Freight Futures Are Coming

Think about the biggest commodities in the futures market: crude oil, natural gas, electricity and agriculture.

Combined, their underlying industries are about $1.1 trillion in size. But individually, they all have one thing in common: they’re dwarfed by freight.

The trucking and freight industry is a $726-billion industry, making it one of the largest industries in the U.S. (crude oil is the largest of the commodities at $421 billion). And yet, there’s been no way to trade this industry directly. Until now.

On March 29, FreightWaves, a freight trade group, is launching Trucking Freight Futures, a new secondary marketplace that will give participants the ability to gain exposure or hedge their exposure to the freight industry.

Why Create Futures For Freight?

Freight is the backbone of American commerce, and not only for companies like Amazon.com, Inc. AMZN, FedEx Corporation FDX and United Parcel Service, Inc. UPS.

In truth, nearly everybody relies on freight in one way or another. Forty percent of S&P 500 companies have said during recent quarters that freight and transportation costs are the most substantial risk to their earnings, according to FreightWaves. Transportation costs represent 8 percent of U.S. GDP, and trucking is the largest mode of transportation in the U.S.

George Abernathy, chief revenue officer at FreightWaves, said the idea to create freight futures was born out of the sheer amount of data that is now available about the industry.

“The ubiquitous nature of all of that data that’s out there gives us an opportunity to use it .. .and go the next step and help us de-risk the market,” he said at the company’s Road Show event at Benzinga’s Detroit headquarters. “It’s an opportunity to empower everybody across the spectrum of the freight community, including shippers, carriers and intermediaries.”

It’s not as if the markets ignore freight completely. The Baltic Exchange has been listing dry-bulk futures contracts for over 30 years, and the Baltic Dry Index has been a barometer of global economic activity and sentiment ever since.

But dry-bulk maritime freight is much smaller than the U.S. truckload market, and it’s estimated that about 84 percent of physical commodities being shipped by transportation have futures traded against them. The hope is that Trucking Freight Futures will fill that gap.

How Trucking Freight Futures Will Work

FreightWaves has partnered with DAT, operator of the largest truckload freight marketplace in North America, for data, and the Nodal Exchange for clearing.

Each Trucking Freight Futures contract will represent a lot size of 1,000 miles, and the price will be pegged to indices based on the trucking spot rate provided by DAT.

Contracts expire on a monthly basis, are cash settled and can be traded 16 months ahead of time with daily settlement.

As for the types of contracts, the market is broken down into 11 securities based on geography.

Contracts are available between Seattle-Los Angeles, Los Angeles-Dallas and Philadelphia-Chicago-Atlanta. There are also regional contracts that average each individual corridor, and a national instrument that averages the three regionals.

Fundamentals Of The Freight Market

The market will be open to anybody, but FreightWaves believes the initial participants will be trucking companies of scale (Abernathy noted that there are 4,500 trucking companies with more than $20 million in annual revenue), shippers and freight brokers.

As far as factors that could impact market volatility, Abernathy pointed to: regulations, trade policy, weather, seasonality, driver availability, commodity supply, construction activity, manufacturing activity, consumer spending and market trends.

“There is seasonality, absolutely But no truck is ever going to show up." 

Once the futures market gets off the ground, it could exponentially increase the size of the freight industry, the CRO said. 

“You think about futures, when they trade they trade in multiples,” he said. “So the theoretical value of that $726 billion is actually more like $3 trillion.”

Disclosure: FreightWaves is a Benzinga content partner.