The historically volatile $750 billion trucking industry has always been a good candidate to have a corresponding futures market. Until recently, certain key components were not in place that are critical for a liquid futures market to properly serve the trucking industry: a bench marked price index (DAT lane rates and indices), an exchange (Nodal Exchange) and market transparency on future supply & demand conditions (Freightwaves). In March 2019, the Nodal Exchange launched Trucking Rate Futures, and the expectation is that it will revolutionize the way trucking rates transact moving forward.
Trucking Freight Futures Overview
Truck carriers, shippers and 3PLs will need to hedge against rate volatility in order to increase profit margins and stabilize cash flow. According to Nodal Exchange, the market size for trucking freight futures is estimated at 40 billion miles per year, the equivalent to 40 million futures contracts. Each contract represents 1,000 miles and will trade as far out as 16 months. Here are the various trucking lanes and national indices that are offered at Nodal:
- Los Angeles to Seattle
- Seattle to Los Angeles
- Los Angeles to Dallas
- Dallas to Los Angeles
- Chicago to Atlanta
- Atlanta to Philadelphia
- Philadelphia to Chicago
- West US
- South US
- East US
- National US
7 Directional lanes and 4 calculated indices have been designed to represent the overall market. And these 7 lanes represent roughly 20 percent of the truckload spot volume reported to DAT.
Applications of Trucking Freight Futures
Trucking freight futures provide a very effective hedge, but will eventually also be used as speculative trade. Participants include: trucking carriers (hedging & speculative), shippers (hedging), 3PLs (hedging & speculative) and opportunistic traders/investors (speculative).
As the market grows and there is enough liquidity, don’t be surprised to see commodity trading advisors that begin to use trucking futures as part of their trading strategy. Furthermore, there may be trucking rate specialists that decide to build a CTA strictly around the industry in order to offer investors a new investment opportunity.
Trucking Freight Futures Benefits
- Decreased trucking rate volatility; stable trucking costs (shippers), revenues (carriers) and cash flows
- Improved budgeting and forecasting capabilities
- Enhanced revenues – carriers, 3PLs
- Reduced trucking rates – shippers, 3PLs
- Valuable tool for trucking rate price discovery
- Increased competitiveness as carriers with hedged positions can bid on load volume more aggressively
- Improved financing terms and market valuations for carriers & 3PLs due to increased cash flow stability