Associated Bank Thought Leadership Podcast

WGN: We're on with Tom Wolf, senior vice president in equipment financing and leasing at Associated Bank. Tom, welcome back.

Tom Wolf: Thanks, Steve. How are you doing?

WGN: I'm doing pretty well. I hope you are as well. I'm going to focus our conversation here on the trucking industry and a 2026 forecast. Talk to us a little bit about the highlights of this. I guess I'm seeing a report here showing a tightening market. What does that mean?

TW: Yeah, and I think tightening is a relative term. I think we're really seeing a light at the end of the tunnel. Ultimately in the transportation business, across all aspects, there's really been somewhat of a recession. And I think now we're seeing out of that. But it's very cautious, and really what that means is, is that I think that the number of carriers that exist out there have shrunk. So the existing carriers out there ultimately are reaping the benefits. And it's not as if the demand is higher. It's just that the number of carriers are less.

And I think they're also extremely cautious in regard to their either ability to expand, you know, with high fuel costs, relatively high interest rates, and then this rearview mirror of a pretty big recession in the transportation, the carriers are reluctant to overspend on expansion until they have a clear picture of what's happening into the future.

WGN: I want to touch on a couple of things there. But first, I want to go back to the the recession that you're talking about in the trucking sector. Talk to us a little bit about why that happened, how that happened and when.

TW: Yeah, I mean, ultimately, it was a COVID-type scenario where excess money into the market came in, and demand for products across all industries exploded. Very low interest rates and the barrier to enter ultimately was really, really low. So, what happened was just huge demand, low supply, and you could charge what you wanted from a transportation standpoint. So ultimately inflation just exploded, and as fast as it went up in ‘21 and ‘22, it went down just as fast. And ultimately that two or three-year lull took a long time for excess carriers to ultimately exit; excess, I would say trucks and trailers to kind of run through the market. Ultimately, I think what we're seeing here now is just the level playing field. And I think honestly, I think it's a healthy market as it is today. Neither is it going down, but it's not hockey-stick going up. So I think it's a healthy industry as I see it today.

WGN: And one of those things that you mentioned was that you're seeing fewer of these trucking companies, so are more of a consolidation of that. I mean, I think we've all we've been taught in business that the fewer players that are involved, really, the less competition. Is that not the case in trucking as well?

TW: Well, you know, I mean, it's a relative term. There are, you know, it's not as if there's monopolies, although there are certainly large trucking companies that are national. But in a regional play, and because there's so many niches, in the refrigerated to the flatbeds, is that there are a lot of small-town-type companies that that can thrive. So, although consolidation might have this monopolistic type of feel, ultimately I don't think it plays because there are so many different players, either large or small, that all can really thrive in good markets.

WGN: I was reading about the different ups and downs that trucking has over the year. Talk to me a little bit about the seasonal freight up-and-down, the lulls, the high points. What drives those?

TW: Yeah, ultimately summer. Summer months are—really it's kind of a couple—one is the summer months, which really drives the refrigerated type of business, and also the flatbed, which is related to construction. Both of those are very seasonal; summer as you would think, with food and produce that increases. And then from a construction standpoint where the flatbed business thrives. Construction business is very seasonal in the spring, summer and fall as well. That is ultimately one season.

Also a big driver is the holiday season, where there are a lot of goods that are being delivered in that October/November timeframe for the Christmas holiday. Again, that's a high season for the trucking industry as well.

So ultimately, what happens is that usually that first quarter—January, February, March—there's typically a lull. All or most transportation companies are ultimately forecasting, getting contracts with their customers, kind of understanding what the next year is going to look like. So seasonality, they understand it very well. First quarter of every year is usually down. And then once the summer months come, you know that that seasonality picks up, business picks up and ultimately runs through through year end.

WGN: We've been reporting on a number of different things impacting the trucking industry recently. One of them has been regulatory enforcement and tariffs and that sort of thing. Talk to us a little bit about the impact of those things on trucking.

TW: Yeah, I think I'll talk about the regulatory, and I think where mostly relates to, although there are other aspects, the one that seems to be most talked about is what I would call the driver qualification requirement, where ultimately English speaking is a requirement for drivers. And in this industry, there are certainly a lot of immigrants that have come over, and with this requirement, it has really curtailed the increase of those people coming in, driving for those transportation companies.

So again, you know, it really has limited the transportation companies to expand. They're able to replace, but ultimately to expand has really, really taken a taken a hit because of the fact that they're just having difficulty getting the drivers in the seats and ultimately then getting more trucks on the road. Where that stands, I'm not sure. But right now I think it's it's pretty flat. It's really taken its toll in the last year, and maybe to the benefit of higher pricing, just because there just isn't enough drivers out there to ultimately reach that demand. So I think the existing carriers, although they can't expand, they can charge more. So there is profitability going to the bottom line because of that.

WGN:  We had a story this week about the feds breaking up driving schools across the country that were really kind of looking the other way when it came to some of these drivers that had problems with the English language, that they weren't really kind of policing that. And that seemed like a big story at the time. Is that something that's impacting this story as well?

