Article 1: The New 3-Dimensional Trucking Market

In anticipation of the launching of “Trucking Financial Markets 360°”, Logistics Management, together with Lakefront Futures’ Trucking & Derivatives Group, will be publishing a series of articles over the next five weeks on the “A-Z” of trucking freight futures. This debut article provides an overview of the paradigm shift occurring in the trucking market and the increasing trucking rate volatility impacting trucking carriers, shippers, & 3PLs.

The trucking sector is going through a major paradigm shift due to the ongoing digitization of the industry, the increased transparency resulting from the digitization and the launching of a trucking forward and freight futures market. It is now 3-dimensional comprised of the spot, forward and trucking freight futures markets.  As the trucking forward and futures markets gain traction, the three markets will become increasingly more interrelated. 

For purposes of this article, the trucking forward market and freight futures markets are defined as follows:

Forward market: The forward market is being established by Leaf Logistics via its digital flex dedicated forward contracts, where shippers place “buy” orders to procure future trucking capacity anywhere from two weeks-to-six or more months out, and carriers place “sell” orders to provide trucking capacity to shippers in the same time frame.  As opposed to the existing non-standardized RFP based contract market, Leaf’s forward contracts are binding and based on a standardized contract.  They provide guaranteed load volume/trucking capacity and rates to shippers and carriers, and the contract rates can be hedged via trucking freight futures.

Trucking freight futures market: The trucking rate futures market was launched at the end of March 2019 on the Nodal Exchange.  The underlying rate, which the futures markets track, are indices produced by DAT and updated daily. There are 7 directional lanes and 4 calculated indices, each with a 16-month series. Trucking freight futures provide a trucking rate volatility hedging tool for trucking carriers, shippers, and 3PLs, allowing them to lock in a trucking rate today for up to 16-months in the future.

What does this mean for trucking carriers, shippers, and 3PLs?

Increasing Trucking Rate Volatility

Because of this increased transparency:

1. Trucking rates will become more volatile, will change more frequently and will be increasingly influenced by changes in the trucking forward and freight futures markets. Carriers and shippers will be able to see changes in trucking rates around the country in all three markets on a more “real time” basis, causing rates in their lanes to adjust much faster.
2. Market participants can now see real time market data nationwide – i.e. inbound/outbound tender volume and tender rejection levels – and their rate expectations will be influenced by this real time market data and will quickly be reflected in spot market rates. 
3. With real time insight on rates, tender and tender rejections etc., trucking carriers will shift assets to take advantage of markets with high load to truck ratios, which will also impact rates in the markets they are shifting assets from to the markets they are shifting assets to. 
4. The traditional spot market rates have a non-transparency premium built into them – as transparency increases that premium will compress.

Given this increase in trucking rate volatility, it is critical that trucking carriers, shippers, and 3PLs hedge against the increasing trucking rate volatility, as revenue/cash flow volatility results in lower market valuations for a company, especially those that are publicly traded. Trucking freight futures provide a very effective way to hedge trucking rate risk, and the Leaf forward market provides a hedge to lock in guaranteed rates and load volume/trucking capacity on a multi-month basis. There are also viable cross-market hedging/profiting strategies that can be executed on in conjunction with the trucking forward/futures markets.

Price Discovery

Since trucking freight futures are financial derivatives that are cash settled with no delivery, there are no carry costs built into the trucking freight futures rate. The futures prices are entirely based on the expectations of future supply and demand and are derived from an exchange-hosted transparent competitive bidding process (like all exchange-based stocks and derivatives), reflecting everything the market knows today. Because of that, the trucking freight futures forward curve reflect true market prices and will provide a very useful price discovery tool when determining which direction the market expects trucking rates to move in the future.

Conversely, with the exception of the digital freight platforms such as Convoy and Transfix, spot market rates have been based on privately negotiated transactions with limited to no open market competition/bidding, and as result do not produce a true market based rate that can be used as a reliable benchmark for a lane. Historically, the price discovery process was tedious and inefficient. The spot market rate determined by the price discovery process could be underpriced or overpriced. 

However, the increasing real time transparency with rates/prices in all three markets will make price discovery much more efficient and reliable.  Also, because of the true market rates derived from a transparent competitive bidding process, trucking freight futures will increasingly be used as a benchmark to work from.

3-Dimensional Execution

The new three-dimensional market provides new ways for market participants to mitigate trucking rate risk, determine trucking rates/pricing and to procure trucking capacity or access load volume. The successful companies in this new market will be those that learn to engineer execution strategies via combined solutions from each of the three markets.

Regardless of whether a market participant ever uses binding forward and/or trucking freight futures, it will need to stay current on the pricing trends in both the trucking forward and freight futures markets as spot market rates in their lanes will be affected by both.

In September, Logistics Management will be launching a new section to reflect the new 3-dimensional market – “Trucking Financial Markets 360°.”  This section will be published weekly digitally and monthly in print. This section will provide a comprehensive snapshot of the trucking spot, forward and futures markets along with the diesel/derivatives market and will be an invaluable resource for market participants in the new 3-dimensional trucking market. The content will be provided by Gary Saykaly, who heads up Lakefront Futures’ Trucking & Freight Derivatives Group that helps carriers, shippers and 3PLs hedge trucking rate and fuel cost risk - [email protected].

Past performance is not necessarily indicative of future results. The risks associated with trading futures and options are substantial. Futures and options trading are not suitable for all investors.