking higher rates.

More on that in a bit because there are some very important things that shippers need to consider in putting together a budget that they may have to defend to the executives in the C-Suite. First, more so than before there are some "Wild Cards" that could have an impact on your freight costs. To wit, right now, there are two very significant contract negotiations that are unresolved.

At the West Coast Ports, there is still no agreement on a contract between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). This contract expired on July 1, 2022. While the ports are continuing to operate, a new contract will undoubtedly affect costs in 2023.

The railroads and their unions have not yet completed their contract negotiations either - for a contract that expired in 2020. The Presidential Emergency Board has a “solution” that could be imposed in September if the two parties do not come to an agreement. That “solution” calls for an increase in labor costs of 22% over five years plus other cost increases. If you are not too concerned about this because you don’t have rail shipments, these increased costs will be reflected in higher intermodal rates. A lot of LTL and parcel freight moves via intermodal carriers.

And one other big unknown is how the rollout of AB 5 will affect freight costs. One thing we do know is that shippers can expect drayage rates to skyrocket because of this.

Since we always like to end with good news, shippers should see ocean rates recede from their all time highs of 2021. Whether this is due to the impact of the “bullwhip effect” or the onset of a more recessionary environment, contract and spot prices in the ocean markets have decreased significantly over the past four months.

We’ve also witnessed an inversion in the spot market rates versus contract rates in the truckload sector. This may present an unusual opportunity for shippers to work with their carriers in addressing changes that could lower a carrier’s cost to serve your business and result in lower rates. Shippers can expect to see diesel prices remain stubbornly high heading into 2023.

One final note, as we have covered in a recent Two Minute Warning, since most major LTL or truckload carriers have experienced significant increases in their operating costs over the past eighteen months, they are relying on their data to guide them in their negotiations with shippers. For that reason, we don’t expect to see major contract rate relief by using traditional sourcing methods. With higher driver costs, higher fuel costs, and higher insurance as the major contributors, the carriers - especially the larger publicly and privately held carriers - are looking at how your freight aligns with their network.

As usual, FedEx and UPS continue to increase their rates, and USPS plans to do the same.

All in, if you are a shipper that wants to conduct business as usual, it’s likely that your freight costs will increase by 7-11% for 2023. But the best news of all is that there are at least three things you can do to lower your freight costs by at least 8-10% if you are willing to make changes to improve your transportation and supply chain processes.

If you are interested in choosing the latter option – reducing your costs, we encourage you to get in touch to hear more about how this is possible.

BY MIKE REGAN, CO-FOUNDER OF TRANZACT
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