Taming the Freight Market Volatility

Taming Freight Market Volatility

In our last blog post “What Causes Freight Booms and Busts?”, we looked at the reasons behind freight booms and busts. And while the freight market certainly experiences its share of ups and downs, it’s human nature to prefer stability. At the end of the day, we’re all trying to carve out our own little bubbles of stability in a volatile world without giving up too much in exchange for that peace of mind. We’d all prefer stable prices, or at worst, “low, slow and stable” inflation.

Historically this preference is framed in psychological terms — for instance, the idea that we dislike deviating from expectations. But there’s a growing body of research at the intersection of economics and physiology/biochemistry that suggests there are deeper biological origins for this preference. In more practical terms, market volatility makes planning difficult by making forecasting budgets more difficult. There is wasted time and wasted energy associated with volatility.

Solutions for Meeting Volatility Head-On

So, what can shippers do? What solutions or remedies exist to solve for this age-old challenge?
Of course, some degree of volatility is unavoidable — that’s a reality of open markets. Prices reflect, and can respond to, fluctuations in demand and supply. Unless we go back to a system of regulated lane prices like the United States had in the 1950s and 1960s (which, of course, led to their own set of market dysfunction) — there’s going to be some degree of price volatility.
More Flexibility
Perhaps counterintuitively, one of the most effective ways to avoid big swings in prices is to embrace small swings in prices.
More Transparency
Getting smarter and more transparent with data can empower decision makers on both sides of the market to adapt more quickly to market shifts (with important caveats).

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Flexibility is Critical When Dealing with Uncertainty

Let’s talk about flexibility first.
The freight industry has unintentionally backed into this “two-size-fits-all” world. With a few exceptions, there are either spot rates or annual contract rates — two options to choose from. At a macro level, the net effect of these limited choices is that we concentrate systemic risk. When an unexpected shock hits one market or the other — the whole system cascades because everyone has the same exposure and the only outlet for volatility is the one other alternative (i.e., when the contract market is hit with an earthquake, the spot market feels aftershocks and vice versa).
Increasingly, the industry is recognizing that not every shipper wants to be cornered into either being entirely exposed to the spot market, or the rigidities associated with annual contracts. For instance, we’ve recently seen a surge in shorter horizon contracts and mini-bids. Given elevated market uncertainty as of early 2021 (and the reality that even the best third-party industry forecasts available still systematically miss market shifts) — this is precisely what a fiduciary would advise.
That’s one reason why at Convoy, we’re constantly working to expand the suite of procurement options that we offer. Programs like Convoy Go drop-and-hook, Convoy Guaranteed Primary where rates can fluctuate based on a fixed margin, and Dynamic Backup that enables on-demand capacity with market rates directly within the TMS allow shippers with more flexible options. We also offer options like Green Appointment Windows for shippers who have more flexibility at their facilities to lower their shipping costs and lower the environmental footprint of their transportation.
The reality is that not every shipper is going to face the same types of risks — not on the same lanes, not for the same commodities, not for the same facilities. As an industry, we shouldn’t treat them as if they’re all the same.

Information Transparency: Don’t Confuse More Data with Better Transparency

The second category of solutions are around transparency.
Transparency is tricky because its meaning is so vulnerable to interpretation and, depending on the details, the illusion of transparency (or only superficial transparency) can make markets less efficient rather than more efficient. When prices are transparent in real time and available to all market participants (that is, there is not asymmetric information about the quality of the good or service being traded), the result is a flexible, adaptive system capable of channeling excess demand to pockets of slack.

But we should not conflate data volume with data transparency. In an industry where there are increasingly copious amounts of data, a healthy dose of skepticism is also necessary regarding the independence of the data. Does each incremental byte of data provide unique information about the state of supply and demand, or does it unknowingly herd market participants toward the same cliff? This dual nature of information transparency is well documented by economists.)

We talk more about this subject on MercuryGate Minutes and to hear our full discussion watch the Taming the Freight Cycle video now. Learn how Convoy can help your business tap into the flexibility and transparency required to meet today’s volatile freight markets.

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Aaron Terrazas
Director, Economic Research
Convoy, Inc
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