If you think your distribution costs are high now, just wait until new government regulations become effective later this year! What? You didn’t hear?
I love the free market. I love it when barriers to enter a market are low, and the most cost-savvy companies offer the most competitive rates. Competition in the marketplace goes a long way toward keeping the prices of goods and services contained.
When the free enterprise system is allowed to operate with minimal interference, consumers benefit.
Unfortunately, government regulations will soon be imposed that may constrain the free market that most of us hold dear. The regulations may eliminate much of the competition that keeps trucking healthy.
The issue at hand is the government’s desire to place new standards on truck drivers and trucking companies. While safety is important to all of us in the industry, the regulations may have some unintended economic effects on the industry.
Readying For Regulations
The federal government’s plan, which has been in the works for six years, will bring the nation’s truck capacity to its lowest point in recent history. These regulations are expected to go into effect in November and industry estimates show the number of trucks available to you, the shipper, could fall as much as 20 percent. So, if you think truck capacity is tight now – and that rates are high – just wait until these regulations go into effect.
Current truck capacity is down already, and rates are up, due to the following:
• Banks will not finance trucking company startups.
• Banks are drawing in credit lines for existing trucking companies.
• The available driver supply is falling (baby boomers are retiring).
• The poor economy has forced more truckers into bankruptcy than any year on record.
Eventually, the free market would “fix” these problems. In a free market environment, the rising rates caused by low-truck capacity would entice people to start new trucking companies or expand existing ones. Banks would be happy to lend because trucks would be in demand and rates would rise. As the economy came out of the recession, shippers would continue to demand more and more trucks to move goods all over the country – and the trucking business would expand. As more truckers entered the market, transportation prices would stabilize and ultimately fall due to higher competition. The cycle is then complete, only to be repeated again over a 4-to-7-year period.
If you are thinking that this is Economics 101, you are right. However, the government’s plan may hinder this normal cycle, and that could cause your transportation rates to go through the roof – and potentially remain inflated for a long time to come.
For clarification, the FMCSA (Federal Motor Carrier Safety Association), which licenses truckers and truck brokers, has regulating authority to an extent never seen before in the industry. Under the moniker CSA 2010 (Comprehensive Safety Act 2010), the government’s plan is to flush out all the truckers and brokers it labels “unfit to operate.”
The existing SafeStat system, which measures truckers’ safety records, contains four Safety Evaluation Area (SEA) categories. The CSA 2010 system will divide carrier and driver safety performance data into seven categories: 1) unsafe driving; 2) fatigued driving based on hours of service (HOS) compliance; 3) driver fitness/health; 4) controlled substance or alcohol; 5) vehicle maintenance records; 6) improper loading of cargo; and 7) crash indicators.
Expect A Driver Shortage
While on the surface this seems like a good idea, the effects are going to be profound. For example:
• Drivers will be “scored” – even for a warning or a leaky tire, not just a ticket. The scores are based on a rating system of 1-10, with 10 being the highest, most severe rating. Operating while driving under the influence will warrant a rating of 10. A leaky tire warrants a rating of 8. Drivers with high ratings, or companies that hire marginal drivers, will be pushed out of the industry. Drivers who are fired for an accident or two (even small ones with no damage or speeding tickets) may not be hired by another carrier.
• Electronic On-Board Recording devices (EOBRs) will monitor how many hours a driver has been “on the clock” (which includes loading and unloading time). As soon as his time is up (currently about 11 hours per day), he is forced to park and take a rest, even if four hours of his time was spent driving and the rest was spent waiting to load or unload. This rule will reduce the number of hours the driver is available to drive. For growers, this means your loads that have 15 stops will be rejected by carriers unless you are willing to pay a hefty fee for each additional stop.
• The cost of running a truck will increase due to the mandatory annual safety training and testing. The EOBRs alone will cost $1,500 to install in a truck (every truck). The costs of mandatory training, safety directors and driver checks will increase costs even more.
• Carriers will be forced to get rid of older tractors and trailers in favor of newer, more “EPA friendly” ones (which, of course, cost much more). If carriers cannot meet the new guidelines regarding equipment, they will need to cease operating that truck or trailer until they can.
• Drivers who are deemed “unfit” (even for mechanical failures of their equipment) will be forced to stop driving until enough time has passed that their ratings are no longer “unsatisfactory.” Should the driver choose to deliver his load after receiving an “unfit” rating, he will be fined no less than $11,000 per day.
The bottom line is simple. Drivers and carriers willing to haul plant loads will become fewer and farther between. Live goods loads generally consist of multiple stops. With the imposition of an 11-hour day (with no cheating possible), drivers will not be willing anymore to sit idle while being loaded or unloaded – and not getting paid. Instead, they will choose loads with only one delivery so they can spend those 11 hours on the road making money.
As stated previously, we are already seeing higher rates and lower capacity due to the economic climate. The drivers and carriers out there want more and more money because, frankly, they can get it. You might not be willing to pay their rates but there are desperate shippers out there who will. Once the new government regulations are phased in, rates will rise further, and quickly, with no free market mechanisms to correct them.
When the economy eventually does pick up again (it will one day) and shippers are looking desperately for trucks to move the increased amount of freight out there, the rates in some parts of the country will almost certainly double. That is exactly what happened in certain parts of the country during this spring – rates doubled in some areas and the carriers were in complete control of our destinies.
At a trucking conference I attended recently, one large national carrier CEO said during his keynote speech, which included some large national shippers, “During the last decade you, the shipper, controlled the rates and we struggled to make money; the next decade is payback time.” Be prepared.