Giving produce shippers, trucking outfits and receivers a way to hedge risk of volatile rate changes, trucking futures contracts will be launched in late March by the Nodal Exchange.
Nodal Exchange, which also trades contracts in electrical power and natural gas futures contracts, has partnered with FreightWaves and DAT Solutions to create what is being called the “world’s first financially settled Trucking Freight Futures contracts,” according to a news release. The planned launch date is March 29.
“We are very happy to be able to announce, with FreightWaves and DAT, the planned launch of the world’s first trucking freight futures,” Paul Cusenza, chairman and CEO of Nodal Exchange and Nodal Clear, said in the release. Cusenza said the exchange sees many similarities between power and trucking freight, including the fact that both commodities cannot be effectively stored, travel along geographically defined grids, are affected by weather and are subject to complex seasonally driven demand cycles.
“We are excited to be able to apply our risk management expertise toward expansion into this new commodity market,” he said in the release. DAT Solutions has created the daily price assessments being used for contract settlement for the truck futures, according to the release.
“Nearly every industry with a commoditized product benefits from a futures market — except for trucking,” Craig Fuller, founder and CEO of FreightWaves, said in the release “Because of the decentralized nature of trucking and the lack of data, trucking freight futures were once impossible. The industry is undergoing a massive transformation and the growing ubiquity of telematics, mobile devices and interconnected systems are now providing market transparency that didn’t exist previously.”
According to the release, the futures contracts will give a path for carriers, shippers and third-party logistics providers to hedge their exposure to truckload spot rate volatility. First contracts will be based on seven lanes between major freight markets, according to the release, three regional baskets of lanes and a national average truckload spot rate.
Lisa McGinty, chief marketing officer for FreightWaves, said that the contracts could be used by users of refrigerated trucks, even though the contracts are based on dry van (unrefrigerated trailers) rates.
The spot market for dry vans is likely to reflect some of the same dynamics as spot rates for refrigerated loads in the same geographic lanes, she said. The use of mobile devices that track trucks brings much more visibility to the movement of trucks across the country and will help those trading to know accurate market conditions, she said.
For shippers or buyers with contracted freight, the futures contract won’t be valuable. “This is really focused on spot rate and volatility,” she said. “If you’ve got contracts out there and get your dedicated freight or trucks, it doesn’t affect you quite as much,” she said. “But if you ever have to come even 15% or 20% of your (business) on the spot market this is a way to hedge your position.”
One futures contract is equivalent to 1,000 miles, she said, so if an operation relies on the spot market for 2,000 miles, a trader would buy (or hedge) two contracts. With an estimated 40 billion truck miles subject to spot rate volatility in unrefrigerated loads alone, that would represent a maximum potential futures contract volume of about 40 million contracts, she said.
According to the Nodal Exchange website, cash settled, monthly term trucking freight futures contracts will be available for seven directional lanes, three calculated regional averages, and one national average for spot market dry van rates, as listed:
- Los Angeles to Seattle;
- Seattle to Los Angeles;
- Los Angeles to Dallas;
- Dallas to Los Angeles;
- Chicago to Atlanta;
- Atlanta to Philadelphia;
- Philadelphia to Chicago;;
- Western U.S.;
- Southern U.S.;
- Eastern U.S. and
- National U.S..
“Freight and transportation costs are the most substantial risk to the earnings of an estimated 40% of S&P 500 companies.” Fuller said in the release. “Labor shortages, regulatory and trade environments, and the trucking industry’s ‘OPEC’ moment in December 2017 with the electronic logging device (ELD) mandate, has created the right inflection point for Trucking Freight Futures to come to market.” Officials with DAT Solutions said in the release that the company’s price data will help companies manage risk.
“When we first started collecting freight rate data in 2010, the goal was to provide greater transparency to transportation professionals and establish a market benchmark,” Claude Pumilia, president and CEO of DAT, said in the release. “Our role in Trucking Freight Futures is just one example of how we are helping the industry manage risk and achieve greater success.”