TW: Yeah, I think so. It certainly is kind of a trickle-down effect, right, that I think it's taken a while for enforcement to really reach through the entire system, not only with the communication of what's required, but also the schools that that are teaching this practice as well. So I think it's just taken a while for the government to enforce this into the driving school, and then ultimately it's just affecting how many new drivers, immigrant drivers, are ultimately going into the workforce.

WGN: Some of these trucking companies also are facing higher equipment costs when they're trying to replace some of these trucks. They're more expensive now than they've ever been. And then insurance has been another high-cost element for some of these truck companies as well. Talk to us a little bit about those things.

TW: Yeah, you know, certainly those those two are are one of their higher line items on their income statement. But I would say probably more so is the fuel cost and the interest rates. You know, those really drive their ability to expand, and fuel being on a much higher timeframe with no real line of sight if that's going to be lowered. And then interest rates. Certainly most of the chatter is that interest rates might even increase even more than where it currently sits. And again, those are two line items that are large. And it's just, transportation companies are just very cautious in expanding when those items are extremely high.

WGN: Yeah. And I'm guessing that, you know, as companies who are listening to this conversation now kind of focus on some of these things, and I'm not talking about the transportation companies, I'm talking about businesses who use the transportation companies. They're hearing about these things. And I'm guessing that they're thinking, well, my transportation costs might be even higher next year because of this. Is that an accurate way of thinking?

TW: Yeah, I would say they're certainly forecasting that. And I think that they understand that they have to utilize this form of transportation. And now it's just a matter of them budgeting this additional cost into their projections, although I don't think it is extraordinary high where it is today. I don't see it being extraordinary high into next year. But I think those that are utilizing this to move their product do have to project a higher cost, although I don't expect it to be extraordinary.

WGN: Tom, while we're having this conversation, a number of different companies and states are testing autonomous truck driving, autonomous trucks to transport things. I know some of these tests are underway, especially in the southwestern U.S. How is this going to change the game if you have a fleet of trucks that are suddenly autonomous, and you don't have to worry about drivers or time spent on the road?

TW: Yeah, it's interesting. I think it hasn't really hit the market too far, certainly in the Class 8, although the chatter has been any of these long-haul trucking routes where this autonomous technology can take hold. And ultimately, you know, I think that is going to be the first step in this industry, because these are mostly high-wage work driven, you know, very, very long routes. Ultimately, having an autonomous driver might be very beneficial to this industry and then ultimately may be changing loads to the last mile to somebody that might be manned. But ultimately, I think the first step, although I have not yet seen it, is going to be the long-haul drivers are going to ultimately be replaced by autonomous.

WGN:               Yeah, well, stay tuned. I guess we'll see how this unfolds over the coming year for sure. Let's just change topics here briefly. I want to make sure I get your thoughts on this next story while we have you on, and that is, I don't know, maybe you're one of the consumers of this, but a lot of the dairy companies now, the dairy processors have changed or added a focus of high protein in their products. And I'm thinking of one of the area companies, Chicago-area companies, doing this is Fairlife, where they've added these protein drinks and protein-enhanced milks. Talk to us a little bit about how this is changing the dairy sector from your vantage point.

TW: Yeah, it's an interesting aspect. You know, since we're in the lending industry, we're very cautious to trends, certainly fast trends in lending into them because obviously you want these trends to take hold. But we're really, really seeing a history that ultimately milk and milk products are really making a comeback in the last five or so years. Ultimately, you know, food-based or plant-based milks certainly are a thing, and, I think, an established thing. But I think milk is making a comeback from a protein type of, kind of consumer want and is really expanding not only domestically. And we've seen that historically, but also we think that foreign interest in this protein-based growth is going to be something that we're going to be able to take advantage of.

So really, we're seeing a ton of infrastructure and capital expenditures related to this expansion, which we think is going to take hold and is certainly going to be something that we're going to see for for the foreseeable future.

WGN: I saw a report that said U.S. dairy processors are spending about $13 billion on new and expanded manufacturing capacity across 19 states. Our neighbors in Wisconsin and Iowa are seeing some of that. From your vantage point, from what you do, this means what, purchasing a lot of new equipment and reshaping some of these dairy processing facilities?

TW: Yeah, it's really kind of, what we're seeing, is efficiency. What we're seeing is new equipment being purchased that ultimately is going to get safer product faster into the market than was previously thought. And I think anytime you see people who are expanding with new equipment, which is ultimately going to make safer, faster, better product, I think that's just better for the consumer. And ultimately, I think it's just going to be better for certain for the dairy industry as well.

WGN: And it's certainly as we've been talking about transportation here, you're going to need trucks and other ways of transportation to get some of these new products around some of these states that are increasing this investment.

TW: Oh, yeah. I mean, ultimately, most of this product is shipped via transportation tank truck, so there is certainly a trickle-down effect as it relates to transportation as well as with what's happening here.

WGN: Tony, great, great conversation as always. How can people get ahold of you and have a one-on-one if they want?

TW: Yeah, best way to reach me is Thomas.Wolf@AssociatedBank.com.

WGN:  All right, Tom, thank you. We'll talk to you next time.