If you're Walmart, Amazon or some other giant business that pays to ship merchandise all over the nation, you want the cost to go down for hauling freight by truck — so your costs go down.
And if you're U.S. Xpress, Covenant Transport or some other big trucking company, you want the cost to truck freight to go up — so you make more money.
Meanwhile, both sides would like a way to hedge their bets, since the price of trucking is notoriously volatile. The rate per mile jumped about 20 percent over the last year to about $2 for a load that fills a 53-foot-long semi-trailer. And trucking rates recently skyrocketed between 300 percent and 500 percent along some routes affected by the hurricanes in Texas and Florida.
Enter Craig Fuller, who's launched TransRisk, a startup Chattanooga business that aims to turn the cost of shipping goods by truck into a commodity — like oil, coal and electricity — that can be traded on futures markets so investors can take the "long" position, meaning they want the price of trucking to go up, or the "short" position, meaning they bet the price of trucking freight will go down.
A futures contract is quite literally how it sounds. It’s a financial instrument — also known as a derivative — that is a contract between two parties that agree to transact a security or commodity at a fixed price at a set date in the future. It is a contract for a future transaction, which we know simply as “futures.” The vast majority of futures do not actually result in the delivery of the underlying security or commodity. Most futures transactions are purely speculative, so it’s an opportunity to profit or hedge risks, and not usually used to take delivery of the physical good or security for most traders.
There are many types of futures
contract to trade. They include:
› Interest Rates
The futures market is centralized, meaning that it trades in a physical location or exchange. There are several exchanges such as The Chicago Board of Trade and the Mercantile Exchange. Traders on futures exchange floors trade in “pits,” which are enclosed places designated for each futures contract. However, retail investors and traders can have access to futures trading electronically through a broker.
Source: TD Ameritrade, Inc.
Although individual investors can buy commodities, TransRisk is meant for big players in the industry.
Amazon could go long, or bet that prices will go up, and make a profit on that investment — while in the real world the giant online retailer pays more to have freight trucked. Therefore, it's a wash.
A big trucking company, such as J.B. Hunt, could go short and bet that the price of trucking will go down — so it makes money on that investment while getting hurt by a real-world downturn in the rate per mile.
It's all about hedging, Fuller said recently as he discussed his one-year-old, 19-employee startup business that's headquartered in a refurbished, old brick building at 1500 Chestnut Street near Finley Stadium in Chattanooga's up-and-coming Southside neighborhood.
"You take the opposite [position] of where you're exposed," he said.
Fuller's wife, Brooke, works as director of administration and human resources at a desk inside the front door that's home to the couple's mini goldendoodle, a cross between a poodle and a golden retriever, that bounds up to greet visitors.
Creating a whole new class of commodity is no small undertaking.
One step that TransRisk took was to boil down the roughly 18,000 "lanes," or routes between cities that truckers drive, to lanes between six major cities that handle about a quarter of U.S. trucking traffic: Chicago, Atlanta, Philadelphia, Dallas, Los Angeles and Seattle. Investors can buy futures to speculate on the price of shipping between the six cities.
TransRisk plans to make the bulk of its money by creating trucking futures contracts and getting a half a percent when the futures are traded.
Fuller didn't want to discuss how much that could add up to. But the potential's huge, since the trucking industry has a market size of $726 billion.
Data, data — and more data
In order to sell trucking futures, TransRisk needs to educate investors, Fuller said.
"In order for people to trade, they need to know what they're trading," he said.
To that end, the company launched a website called FreightWaves.com that's chock full of news about the trucking industry written by a team of TransRisk writers. Anyone can read the articles free of charge on the website that Fuller said already has climbed to the top 10 among trucking industry news sites. TransRisk doesn't expect to make much money by selling advertising on the site; it's meant to educate.
TransRisk also plans to launch Sonar, a subscription-only service that provides in-depth data about the trucking industry for $300 per person per month. Fuller hopes to sell 50,000 subscriptions to Sonar.
TransRisk taps about 150 sources of raw data to track the trucking industry and try to give investors a sense of where rates are headed and their volatility (which is a good thing for TransRisk).
"If trucking rates were not volatile, you couldn't trade it," said David Sheppard, TransRisk's chief strategy officer.
The data sources that TransRisk pays for include fuel card transactions, the location of trucks given by global positioning satellite (GPS) and price of used trucks.
Even crimes, such as shootings, that could disrupt truck traffic show up as pink dots on the interactive maps that TransRisk has made.
One of the most useful data sets, Fuller said, is the percentage of "turndowns" in the six cities.
A turndown is when a trucking company doesn't pick up a load of freight because it got a better offer elsewhere. Trucking contracts aren't locked in, Fuller said, they're commitments that can be broken. For an analogy, Fuller said it's like if you paid a guy $30 to mow your lawn, but then the landscaper ditches you for a neighbor who offers $100.
The turndown rate recently was around 50 percent in Atlanta, probably because of the hurricanes, said Fuller as he pulled up a computer graph on a bank of four large computer screens at TransRisk's headquarters.
That sort of detailed information is available for investors in other commodity markets, such as oil futures. So TransRisk had to create it, Fuller said, in order to make the trucking futures market viable.
"The world's most valuable resource is no longer oil, it is data," says a quote from The Economist posted on the wall inside TransRisk's front lobby.
Trucking is the family business
Fuller knows his way around the trucking industry. He's a third-generation trucking industry executive.
His grandfather was Clyde Fuller, a Chattanooga trucking magnate whose business was Southwest Motor Freight. Craig Fuller's father, Max Fuller, co-founded Chattanooga-based U.S. Xpress, the nation's largest privately held trucking business. Craig Fuller's older brother, Eric Fuller, recently was named CEO of U.S. Xpress.
Craig Fuller worked for a division of U.S. Xpress called TransCard, a fleet card and fuel payment services company that was sold in 2012 to U.S. Bank.
But he's left the family fold and has struck out on his own.
Funding is coming from venture capital from nine outside investors.
They include Fontinalis Partners, a venture capital firm "strategically focused on next-generation mobility" that has offices in Boston and Detroit. One of its founders and partners is William Clay "Bill" Ford, Jr., the executive chairman of Ford Motor Company and the great-grandson of its founder, Henry Ford.
Fontinalis Partners, which isn't affiliated with Ford Motor Co., and number of other firms recently contributed $3.4 million in seed financing to TransRisk.
Contact staff writer Tim Omarzu at firstname.lastname@example.org or www.facebook.com/MeetsForBusiness or on Twitter @meetforbusiness or 423-757-6651.