Futures markets, also known as exchanges, are common in American industry.
The New York Mercantile Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange, the Chicago Board of Options Exchange, the Chicago Climate Futures Exchange, the Kansas City Board of Trade, and the Minneapolis Grain Exchange are where contracts in their respective industries are bought and sold.
There are two kinds of participants in futures markets: hedgers and speculators.
Hedgers do not usually seek a profit by trading commodities futures but rather seek to stabilize the revenues or costs of their business operations. Speculators are usually not interested in taking possession of the underlying assets. They essentially place bets on the future prices of certain commodities. Speculators are often blamed for big price swings in the futures markets, but they also provide a lot of liquidity to the futures markets.
Which is why the March 29 opening of the country’s first trucking freight futures market will be an industry milestone, according to Craig Fuller, CEO of FreightWaves, which has partnered with DAT and Nodal Exchange to roll out the market in Chattanooga, Tennessee.
Fuller points out that trucking moves 71 percent of the country’s goods and is a $726 billion market. By comparison, petroleum refining is a $501 billion industry. The freight futures market will locate in Chattanooga, Tennessee. The exchange is a partnership between FreightWaves, DAT, and Nodal Exchange. Fuller said the tens of thousands of firms who use trucks to move their goods will be able to better forecast what transport costs will total as far as 16 months ahead.
“People always think about energy prices as creating inflation in the market,” said Fuller. “Trucking and transportation are actually a bigger cost.”
He said trucking is a massive industry that affects a wide array of consumers. According to Fuller, there are more than 4,500 trucking companies that bring in more than $20 million in annual revenue.
Add to that the 20,000 shippers who spend more than $10 million on trucking costs every year, shipping everything from breakfast cereal to electronics. He said being able to forecast their transportation costs will ease the budgeting process.
The predictability associated with futures is designed to settle what has been a volatile market. Rates last year jumped so much that major companies had to ramp up prices to accommodate shipping increases. According to FreightWaves, 40 percent of Fortune 500 companies reported that transportation costs were harming their bottom lines.
Fuller described 2018 as the trucking industry’s “OPEC moment” — when an entire industry realized just how volatile conditions, pricing, capacity, and labor issues can get. A futures market might be able to help transportation companies, and everyone who depends on trucking to move goods, ensure prices remain stable.
“Once you add visibility and transparency to it with a futures contract, what will happen is that the delta between the high number and the low number will actually come down,” Fuller said. “What you end up doing is you mitigate your volatility.”
Doug Waggoner, CEO of Echo Global Logistics, said an exchange can help shippers and carriers mitigate price risks.
“I’m comfortable saying that capacity behaves like a commodity,” said Waggoner. “Fifty-three-foot trucks are fifty-three-foot trucks. Trucking is pretty fungible to most shippers these days.”
Waggoner said that the reason spot rates for trucking capacity are so volatile is because in transportation and logistics, supply and demand are inelastic. In other words, it is not the case that when trucking capacity is cheap, shippers increase production and move more freight, nor do they reduce freight volumes in response to high trucking prices. As demand reduces, it lowers prices; trucks are available and there’s less spot freight.
“We see our margins expand because the price we pay to the trucks falls faster than what we pass through to the customers on contract rates. So, we see significant margin expansion, albeit on lower volumes. When prices go up faster than we can pass it through, margins compress, but it’s somewhat offset by larger volumes,” he said.