FreightWaves’ SONAR chart of the week (July 21, 2019 – July 27, 2019)
Chart of the Week: DAT US National Long Haul Van Freight Rate Index – USA, Freight Futures National Settlement Price – June (SONAR: DATVF.VNU, FUT.VNU201906 )
The DAT US National Long Haul Van Freight Rate Index which measures the average long haul spot rate for dry van truckloads in the U.S. excluding fuel and other accessorial charges averaged $1.50/mile in June. This number fell well below expectations according to the freight futures settlement price which started the month over $1.66/mile, meaning futures market participants expected rates to be much higher than they were this June.
Looking at the national DAT Long Haul Van Freight Rate Index over the past five years, the fall of 2017 till December of 2018 sticks out like a sore thumb due to a massive swell in upward rate pressure. The effects of such a bullish year in spot rates will have lasting effects for years to come. As long as there are people who remember that this level of volatility is possible, spot rates will have the potential to swing wildly.
The impact of 2018 is still being felt today. Rates may not be as high as they were a year ago, but there is still a level of uneasiness about how quickly the situation can change, and the pendulum can swing the other direction.
Most people apply more weight to near term information, this is called the recency bias. This is not altogether fallacy, as more recent information tends to be more reliable in predicting near term outcomes. When budgeting for 2019 most companies looked at the previous year and applied percentage increases or decreases. Most of the time it provides guidance that many refer to as being ‘directionally accurate’, but lacking precision.
Looking at last June, it would have made sense to have expected a significant surge in spot pricing this year, seeing as this occurs every year as volumes tend to increase with the temperature, tightening capacity. Predicting seasonality is not that difficult, but what anyone who has attempted forecasting will tell you is predicting its magnitude. Futures were created to help people deal with this uncertainty.
Futures in many other industries provide a layer of transparency into what the consensus of commodity prices like oil and frozen concentrated orange juice will be. Keep in mind, there are few that know what any future price will be, hence the value of an aggregated value based on multiple perspectives, as no one person can claim 100% visibility into the value of a commodity. But multiple people spread throughout the spectrum of buyer (shippers) to intermediary (broker) seller (carrier) can give insight.
The most tangible value of futures is not in price discovery, however, but the ability to hedge your position in the market. If a carrier shorted or sold a June contract at the beginning of the month, they would have at least guaranteed that they would have received $1.66/mile for however many miles they decided to sell, or 10% over the market average.
As with any financial instrument there is risk. The flipside of taking this position means carriers would not get as much benefit if spot prices went above the $1.66 threshold, effectively missing the high end, however the desired result was achieved.
The settlement price is calculated by the Nodal Exchange based on activity in the market each day. The price represents what participants expect the rate to be at the end of the month.
Looking back on the settlement price for June, there was a notable turn in direction around mid-May when many saw a significant decrease in market volumes. This decline was seen in FreightWaves own Outbound Tender Volume Index (OTVI) where national volumes fell almost 6% after the new tariffs on Chinese imports were implemented.
Futures provide a way to monitor the freight market and protect carriers and shippers from its wild swings. June may have underperformed many expectations, but it did not have to.
Disclosure: FreightWaves is partnered with DAT and Nodal Exchange in the promotion of Trucking Freight Futures. Trucking Freight Futures, like all futures products carry substantial risks. For information on Trucking Freight Futures, contact: Tom Mallon.
FreightWaves does not provide investment or financial advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
About the Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week a Market Expert will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry in real time.
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