KANSAS CITY, MO. — Shippers of grain, food and other products expect to face better prospects for logistics in 2023, hoping much of the COVID-induced issues are in the past, as well as a nationwide strike by railroad workers that was averted by legislative action.
“Logistics as we know it has been spun out of rhythm over the past two years, with supply and demand discrepancies, low reliability, global port congestion, labor shortages, capacity constraints and more all coming together to put pressure on rates,” shipping giant A.P. Moller - Maersk said in a recent report. “While the circle of inflation affecting freight rates and freight rates affecting inflation is set to continue in the short term, the outlook is positive for pressure coming down in the not-too-distant future — albeit not to the levels seen before COVID due to inflation’s impact on operational costs.”
Truck, rail, barge and ocean freight rates don’t always react to broad economic changes in concert. While the entire transportation industry appeared to crumble during COVID, normally any number of factors may affect each mode independently, regionally and in other ways.
The Council of Supply Chain Management Professionals said in its latest Supply Chain Quarterly that freight volumes for sea, air and trucks are expected to decline in 2023, and that freight rates for all three “are on track to drop from their pandemic high points,” noting a “severe rate of contraction in transportation prices measured in November.”
The US Department of Agriculture said in a recent Grains Transportation Report that third-quarter transportation costs for shipping soybeans to China and Europe from both the United States and Brazil declined from the second quarter. During that period, truck rates fell in both countries (with lower diesel fuel prices a factor in the US) and ocean freight rates declined due to weaker demand for bulk commodities (in part related to COVID lockdowns in China). In the US, barge freight rates rose as lower water levels restricted movement on the Mississippi River, and rail freight rates also moved higher. The cost of US shipping corn and soybeans to Japan also declined from the second quarter.
In the US, lower grain and soybean exports are an influence on freight demand and rates. The USDA forecasts 2022-23 US wheat exports down 3.1% from 2021-22 and down 22% from 2021, corn exports down 16% and 24%, respectively, and soybean exports down 5% and 10%.
“Quarter-to-quarter and year-to-year ocean freight rates decreased mainly because of falling global trade and shrinking demand from Asia for bulk grain products,” the USDA said.
Trade sources also have noted an oversupply of bulk freight capacity.
For ocean freight, not only has volume for bulk commodities decreased, but containers also are in oversupply, potentially leading to “an all-out price war” in 2023, according to one industry expert.
As with ocean freight, trucking capacity remains available, a stark contrast to conditions early in the pandemic.
Many suggest the trucking industry is the best barometer for logistics, even if it may be less important than rail, barge and ocean vessels for agricultural commodities. The American Trucking Association said trucking accounts for about 80% of total freight spending. While more expensive per mile than other modes of transportation due to smaller load volumes, trucks are the key source of “quick” freight movement and the all-important “last mile.”
Spot freight rates (excluding fuel surcharges) for trucks peaked in January 2022 after more than doubling from May 2020 lows, according to DAT Freight and Analytics.
Year-over-year spot truck rates may be down more than 25% in the first quarter of 2023 and may be down 25% to 35% from their January 2022 peak by the end of 2023, Yan Krasov, CFA and partner at William Blair Investment Management, said in a recent Institutional Investment report.
Arrive Logistics forecast spot truck freight rates to hold “relatively stable” in 2023 (after falling in 2022) and contract rates to “normalize,” falling from pandemic highs as freight tonnage declines as economic conditions move toward pre-pandemic levels.
The impact of fuel prices on freight costs to shippers is an unknown for next year. The average on-highway diesel price reported by the Energy Information Administration was $4.754 per gallon as of Dec. 12, down more than $1 per gallon, or 18%, from the late June high of $5.81 per gallon, but still up more than $1 per gallon, or 30%, from a year earlier.
The much-forecast arrival of a recession in 2023 should help reduce freight demand and subsequently freight rates as consumers buy less (although the relationship is far more complicated than that). High freight costs were seen as a major contributor to rising US inflation and now may contribute to helping rein in inflation.