There was no calling of vowels or providing answers in the form of a question. But there was champagne.
“Let’s play our Trucking Freight Futures trading game!” said emcee George Abernathy, president of FreightWaves, during arguably the most interactive session at the CSCMP Edge 2019 conference in Anaheim, California, this week.
“It is standing room only,” Abernathy noted.
Trucking Freight Futures is not make believe. It’s real, he explained.
“By the end of today, you will have a much greater understanding of how Freight Futures works, how hedging can work for you if you are a shipper, if you are a carrier, if you are an intermediary.”
FreightWaves’ Freight Futures offering became real on March 29. That’s the date the first freight futures trade occurred, Abernathy said. “There have been subsequent to that significant hedges that have occurred because volatility has started to rear its interesting or ugly head.
“There have been large chunks of miles. Note that I say miles and not loads. Note that I saw miles and not trucks. These are contracts that are utilizing miles, not trucks. No truck is going to bump the dock,” he explained.
Abernathy said the $726 billion trucking and transportation services market is “large enough to have the ability for there to be a market to build itself to liquidity. What else do you need to build a market in which you can hedge? You need volatility.
“How many of you shippers had a 2018 that was a once-in-a-hundred-year kind of transportation rate market? Kind of a tough year? That’s the volatility we’re talking about,” he continued.
Abernathy explained that “if there was no volatility and everything went along nice and normal and everybody knew what was going to happen in regard to rates, you wouldn’t need to hedge. You’d be able to forecast.”
With volatility, “Freight Futures has the ability to come in and make a difference and derisk some portion of that transportation network,” he said.
A list of freight market volatility drivers flashed onto the screen.
“It would be easier for me to describe those things that don’t cause volatility in the freight market than that that does. Everything does. Less than 140 characters changes our lives, right? … One tweet out of the Oval Office and we have volatility in the market,” Abernathy said. “Acts of God, Mother Nature, just what we went through with Dorian recently, did that change the marketplace? You’re darn right it did. It changed it dramatically.”
There are lanes in the East, South and West used for Freight Futures trading. In the West, it’s Seattle to Los Angeles and back. In the South, it’s L.A. to Dallas and back. In the East, it’s Chicago to Philadelphia, Philadelphia to Atlanta and Atlanta to Chicago.
“It is real. People are hedging today. There’s going to come a point in the not-too-distant future when a publicly traded company is describing their results and they are going to say, ‘We hedged our transportation network. We hedged this particular portion of what we do’ as an intermediary or as a carrier or as a shipper and that will play extraordinarily well,” Abernathy said.
He recalled when a large shipper reported its Q2 2018 results. “They had a huge topline beat. They had a huge bottomline beat. … Their stock was getting crushed.They reported that they had a significant miss on transportation and the outlook was cloudy. That caused there to be as much instability in the stock that there was.”
Abernathy presented different scenarios for those playing the game. They had to pick the correct futures market. They had to pick the correct contract length. They had to pick the correct number of contracts. And they had to pick the right buy and sell decision.
Kyle Lintner, a principal with K-Ratio, explained the goal is to eliminate the risk for downward price pressures.
“Your futures account will always offset with your real-world account,” Lintner said. “Whatever price you get in the futures market is going to end up being the price you get in the real world. … It’s a mutually offsetting zero-sum game.”
He continued, “We all know about seasonality. It’s already baked in. What’s not in the market are Dorian or this drone attack on oil, all these things we didn’t see coming … We’re trying to eliminate the uncertainty and provide some stability for your company.”
Contracts settle eight business days after the final trading day of the month, Lintner said. “All settlement is marked to actual DAT cash price.”
Lintner granted freight futures trading is new and still catching on.
“Any other industry that can have a commodity market does,” Lintner said. “Not hedging is what’s risky.”
And eliminating risk can make everyone a winner.