New truck exchanges offer hedge, but come with risk – Ari Ashe, Associate Editor, William B. Cassidy, Senior Editor, Eric Johnson, Senior Technology Editor | Mar 27, 2019 3:59PM EDT

Shippers nervous about volatility in US truckload rates have two new options to hedge risk in the form of exchanges, also known as “futures” and “forward markets.” But each comes with risks of their own, from losing money to collapsing altogether, most commonly because of a lack of liquidity or loss of confidence in the data.
After a year of beta testing, Leaf Logistics is on the verge of opening a forward contract market, and the Nodal Exchange on Friday will launch a freight futures market supplied with data from FreightWaves and DAT Solutions. Although both can protect shippers against unforeseen rate fluctuations, the two markets vary greatly.
Different instruments for different purposes
Both Leaf and FreightWaves say these markets will be more likely to gain traction in the market than previous attempts because of how much trucking and technology have changed in the last 15 years. For example, DAT and weren’t using indexes or disseminating pricing data in the early 2000s, when the first attempts were made at creating futures markets for freight shipping. Brokerage was done via online bulletin boards, but cold calling and phone checks were necessary. While those traditional practices still exist today, so much freight is brokered online that new entrants can succeed without relying upon old-school advertising.
Pricing data that once may have been tightly guarded as proprietary information are now easily accessible on DAT Rateview, FreightWaves SONAR, J.B. Hunt 360, Freightquote, and digital brokers such as Uber Freight, Convoy, Loadsmart, and Transfix, bringing a previously unthinkable level of rate transparency for shippers and lowering the educational bar to entry.
While successful futures markets have been established in everything from electricity to pork, the track record of futures in shipping has been spotty at best. In the early 2000s, a group of financial institutions that included Clarksons Securities, iCap, Morgan Stanley, and others created a container freight derivatives contract based on the Shanghai Containerized Freight Index (SCFI), a measure of spot rates on trades to and from China.
Despite extensive marketing via road shows and industry outreach, the contract never gained traction and adequate liquidity was never maintained, so the market went dormant. Among the reasons cited for the failure was a lack of willingness to participate on the part of industry players — particularly ocean carriers — unless traders such as forwarders and beneficial cargo owners (BCOs) used the contract as a hedge against real-world shipments.
A narrower focus on US domestic truckload on a small number of lanes might overcome those hurdles. The Nodal Exchange will trade derivatives using dry-van rates between Los Angeles and Seattle; Los Angeles and Dallas; Chicago and Atlanta; Atlanta and Philadelphia; and Philadelphia and Chicago. Four other contracts represent “baskets,” or averages of different lanes. Refrigerated, bulk, tank, and flatbed trucking aren’t included in the market.
Because freight futures are not connected with the physical movement of freight, the Nodal/FreightWaves instrument will be managed by a company’s financial or treasury department, not transportation. A forward contract, on the other hand, such as that being introduced by Leaf Logistics, is tied to an actual haul, which means a director of transportation or supply chain will be involved. One is a financial tool used to hedge against price spikes, while the other is an operational tactic to obtain capacity in advance at a lower rate.
In other words, trucking futures don’t alter the way goods are moved. Transportation executives will conduct a bid process and tender freight in the same way they would otherwise. Futures contracts are educated wagers on future prices based on speculation like a stock.
“A strategic shipper who has quality relationships with a carrier that doesn’t gouge them when the market is low is being rewarded already. This behavior shouldn’t change one bit,” Craig Fuller, CEO of FreightWaves, told “This is a tool to mitigate some of the upward and downward spikes.”
