Freight load pricing is notoriously volatile — rates veer widely with economic shifts, political movements and even weather changes.
Similar swings occur in industries that deal with commodities such as gold, wheat and oil. To temper the instability, investors make bets on the shifts by trading futures contracts on marketplaces known as exchanges.
Serial entrepreneur Craig Fuller wants ground transportation to join the derivatives party. He’s launched TransVix, a trucking futures exchange that will be open to shippers such as Walmart and Amazon, manufacturers, carriers, logistics companies, hedge fund and commodity traders and more.
“We’re helping companies that are exposed to the trucking business hedge and protect themselves against volatility,” said Fuller, who previously built on-demand capacity provider Xpress Direct as a division of carrier U.S. Xpress.
TransVix is currently seeking approval of its tradable instruments from the U.S. Commodity Futures Trading Commission. The company hopes to be ready for trades by the fourth quarter of 2017.
Participants — who TransVix won’t disclose until it clears the CFTC process — will be able to trade via financial brokers. Rather than take eventual physical ownership of loads, they’ll use a cash-settlement system, in which those holding long or short positions will be credited or debited the difference between the initial price and the final close of the contract.
TransVix is designed to help shippers avoid upside risk by locking in an internal price ceiling for weekly, monthly and annual freight contracts.
For example, a shipper currently moving freight at $2 a mile can buy a futures contract now maintaining that $2-a-mile rate. In six months, if the price rises to $5-a-mile, the $3-a-mile the shipper earned by hedging on TransVix will offset the price increase. If the price drops below the contract price, the shipper loses money.
Carriers can do the opposite, shielding themselves against downward price shifts by establishing a floor when laying out long-term commitments with clients. Freight brokers can protect their margins. Speculators can bet on market movement, and hedge funds and banks can hedge to bolster their portfolios.
In an industry that’s inherently unpredictable, with even more inconsistency because of new regulations and presidential administration, a futures exchange allows a measure of stability by creating market liquidity, experts said.
“Freight rate volatility is dealt with on a transactional basis where one party loses and the other gains depending on the supply/demand relationship,” said David Roush, president of KSM Transport Advisors in Oklahoma City. “This market would cap the exposure for the parties that choose to participate.”
Spot prices for line hauling — the movement of cargo between two major cities or ports — can sometimes swing 40 percent in a single week, according to TransVix.
The company provides the digital marketplace technology that powers the trucking futures exchange. Unlike the New York Stock Exchange, it will have no physical footprint, though the company moved its headquarters in February to Chattanooga, Tenn., from Fort Worth, Texas.
Fuller isn’t sure how busy the market will be. “It’s too early to say; these markets take on a life of their own,” he said.
Roush agrees that the level of demand for the platform is hard to gauge, but said he expects the initial players to be mostly larger carriers, shippers and freight brokers.
“Less-sophisticated carriers tend to take a transactional approach to their freight networks and look for market opportunity and push trucks to areas with more demand,” he said. “More-sophisticated carriers tend to take a strategic view of their freight networks to minimize rate volatility by contracting rates with strategic shippers and engineering their freight networks for success week in and week out.”
Transvix’s usefulness “depends on what part of the trucking industry you’re in,” said Peter Adeli, who owns City Business Shipping in Los Angeles. For some companies, ground freight prices follow fairly predictable patterns.
“It’s not really for my line of business — it seems more like it would benefit capacity managers at a place like Swift,” he said. “It might work out more for the bigger guys than the smaller guys.”
The company focuses on the California market, specializing in local hauls and final-mile delivery.
“Usually, we have no capacity when nobody else has capacity and a lot of capacity when everybody has capacity,” Adeli said. “We’re busy in periods when everyone is busy — we don’t have that much rate volatility or price wriggling.”
There’s already a derivatives market for global dry-bulk maritime freight, settled against the Baltic Exchange, which is based in London. In September, the exchange’s shareholders approved a $112-million takeover by the Singapore Exchange.
Fuller said that those shipping futures represent an estimated $200 billion in activity — nearly four times the value of the actual physical goods being moved. He believes that the $700-billion U.S. ground freight market could generate an even higher multiple in derivatives trading — something in the ballpark of $2.8 trillion.
TransVix will draw its data from a major index provider — DAT Solutions — that tracks 600,000 Class 8 heavy-duty loads daily in the U.S. via the transportation management systems of trucking companies, shippers and brokers.
Until recently, doing so was a tall order. Data were difficult to aggregate in such a sprawling industry, which meant that pricing transparency and historical data were hard to come by, Fuller said. But last year, DAT collected data from 100 million loads and $33 billion in transactions.
“Only recently, in the past five to eight years, have we seen index providers start tracking truckload spot rates and have those indices be mature and reliable enough to create contracts to trade off of,” he said.
The result: more visibility in the market, but also more volatility, he said.
“The ubiquitous nature of smartphones now means that brokers are becoming more digital and integrated, which means small, independent carriers can afford to participate in the market,” he said. “When more participants have more information, you’re going to have decisions being made much quicker than in the past.”