The transportation industry in the United States is facing a multitude of challenges. Inflation is making it increasingly difficult to keep costs down while maintaining efficient operations. Rising freight rates and fuel prices are creating cost pressures that are felt throughout the system.

Transportation is a key element of supply chain logistics for dairy processors. The industry has seen a shift in recent years toward more efficient and cost-effective transportation logistics in an effort to combat rising costs.

During a session on Transportation & Global Supply Chain Disruptions at the 2023 USDA Agricultural Outlook Forum, which took place in Washington, DC, on Feb. 23 and 24, Dr. William Wilson, CHS chair in risk management and trading in the Department of Agribusiness & Applied Economics at North Dakota State University, Fargo, ND, was asked if he felt the ongoing supply chain issues would ever be resolved.

“I think in the next five to 10 years, probably not,” Wilson responded. “And the reason for that is, we have tremendous geopolitical intervention in agricultural markets today, more than I’ve ever seen.”

Combatting inflation

Inflation has pushed up the cost of goods, materials and services throughout the supply chain, making it more difficult for companies to remain cost-competitive.

Truck, rail, barge and ocean freight rates don’t always react to broad economic changes in the same way. While the entire transportation industry struggled during COVID, normally any number of factors may affect each mode independently, regionally and globally.

“Transportation globally, regardless of whether it’s agricultural commodities or retail, has been a dumpster fire,” said William Rooney, vice president for strategic development, Kuehne & Nagel, Inc., at the USDA Agricultural Outlook Forum. “I’ve been in the business for 50 years in June and I tell people all the time if I added up all the mayhem that happened in the first 48 of those 50 years and multiplied it by five it’s still would not come close to the craziness that we have all experienced in the last two and half years.”

In April 2020, at the beginning of the COVID-19 pandemic, images of tanker trucks on the side of the road dumping excess milk were all over the news. In peak COVID, the congestion of 109 container ships sitting offshore near Los Angeles and Long Beach, Calif., in January 2022 made headlines.

“This industry went through a near-death experience,” Rooney said. “It was total mayhem.”

Many of the extreme cases of transportation logistics issues have eased in recent months. But now inflation weighs heavy on the industry.

 “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,” according to a recent report from A.P. Moller - Maersk, an integrated container logistics company.

The S&P Global Market Intelligence 2023 US macroeconomic baseline forecast is indicating a recession in the first two quarters with a recovery in growth in real gross domestic product (GDP) in the second half of the year.

A combination of factors will lead to reduced demand in 2023 as the economy falls into a recession. These factors include inflation, consumer and business spending, inventories and a US Federal Reserve Board monetary policy focused on taming inflation.

Volatile fuel prices

Fuel prices have an extensive impact on the cost of food, especially in the US. As fuel prices increase, so does the operational costs associated with transporting food products from farms and production plants to grocery stores.

The ripple effects of higher fuel prices are felt not just by consumers at the grocery store but throughout entire supply chains.

The impact of fuel prices on freight costs to shippers is an unknown for remainder of the year. The average on-highway diesel price reported by the Energy Information Administration (EIA)  was $4.185 per gallon as of March 20, down $0.949 per gallon from the previous year.

GasBuddy projected diesel prices for 2023 to average $4.12 a gallon with prices dipping below $4 in July before rising back above the $4 mark in November.

The diesel fuel supply situation made national and social media headlines in the later half of 2022 after the EIA reported inventories were the lowest for any month since 2008 and were the lowest for October specifically since the data series began in 1982.

Because of its use in the trucking and transportation industry, diesel prices are critical to the economy because they affect the cost of virtually all products.

Attention on prices has grown, including inaccurate reports on social media in the latter part of 2022 which, at the time, lead to fears that the US would run out of diesel fuel in 25 days.

“I’d argue that the frequently cited ‘25-day’ timeline [was] misleading at best,” said Robbie Fraser, manager of global research and analytics, Schneider Electric, Louisville, Ky. “That figure comes from the days of cover provided by the amount of diesel in storage. The only way it becomes a realistic timeline is if all refineries ceased operations, which of course isn’t realistic at all. If we look at data ... we’re looking closer to 9 to 12 months of supply.”

Distillate fuel oil inventories increased by 3 million barrels in the six weeks between Oct. 7 and Nov. 18, according to the EIA.

Lower freight costs

The American Trucking Associations (ATA) 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.”

The forecasted recession in the later part of 2023 is likely to 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.

After months of climbing to new highs, freight prices plunged at a record rate in December. Transportation costs as measured by the Logistics Managers’ Index (LMI) – a monthly survey of supply chain leadership – dropped to a reading of 36.9 for the month, falling into contraction territory.

With warehouses already stocked for the holidays, analysts say less freight was needed to move goods ahead of Christmas. That weighed on transportation costs and the LMI’s transportation utilization gauge, which also contracted, even as capacity loosened.

Amid faltering demand, trucking rates are decreasing. DAT Freight & Analytics reported month-to-date spot dry van rates at $2.42 per mile, down 68 cents year-over-year, while spot reefer rates declined to $2.84 per mile, down 76 cents versus prior-year levels. Following recent drops, analysts say freight markets are likely to stabilize in the months ahead, as first quarter activity is shaping up better than expected.

Ongoing labor challenges

The truck driver shortage in the US is a growing concern for transportation and supply chain logistics companies. In 2021, trucking companies in the US suffered a record deficit of 80,000 drivers, according to the ATA. Trucks move approximately 72% of American freight.

The ATA estimates that up to 50,000 additional drivers are needed each year – over a million drivers in 10 years – just to keep up with demand. In addition, research shows that as much as two-thirds of current drivers are expected to retire within the next decade, creating an even greater need for qualified candidates.

The shortage is caused by a range of factors, including lower pay compared to other industries and long hours that can make it difficult to maintain a good work/life balance. In addition, recent safety regulations have made it harder for inexperienced drivers to get on the road quickly, while older drivers are often presented with increasing physical challenges after years behind the wheel. In some areas of the country, high unemployment rates also mean fewer people willing to take on these demanding jobs despite their relatively competitive wages.

One of the largest issues influencing the driver shortage is the demographic of the current workforce, primarily age and gender. The trucking industry relies heavily on male employees, 45 years of age or older.

According to the Bureau of Labor Statistics, the average age of a commercial truck driver in the US is 55 years old. With an alarming amount of these drivers retiring within the next 10-20 years, the industry will be hit hard if new, younger workers aren’t hired to fill those imminent vacancies. This has proved to be difficult, though, as the federal requirement states drivers must be 21 years old to hold an Interstate Commercial Divers License. This leaves a gap of approximately three years post-high school, where potential employees may pursue other employment opportunities.

Another major demographic issue comes from only tapping into a little more than half of the workforce population. Women make up 47% of the nation’s workforce, according to the US Department of Labor, but only account for 6% of commercial truck drivers, according to the ATA.

In response to the ongoing labor concerns, US Representatives Jim Costa (CA-21) and Dusty Johnson (SD) introduced a sweeping overhaul of the interstate trucking supply chain system in January. According to Costa and Johnson, the Safer Highways and Increased Performance for Interstate Trucking (SHIP IT) Act would increase safety and shipping capacity for truckers, provide recruitment and retention incentives for drivers and include flexibility during times of emergencies or “black swan” events.

“Disruptions in our trucking supply chain continue to drive up costs and create uncertainty for American consumers and producers,” said Costa. “We need to recruit, train and retain truck drivers to keep our supply chain moving, while also updating best practices to improve trucking to fit our modern economy.”