This morning, July 30, two separate trades of Trucking Freight Futures contracts were executed on the Nodal Exchange. A total of 50 Los Angeles to Dallas contracts changed hands, 25 for the month of October (FUT.VLD201910) and 25 for the month of November (FUT.VLD201911).
“What we are looking at are two parties moving their risk into the marketplace,” said Patrick Draut, principal at K-Ratio, a Chicago-based financial services and consultancy firm offering shippers, brokers and carriers custom risk management solutions, including freight futures.
The October contracts were transacted at $1.90/mile and the November contracts moved at $2.103/mile. Each contract represents 1,000 miles hedged, representing a total of 50,000 miles of open interest.
“The long party is most likely a 3PL [third-party logistics provider] protecting its margins on its contract rates, or a shipper looking to insulate itself from rising rates on the LA to Dallas lane during the holiday retail season,” Draut explained. “If rates do increase, the margins will remain intact for the 3PL, or if it is a shipper that is long, the transportation spend will remain constant. On the other side of the trade, either a carrier or 3PL is protecting its revenues, essentially saying, ‘I want to continue to conduct my business at these prices.’”
The chart below shows DAT-derived historical spot rates for the Los Angeles to Dallas lane (DATVF.LAXDAL) as well as the forward curve (FWD.VLD), with today’s trades setting the price for October and November 2019.
Judging from today’s trades, the counter-parties believe that 2019’s peak season will fall somewhere between 2017 and 2018; that fears of a freight recession may be over-hyped; and strong retail volumes will push up trucking rates out of the busiest ports in North America.
There are some macro-economics to support that view. Strikingly, the trades bidding up October and November contracts came on the same day as the release of new consumer confidence numbers. The Conference Board’s survey showed consumer confidence rising to 135.7 in July from 124.3 in June, an eight-month high. Not only are consumers confident, but they have more money to spend – personal income numbers released today by the Bureau of Economic Analysis posted 4.9 percent year-over-year growth.
June’s inbound container volumes to West Coast ports were also healthy, and if that trend holds through September, there could be some trucking rate inflation.
The burst of activity in the Trucking Freight Futures market is a positive sign for the viability of the contract and the transportation industry’s ability to hedge against spot rate volatility.
“This is a ‘tipping point’ as we believe this is an indication that trading activity, volume and open interest are going to pick up as the market moves into the holiday season,” said Tom Mallon, FreightWaves vice president of freight futures markets.
“We knew that the upfront lift on the market was going to be significant,” added Draut. “However, as shippers, carriers and 3PLs continue to get educated on the benefits of this product, more people are showing up to the Exchange each month, which is precisely what a healthy market requires.”
“Based on our conversations with shippers, trucking carriers and 3PLs, there is growing interest in Trucking Freight Futures given how volatile trucking rates are – in the last two years they have swung 20 to 76 percent in each direction in a very short period of time,” said Gary Saykaly, senior vice president, Trucking & Freight Derivatives at Lakefront Futures & Options. “However, a number of these potential hedging participants have been on the fence waiting for confirmation of activity before they would enter the market. It is similar to a high school dance – no one wants to be the first one on the dance floor. With this trade completed, you will start seeing hedging participants entering the market at a growing pace and that pace will increase as additional trades occur.”