A truck will never show up.
That is the main point FreightWaves CEO and founder Craig Fuller wanted to get across during the Chattanooga-based company's announcement of a liquid futures market for the U.S. trucking industry this week.
"There will never be a truck in the financial futures market," he said in a presentation Thursday. "If you trade a future and you think a truck will show up – 100 percent of the time the truck will not show up. We are talking about trading an average of a market."
FreightWaves will partner with Nodal Exchange and DAT Solutions to create freight futures contracts that will allow market participants to hedge exposure to rate volatility nationally, Fuller said. The contracts will launch March 29 on the Nodal Exchange.
Launched in June 2016, FreightWaves provides news and commentary, data analytics and risk management tools for the transportation and logistics industry, and next month's start of the futures trading in the spot market is expected to help propel the growing Chattanooga startup, which already announced a $3.9 million expansion late last year.
Fuller said the freight industry is a great barometer for the overall economy, and it can give great insight into what direction the economy is moving. By partnering with DAT and Nodal, they will create more financial certainty within the industry for trucking companies, shippers and freight brokers, he said.
In simplest terms, those in the industry will be able to buy miles in order to hedge risk.
Futures trading when there is not a physical commodity involved is a complex topic for most. According to figures provided by FreightWaves, the country's trucking industry has a market size of $726 billion, and it is 35 percent bigger than the U.S. petroleum and coal production industries combined, each of which now have futures markets to help those in the industry hedge their risks and limit price volatility. If a product is going somewhere, seven out of 10 times, it's getting there by truck, FreightWaves states.
Futures are exchange-traded agreements to buy or sell a product at a point in the future, and traders contend they are essential in price discovery, transparency, and risk management.
Some futures have been around since the 1800s, yet trucking, an integral part of nearly every industry, has been largely neglected.
Crude oil futures, NASDAQ futures, even some treasury note futures, were not introduced until the aftermath of the energy crisis in the 1970s, Fuller said.
Electricity, which is only half the size of the trucking market, has a lot of similarity to trucking freight in that it is capacity constrained, can't be stored, and travels a grid. Electricity has been exchange traded since the mid 1990s.
Until recently, such futures trading in the trucking market was nearly impossible because there was no agreed upon spot-market index that accurately tracks the market. But over the past decade, DAT developed a spot-market index that tracks the broader spot market by aggregating over $33 billion of annual truckload spot freight from over 600 different providers. The mandate for truckers to keep electronic logging devices starting in December 2017 has also helped gather much more data on trucking shipments and routes.
DAT takes in pricing data from across the trucking physical spot market and publishes a daily index.
DAT and FreightWaves are collaborating with Nodal Exchange, LLC, a leading futures exchange for electricity, in developing a futures contract for trucking freight.
Addison Armstrong, a former executive director of investor services at J.P. Morgan Securities in New York who has worked in the futures market for electricity and other commodities at TFS Energy, ADM Investor Services and Sempra Energy Trading for more than two decades, joined Freightwaves this month as executive director the company's new futures trading initiative.
"We have a very large and volatile market, an industry established index on which our pricing is based and we have a well-established exchange as a partner in creating these trades," Armstrong said. "With all of that, we think we have the recipe for a very successful contract."
In 2018, 40 percent of S&P 500 companies state that freight and transportation costs were their biggest risks to earnings, according to FreightWaves. Government regulations, consumer spending, weather, driver availability and even tweets from the president of the United States regarding tariffs and trade policies can drive volatility in the freight market.
Next month, FreightWaves plans to launch futures trading in the trucking market with 11 futures contracts focused on freight lanes from Seattle to Los Angeles and Los Angeles to Dallas on the southern and western corridors. On the eastern corridor, they will be focused on lanes between Philadelphia, Chicago and Atlanta. There will be one national average index, as well. The futures contracts will initially extend out in monthly increments for 16 months.
Not only should a futures market for trucking decrease the pricing volatility in the spot market, it should also allow participants in the market to protect themselves from that remaining volatility by hedging, a strategy the larger groups in the industry already employ for fuel price fluctuations. Even those who are not familiar with hedging should feel the impact of a trucking futures market.
"With the implementation of a futures market, participants will gain a huge advantage in knowing where the market is headed," FreightWaves says in its description of the new futures market. "Shippers, carriers, and brokers will be able to negotiate rates with a perspective on what the future holds and where the market is headed. Less guessing, more activity. This provides a huge advantage over using historical pricing information that is a week or more old."
Contact staff writer Allison Shirk Collins at firstname.lastname@example.org, @AllisonSCollins or 423-757-6651.