Logistics data and analytics provider FreightWaves will partner with price reporting agency DAT and derivatives exchange and clearing house Nodal Exchange to create a futures market for trucking, a tool that will allow buyers and sellers to trade financial contracts for freight pricing, helping them hedge their exposure to spot rate volatility, the firms said recently.
Set to launch in late March, the trucking industry's Freight Futures Exchange is "all about risk mitigation," according to Craig Fuller, CEO and managing director of Chattanooga, Tenn.-based FreightWaves, who announced the launch during the company's MarketWaves18 conference in Dallas earlier this month.
The exchange was three years in the making, a product of Fuller's deep industry experience and research into developing a trucking futures market, which led to the launch of FreightWaves in 2016. The market combines DAT's benchmark freight pricing data with FreightWaves' market data to trade on Nodal Exchange, which runs a futures exchange for electricity production and other commodities.
Fuller said Freight Futures Exchange will help companies ensure price and mitigate their exposure to risk, protecting against upward or downward pressure in the trucking capacity market, where spot rates are volatile. Between January 2016 and January 2018, for example, U.S. trucking rates were up more than 25 percent, according to FreightWaves' data. Spot rates can fluctuate throughout the day, week and year, the company also said.
Fuller uses the trucking industry's driver shortage to illustrate how this can affect the industry.
"People will say, 'why not just pay [drivers] more?' The reason is, [trucking companies] don't know how long the cycle will continue," he explains, noting that it's hard to provide a 15 percent to 20 percent pay increase when you don't know whether or not the market will hold up. "If the market slows down, which we are seeing now, that downward cycle will drag on truckloads ... With futures, you're protecting [against that] downward cycle."
The freight futures market is likely to be made up of both physical traders—those who are exposed to the price risk, including shippers and trucking companies—and financial traders or speculators, Fuller and others said during a panel discussion on the topic during the MarketWaves18 conference. Paul Cusenza, CEO of Nodal Exchange, said he expects freight futures to work much like the electricity futures market, which he said is 60 percent physical, 40 percent financial.
Fuller said FreightWaves and its partner companies are hosting a series of "mini road-shows" about the exchange starting in January, with stops in Chicago, Houston and New York, "where there's an awareness of futures markets [along with] large brokers and freight companies."
Freight Futures Exchange is set to launch March 29.
"We've got a lot of education ahead of us," said Fuller, who held a series of positions at privately held trucking company US Xpress, which his father founded in 1985, before branching out to found several industry companies of his own. "These are not products you should be buying experimentally. They are meant to be used by sophisticated players who know the risks involved in trading."
Despite the work ahead, Fuller said he looks forward to the next phase of the project.
"We're certainly excited about the progress," Fuller added. "It's been three years in the making, and it will be good to get this going."