Spot market rate futures market in the works

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Updated Nov 20, 2018
Like the electric power market, which already has a commodity exchange, trucking also has a nationwide network of paths connecting nodes.Like the electric power market, which already has a commodity exchange, trucking also has a nationwide network of paths connecting nodes.

Trucking’s first futures market, enabling participants to hedge exposure to spot rate volatility, will be launched March 29, announced Craig Fuller, head of trucking data company FreightWaves.

He made the announcement jointly with Paul Cusenza, chairman and CEO of Nodal Exchange, which operates a futures exchange for electricity production. They were part of a panel on “How to Survive Freight Market Volatility” at FreightWaves’ MarketWaves conference near Dallas this week.

DAT, whose spot market indexes will be a critical part of the rate calculations, is also a partner, said Tom Mallon, vice president of financial and trucking freight futures markets for FreightWaves.

The exchange created for the futures market will be “a great tool for smoothing out the fluctuations in pricing,” said panelist Doug Waggoner, of Echo Global Logistics. It could help, for example, “a shipper buying capacity who’s submitted a budget for the year and wants to protect against prices going up.”

Given the dramatic increase in freight rates during 2018, said panel moderator John Kingston of FreightWaves, “there couldn’t be better timing for this.”

Contracts will be for up to 16 months, Mallon said. They will set rate spreads to limit risk, but those spreads will shift up and down at spot market rates change, as measured by DAT data.

While many commodities markets have contracts for derivatives trading, “there are no real risk management tools available” in trucking, Fuller said. He began investigating the feasibility of trucking futures two years ago, determining that trucking has enough volume and, in its spot markets, enough volatility and to make it suitable for futures contracts. With a market size of $726 billion a year, it’s larger than many of the commodities, such as coal, that have their own futures market and are transported by truck, he said.

Commonalities between trucking and the electric power market were one reason Fuller and Cusenza believe there is great potential for trucking futures. Like electric power distribution, trucking has a nationwide grid of connections (highways) and nodal points (cities where most shipments begin and end).

In the electric power market, said Cusenza, about 60 percent of the participants are “physical traders” closely involved with electricity, with the remaining 40 percent being financial traders. Likewise, he and Fuller anticipate hedge funds and other financial interests to trade trucking futures.

Some people have been skeptical in considering trucking capacity as a commodity, Fuller said, while others asked why it hasn’t been done before if it’s such a good idea. Oil production is an old industry, he noted, yet there were no oil futures available until 1982, he said, “a relatively recent phenomenon.”