FreightWaves executives discuss how futures mitigate risks facing carriers, shippers and intermediaries in spot trucking market.
The Motor City’s motor is a 500-horsepower, inline six, thanks to its dependence on trucking.
More trucks cross through Detroit than any other location along the U.S.-Canada border, with a monthly average close to 134,000 during the first nine months of last year, according to the U.S. Department of Transportation. The dollar value of trade between the U.S. and Canada going through Detroit was $125 billion through last November, according to U.S. Census data.
Yet that truck supply crossing one the largest free trade zones in the world faces new risks. Canada will implement its own version of the electronic logging device (ELD) mandate by year’s end, limiting the amount of time that a driver can spend on the road. To the south, Mexico likewise is limiting the amount of time drivers can spend on the road.
“The OPEC moment for the transportation industry was the ELD mandate,” George Abernathy, Chief Revenue Officer of FreightWaves, told a crowd at Benzinga’s Detroit headquarters. “That drove significant amounts of volatility into the market and it will be even more impactful as Canada and Mexico move that way.”
Abernathy, along with others, were addressing the new risk mitigation tool for the transportation industry coming at the end of March. FreightWaves, in conjunction with DAT Solutions and Nodal Exchange, is introducing Trucking Freight Futures contracts.
The new futures contracts will enable shippers, carriers and intermediaries to hedge against changes in spot rates for trucking. The ELD mandate, driver scarcity and the rise of e-commerce have been among the factors impacting those rates. But regular and recurring shocks such as weather and seasonal and regional demands such as agricultural harvests and the need to ship produce immediately also drive rate volatility.
“Weather and harvests are going to impact the freight market,” Abernathy said. “There’s only going to be so many trucks left in an area when Mother Nature decides to do something significant.”
The new Trucking Freight Futures contract, which is priced in dollars and cents per mile, reflects spot transactions recorded by DAT across seven major origin-destination pairs for trucking across the U.S. DAT will also compile three regional averages and one national average rate.
FreightWaves Vice President of Futures Tom Mallon said the seven lanes handle nearly one quarter of all dry van freight moving across the U.S. The spot rates in those lanes, which exclude fuel and accessorial charges, show an extremely strong relationship to overall rate movements in the U.S., he added.
“They are a very representative and liquid set of lanes,” Mallon said. “They correlate very well to the national movement of freight.”
Nationwide, spot rates for dry van freight swung between $1.52 and $2.11 per mile last year, according to DAT (SONAR: DATVF.VNU). Those price swings make it harder than ever for major shippers to adequately forecast or budget for transportation costs. About 40 percent of companies in the S&P 500 have said freight and transportation costs are the most substantial risks to their earnings estimates, Abernathy said.
Trucking costs are “further out of their control than they would like them to be,” Abernathy said. Drawing on his prior experience managing the transportation spending for a third-party logistics firm, “Trucking Freight Futures would have given us the opportunity” to manage the volatility of those costs, he added.