Fuller said trading futures is a sophisticated process best suited for companies with prior experience, such as those in the petrochemical, metal, and food and beverage industries. It also requires a certain level of corporate infrastructure to handle a complex task, so large companies are the primary target.
With forward contracts, the opposite is true because they simplify a complex process. A forward contract sets a rate for service on a future date. Small shippers unable to buy rate intelligence data or employ consultants can lock in reasonable rates and ensure that a truck will show up. Because corporate infrastructure is irrelevant, a forward contract market evens the playing field and can also be sold or traded if the shipper no longer needs the capacity or the carrier no longer has it.
Untapped markets
The private equity groups backing each market are banking on billions in spot market freight spending annually. FreightWaves recently closed on $20 million in series B financing to build out its data capabilities, bringing total funding to nearly $40 million. The financing isn’t directly for Nodal Exchange, which administers the contracts, but for the underlying rate information disseminated by FreightWaves. Leaf Logistics raised $1.2 million in its initial seed round in August 2018, according to technology investment tracker Crunchbase.
Historically, spot market contracts represent 15-20 percent of US truckload business, but even 15 percent of total truckload spend is a big number. American Trucking Associations estimates US shippers spent $356.4 billion on truckload freight in 2018. That would peg the spot market spend at $53.6 billion, using the 15 percent benchmark. In the first half of 2018, however, the spot market’s share of truckload spend was much higher than 15 percent, falling somewhere between $50 billion and $130 billion, depending on the data source.
“The more cyclical the product, the more demand there is for a market based on speculation,” senior economist Noël Perry said. “Heck, a bookie has a futures market on what will happen every Sunday in the National Football League. So can somebody create a futures market on $130 billion in [transportation] revenue? If there is demand, then absolutely.”
Futures markets are anything but new. One of the first recognized futures markets, the Dojima Rice Exchange, was established in Japan in the 18th century to trade against fluctuations in rice prices. Futures trading in the US began with markets for corn, wheat, and soybeans, and financial futures came along in the 1970s. Historically, futures markets have been used to match buyers and sellers, or short and long speculators, although no actual “product” — i.e., goods or services — is exchanged. Instead, the futures contract itself is the product.
What makes such markets work? Liquidity and transparency are two keys, according to John Mothersole, director of pricing and purchasing at IHS Markit, the parent company of “Theoretically, an exchange should increase transparency between buyers and sellers, and lower market volatility. In some ways, an exchange works like the internet: it makes the cost of gathering information much lower,” he said.
For hedging to work as a risk management strategy, there also needs to be a balance between bets the price will go up or down. If a market is lopsided in favor of short-sellers or long-sellers, or contract values become too separated from underlying asset values — e.g., actual truck rates — it won’t attract speculators.
“It ultimately comes down to price,” said Mothersole. “Are you offering something at a reasonable cost as a means to manage risk?”
Trucking certainly is not the most unusual candidate for a futures market. The Chicago Mercantile Exchange, for example, has been operating an exchange for weather futures to help agricultural commodities traders hedge against losses stemming from adverse weather since 2001. Contracts are based on how temperatures in eight US cities vary from a base of 65 degrees, depending on the season.
While early attempts at container shipping futures markets have long since folded, players such as Freightos and the Baltic Exchange have revived the effort. They say a financial contract based on freight rates won’t gain traction unless and until real-world freight market players use indices such as their FBX index in floating rate contracts, and in a broader sense, look to the spot market as the key arena for pricing, not annual contracts.

