The freight industry and market speculators will soon be able to use futures contracts to hedge their bets on the price of hauling cargo.
Nodal Exchange, FreightWaves and DAT Solutions have partnered to create Trucking Freight Futures contracts on seven heavily traveled trucking routes that take into account driver availability, government regulations, trade policies, time of year, consumer spending and weather.
Futures contracts are a risk-management tool widely used in commodity trading.
Purchasing a freight futures contract at a set price protects the buyer when the cost for a load on a given route rises or falls when the contract expires. Contracts are settled in cash without any physical property being exchanged.
“Nearly every industry with a commoditized product benefits from a futures market – except for trucking,” said Craig Fuller, chief executive of FreightWaves, which provides news, data and market analysis for freight markets.
The first contracts covering seven lanes, or routes, between major freight markets, three regional groups of lanes and a national average truckload spot rate will be offered starting March 29. The routes were chosen by Nodal and FreightWaves because they represent a meaningful cross-section of nationwide prices.
“The industry is undergoing a massive transformation,” he said. “Mobile devices and interconnected systems now provide market transparency that didn’t exist.”
The federal mandate requiring truckers to replace paper logs tracking their driving hours with electronic logging devices also helps power information flows that a financial market needs to function, said Lisa McGinty, FreightWaves’ chief marketing officer.
Until now, decentralization and a lack of data about the $726 billion U.S. trucking industry made freight futures impossible to create, Fuller said.
Digital freight brokerages like Convoy, Transfix and Loadsmart make getting spot price quotes almost instantaneous, said Silpa Paul, commercial vehicle analyst for Frost & Sullivan, adding that the time is right for a futures market for freight.
“My bet is, it’s going to take off,” she said.
TIME FOR A CHANGE
Futures contracts can limit a shipper’s risk from wild swings in truckload spot-rate pricing, such as occurred during most of 2018, when prices of last-minute loads rose as much as 30 percent because of robust freight demand and a shortage of trucks.
The industry continues to face pressures that can foster price volatility in shipping rates. They include a shortage of long-haul truck drivers, estimated at 51,000 by the American Trucking Associations. Other factors are U.S. trade tensions with China and regulatory constraints on driving hours. These factors have combined to create “the right inflection point” for a freight futures market, Fuller said.
Nodal Exchange, which is regulated by the U.S. Commodity Futures Trading Commission, will clear and financially settle the freight futures contracts listed by the trading commission.
Nodal is a major player in the futures market. It has a 32 percent share of the North American monthly electric power futures markets.
“We see many similarities between power and trucking freight,” said Paul Cusenza, chief executive of Nodal Exchange, a part of EEX Group, which serves international commodity markets.
Neither power nor freight can be effectively stored. Both travel along geographically defined grids and are affected by weather and complex, seasonally driven demand cycles, Cusenza said.
During a recent nine-city road show used to explain to potential investors how Trucking Freight Futures would work, McGinty said the biggest takeaway was the quick acceptance of how powerful a form of risk management it would be for the industry.
DAT Solutions, which collects data on $60 billion of freight bills annually from more than 800 manufacturers, distributors, freight brokers and trucking companies, developed the daily price pegs being used for contract settlements.
In 2018, DAT’s load board was used for 256 million online transactions matching empty trucks with freight loads.
“We were the obvious choice to provide the price assessments on which the futures contracts will be settled,” said Eileen Hart, DAT vice president of marketing.
Nodal, FreightWaves and DAT will make money based on trading volume. DAT said it would not participate in truck futures trading.