TransFX works to create shipping price transparency through trucking lane futures contracts
How many times has a carrier sold capacity on its trailers at a future date only to learn that when the load is picked up, the going rate for that lane is now $1 more than it charged? Conversely, how many times do shippers get stuck in the same predicament, paying more to secure capacity only to realize they have overpaid based on current spot-market rates?
Smart carriers, shippers and brokers try to mitigate their exposure to price volatility whenever they can. Many have successfully done so through fuel hedging to combat diesel fuel price swings, but until now there has been no similar option when it comes to volatile shipping rates. That’s where a new Chattanooga, TN-based company, located in the center of Freight Alley, is hoping to carve out its niche.
TransFX, founded by CEO Craig Fuller, intends to offer “freight futures contracts” that allow brokers, carriers, shippers and speculators to hedge against rate movements. All of this is marketed under the TransRisk banner. The financially settled contracts, which will feature no physical delivery or service, are meant to be a risk-management tool that participants can use to normalize price fluctuations. They will be based on line-haul rates among major freight lanes in the U.S.
What is a futures market?
According to Investopedia, futures markets play an important role in the economic activity of a nation. One, they provide “price discovery,” which is where the futures market becomes “an important economic tool to determine prices based on today’s and tomorrow’s estimated amount of supply and demand.” Information that affects the price of the commodity, in this case trucking lane futures, alters the value of that contract on a daily basis and is referred to as price discovery.
Secondly, futures markets provide risk reduction. “Futures markets are also a place for people to reduce risk when making purchases,” Investopedia writes. “Risks are reduced because the price is pre-set, therefore letting participants know how much they will need to buy or sell. This helps reduce the ultimate cost to the retail buyer because with less risk there is less of a chance that manufacturers will jack up prices to make up for profit losses in the cash market.”
For more on futures markets, read: Futures Fundamentals: How the Market Works
How does this work?
Rate volatility is a function of supply and demand within a lane, which is driven by a number of factors including weather, fuel prices and even the political winds of change. The problem is that no one knows when those winds of rate change will blow. TransFX intends for its futures contracts to increase price transparency within a lane, giving participants the chance to settle financial contracts at a pre-determined price.
A carrier may participate in a freight futures contract because it believes rates in a certain lane are overpriced at that time, for instance. TransFX describes the following example of this situation.
“During February, a carrier is concerned that rates on a key lane will drop significantly by July. The carrier seeks to protect its rate exposure on the Los Angeles to Dallas lane because current rates are above historical average,” the company explains. “On Feb. 1, the carrier sells the trucking futures contracts on that lane with a July expiration. This sale locks in a current rate of $2.50 per mile. As the carrier predicted, rates begin to drop to $1.50 per mile for physical loads on that lane by July.”