One less thing to worry about

Risk-averse shippers have other ways to protect themselves against the unknown. Tendering as much freight as possible under contracts, for example, limits peaks and valleys in pricing by controlling variables. If a shipper is worried about capacity shortfalls, paying more for a dedicated contract can solve the problem. Being a “shipper of choice” also lowers risk, as carriers are much more likely to assist a true partner in an emergency. Using digital brokers can also keep costs down because these services are cheaper than those with a higher associated overhead.

There are also traditional brokers using contract pricing. When a non-asset-based provider such as C.H. Robinson Worldwide gives an annual contract rate to a shipper, for example, it’s agreeing to a forward contract. If purchased transportation costs rapidly rise, C.H. Robinson’s margins are squeezed and its profits are diminished, possibly even turning into loses. If those costs fall rapidly, C.H. Robinson’s profits increase. If transportation rates stick to forecast, C.H. Robinson and the shipper both avoid unexpected losses.

“Guaranteeing that my transportation budget won’t get blown up is important after last year, but you don’t become a hero by saving a couple percentage points,” said Anshu Prasad, CEO of Leaf Logistics.

Like C.H. Robinson generating a contract rate based on a forecast of future pricing, Prasad believes it is possible to make reasonable predictions on many lanes of Leaf’s customers. He also says the company’s technology can create better backhaul matches.

“Our analytics identify 71 percent of the loads on our platform as ‘forward contractable.’ Of these, 46 percent can be paired with other loads on the platform to generate stepchange efficiencies such as roundtrips,” Prasad said. “[Shippers are] seeing 5-20 percent cost savings from early trading, and even more dramatic improvements in service reliability.”

Impediments to adoption

The biggest hurdle to both futures and forward contracts is bandwidth. How much time and resources do executives have to learn about these new products and adjust their operations?

“We were talking with a chemicals company the other day with over 10 different business units. One guy told us, ‘I have 30 minute blocks. I’ve got to do other things.’ Bandwidth just to entertain these conversations is a big issue, and more importantly how do you meet them where they are and sell them here and now,” Prasad said.

Potential traders might also be wondering how volatile are truckload prices. Are they more volatile than diesel retail rates? Are they more volatile than the Standard & Poor’s (S&P) 500?

Based on the standard deviation, the S&P 500 is much more volatile than fuel or truck rates. Comparing truck and diesel rates is more complicated. According to a FreightWaves analysis of seven lanes, the standard deviation in 2018 was greater on truck rates. Between 2016 and 2018, the results were mixed based on lane. Between 2014 and 2018, diesel prices had a greater standard deviation.

This makes sense because truckload rates were highly volatile in 2018, but widening the scope to 2014 includes a two-year period in which crude oil prices were as high as $107 per barrel and as low as $30 per barrel.

Fuller said shippers participating in the futures market evaluate transportation costs independent of variables such as fuel, so the lack of predictability necessitates hedging.

“What they are looking at is the overall volatility in their operations. It’s not so much fuel versus spot trucking,” he said. “If you look at it on pure volatility, Bitcoin is extremely volatile. But it doesn’t matter if you don’t have any exposure in your business to cryptocurrency. This is hedging against an expense they’re exposed to in their business.”

Completing the exchange is a FreightWaves news and data service. Fuller compares its products to Bloomberg Intelligence, which informs investors that then execute trades using the Bloomberg Terminal. FreightWaves has a financial stake in the success of the derivatives exchange, and some of its news coverage has had a pro-futures bent.

Nodal Exchange is required to report two metrics to the US Commodity Futures Trading Commission: total contracts traded and notional value of outstanding contracts. Fuller has set a goal of 1,000 contracts traded during December 2019 with a total value of $1 million. Each contract is 1,000 miles. If the per mile rate is $2, then each contract would be worth $2,000. Multiply $2,000 by 1,000 contracts per month to get a monthly notional value of $2 million. Some lanes in the futures market are more than 1,000 miles in reality, but applying the per-mile rate on a fixed distance is simpler.

Matt Tillman, CEO of ocean freight rate and transportation management system provider Haven Inc., says this liquidity is absolutely necessary to attract early adopters.

“If someone places an order for 100 contracts, you don’t want to have to wait for that to get filled. It should be a real-time transaction in the highly liquid futures markets that exist today,” he said.

But as prior attempts at freight futures markets have shown, market size and rate volatility alone aren’t enough to ensure adoption. According to Fuller, data accuracy will ultimately be a deciding factor for prospective traders.

“People have to trust the index is representative of the market. They have to trust that it’s a viable hedge. It has to be highly, highly correlated to other data sets,” Fuller said.

Contact Ari Ashe at and @arijashe on Twitter; William B. Cassidy at and @willbcassidy; and Eric Johnson at and @LogTechEric.

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