newsworthy

IS THE DRAMATIC SURGE IN FREIGHT PRICES BEGINning to hit corporate America where it hurts?

Taking at face value General Mills Inc.’s commentary that accompanied the release of its fiscal 2018 third-quarter results in late March, the answer would be an unqualified yes. The Minneapolis-based food giant reported operating profits that Chairman and CEO Jeffrey Harmening said “fell well short” of the company’s expectations. The reason: sharp increases in input costs, including North American freight services, which inflated in February to levels that General Mills hasn’t seen for many years.

Company executives said they are urgently looking at implementing steps such as “increasing the number of qualified carriers” the company partners with as well as utilizing different modes of transportation, which means intermodal. The impact of such actions would not fully kick in until the next fiscal year, they admitted. General Mills’ equity, which normally doesn’t see big daily price gyrations in either direction, fell nearly 9 percent the day it released the results, taking the equity prices of other big food companies, which are also large shippers, down with it.

General Mills would hardly be alone in being caught in the freight-cost vise. For the past 10 months, virtually every statistic has pointed to escalating prices, bringing to reality the long-made prediction that supply conditions had become so tight that all it would take to send freight costs up would be a solid and sustained economic recovery similar to what is happening today.

Some striking data points surfaced in audit and freight payment provider Cass Information Systems Inc.’s monthly indexes for February covering all domestic transportation modes. Cass’s truckload linehaul index, which excludes fuel and accessorial charges, rose 6. 5 percent in February, the 11th consecutive monthly increase. Cass’s intermodal price index, which includes fuel costs, rose 5. 4 percent that month, its 17th straight monthly gain. Intermodal prices are continuing to strengthen, said Donald Broughton, the veteran transport analyst who pens the Cass reports.

As for truckload, over the last seven months, Broughton has raised his pricing forecast to a range of 6 to 8 percent higher, from a minus 1-percent to positive 2-percent range.

In what has become a familiar refrain, Broughton said he
believes the “risk to our estimate may be to the upside.”
Cass’s flagship monthly freight index, which includes all
modes, delivered even more striking year-over-year results.
Freight “expenditures”—or prices—exploded in February
by 14. 3 percent. Shipments rose 11. 4 percent year over year.
Just from January, expenditures and shipments increased
5. 9 and 5. 2 percent, respectively. These gains came during
what is often considered the slowest seasonal period of
the year.
In his comments, Broughton said he doesn’t see over-
all demand slacking off any time soon.
Resurgent oil prices have sparked a renewed
boom in the industrial economy, just as
the collapse in the energy complex in 2014
led to the industrial recovery’s end. More
tellingly, and somewhat counter to expec-
tations since they had been written off as
parent material, millennials are pushing
into the “household formation” cycle and
are accumulating the goods that come with
that stage of life, Broughton said. Given
that there are more millennials than baby
boomers, consumer spending is “poised to
be strong” for the foreseeable future, Broughton said.

The analyst acknowledged that “pricing power has erupted” with such velocity that it is bound to spark concern over inflationary pressures feeding through into the broader economy. However, the price surges of today are likely to have no meaningful impact on the long-term inflation outlook, he said. To support his view, Broughton trotted out two of transportation’s immutable laws: that pricing is cyclical because the service is based on derived demand, and that better pricing spurs decisions to create capacity either by adding assets or by leveraging technology to boost asset utilization.

Add to that the improvements in IT (information tech-
nology) that allow for improved price discovery and asset
visibility, and that the vast majority of carriers have under-
invested in their physical assets, and Broughton said he’s
confident in the “industry’s ability to use increased profit-
ability to fund enough capacity to kill outsized pricing gains
in the long term.”
That may be so. But that’s currently cold comfort to the
Wheaties guys in the Twin Cities.