From SCDigest's On-Target E-Magazine
- Dec. 10, 2013 -
Logistics News: New Federal Motor Carrier Safety Administration Rules Dramatically Paring Back Number of Freight Brokerage Firms, but Impact on Shippers Likely to be Modest at Best
Registered Brokers Numbers May be Cut in Half, to 10,000 or So, but Currently Active Ones Likely to Stay in Business or Become Agents for Larger Firms
SCDigest Editorial Staff
Over the past nine days, the US Federal Motor Carrier Safety Administration (FMCSA) has revoked the licenses of some 6500 freight brokers over their inability or unwillingness to meet new insurance requirements.
On October 1, 2013, the FMCSA reported that then there were 21,656 licensed brokers; this week, that population numbers little more than 15,000. Some say several more thousand small brokers could still exit the market in coming weeks and months.
SCDigest Says: |
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| Oddly, in healthy freight markets, broker margins decline, as carriers have their assets busy with direct customers and are less inclined to take brokered loads. |
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What Do You Say?
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But few seem to think this dramatic change in the numbers, mostly the result of very small and even inactive brokers shutting down, will have much if any impact on shippers or carriers, other than some modest relationship changes. Even then, many of these relationships may be continued as some smaller brokers move on to agent relationships with larger firms.
In 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) bill was signed into law, legislation largely dealing with funding for surface transportation programs. But it also included a provision that raised the level of insurance (bond) that a broker has to carry from $10,000 to $75,000. The $10,000 level had been in place for some 30 years.
That bond is used to protect truck carriers from brokers who go bankrupt or use unethical business practices and don't pay the truckers they contract with. Sometimes, brokers collect from the shipper, go belly up, and then stiff carriers who in a sense loaned them money by agreeing to haul some freight on the promise of being paid later.
In that context, given that a given freight broker could rack up tens or even hundreds of thousands of dollars' worth of freight bills even over a month's time, and the previous $10,000 maximum requirement seems quite antiquated. Many argue that even the new $75,000 level is not nearly sufficient.
A $75,000 surety bond, as they it is called, shouldn't cost a broker more than $5-6,000 per year. Still, that is up quite a bit from what brokers would have paid for just $10,000 worth of insurance. (Alternatively, a broker can put $75,000 in escrow or have their bank send letter confirming a broker has that kind of money on hand.)
Thom Williams, a former trucking industry executive who now runs advisory firm AmherstAlphaAdvisors, thinks many of the brokerages which had their licenses revoked for failure to show they had meet the new requirements by Dec. 1 (following an unsuccessful court battle by the Association of Independent Property Brokers & Agents delayed enforcement for two months) were not really active market participants. Rather, they simply maintained their licenses for possible future activity because the cost to do so was so low. The high bond requirement changed that equation.
For those that were still active but for which the new requirement is a real burden, Williams believes that many will accept roles as "agents" for larger brokers such as Landstar or USA Truck, which will take care of the bonding, accounts receivables management and other administrative areas in return for 7-8% of the cut.
Williams noted to SCDigest an odd characteristic of the freight brokerage market, which is that when the freight market is weak, broker margins (difference between the sell price to the shipper and what carriers are paid) actually rise, as there are more carriers willing to move freight at rock bottom prices.
In healthy freight markets, broker margins decline, as carriers have their assets busy with direct customers and are less inclined to take brokered loads.
(Transportation Management Article Continued Below)
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Do the gyrations in the freight brokerage market really mean much to shippers?
