Interested representatives of carriers, shippers, third-party logistics providers (3PLs) and the financial community gathered in Dallas on Valentine’s Day to learn more about Trucking Freight Futures from FreightWaves, DAT and Nodal Exchange. Trucking Freight Futures begin trading on March 29, 2019 on the Nodal Exchange.
The Dallas event, sponsored by K Ratio and TriumphPay, was the fourth of at least nine Trucking Freight Futures Road Shows taking place in February and early March ahead of the March 29 launch of the product. To date, the four Road Shows have generated interest and excitement in audience members. In addition to those attending the Road Show events in person, nearly 900 live-stream views (with at least some percentage of those being watched by multi-person audiences) have occurred.
Even those who have spent their entire careers in some aspect of the transportation industry were impressed by the size of the market. Trucking is the largest transportation mode in the U.S. and grows slightly faster than the U.S. gross domestic product (GDP). Moreover, transportation costs represent 8 percent of the U.S. GDP. Moreover, freight is a larger cost of goods sold than energy in many sectors of the economy.
The U.S. trucking market is valued at over $726 billion, which is larger than several other markets that already have futures markets. The next three largest markets are: petcoke and refined petroleum (nearly $535 billion); agriculture, forestry and fisheries (nearly $429 billion); and electric power generation and distribution ($301 billion). Trucking is much larger than each of these, and because futures markets operate in multiples by nature, the theoretical size of the futures market for trucking is upwards of $2.8 trillion.
In addition, many of the same physical commodities that have futures traded against them comprise the majority of goods (84 percent) being moved by surface transportation. Among these commodities are energy (oil), agricultural products, industrial metals, chemicals and forest products.
As massive as the U.S. trucking market is, it is vulnerable to outside forces. Among these forces are the weather, government regulations, trade policies, fuel prices, road construction, manufacturing and commodity cyclicality, consumer spending and market trends (such as the rise of e-commerce and more rapid delivery schedules). Any of these can (and has) impacted trucking – and several of those factors are impacting the industry right now (think of the recent storms that have stalled trucks around the country, the trade negotiations underway with China, etc., etc., etc.).
The industry is also fragmented. Since trucking was deregulated in 1980, hundreds of thousands of trucking companies have been started. Of those, more than 4,500 generate annual revenue of $20 million or more. There are 20,000+ shippers that spend more than $10 million each annually on trucking freight. There are more than 17,000 freight brokers; about 1,600 of them generate more than $10 million revenue annually.
K Ratio representatives at the Road Show made several points of interest to the audience, including the fact that in 2018, a number of Fortune 500 companies cited increased shipping costs as a key driver for missed earnings.
According to K Ratio, the unpredictability of the freight markets year-to-year and season-to- season creates a challenging environment to accurately forecast the cost of shipping freight and subsequent earnings. Therefore, hedging in the Freight Futures Market is an exercise in enterprise value protection.
In late 2017 and 2018, about 40 percent of S&P 500 companies stated that freight and transportation costs were a substantial risk to their earnings. For example during the first quarter of 2018, Coca-Cola’s freight costs were up as much as 20 percent. As a result, the company increased prices, passing along the cost pressures from freight and metals to consumers. Many other companies implemented similar measures. But what happens when the pass-throughs can no longer be supported?
Moreover, for these companies (shippers) that are required to get their products to market, losses are not limited to unpredictable increased freight expenses for the quarter and year; the subsequent decrease in EBITDA x industry multiple can result in billions of dollars of market losses.
But Trucking Freight Futures offer the opportunity to mitigate the risk of variable spot trucking rates for shippers and can help smooth the variability of the market.
For carriers, sudden drops in spot market prices due to oversupply and other factors can negatively impact the bottom line. Trucking Freight Futures will help de-risk the market for carriers, allowing them to hedge inevitable market corrections and normalize revenue per mile.
For freight brokers and 3PLs, the challenge can be even more difficult than for shippers and carriers, because they have to protect both sides of the equation. They seek fixed operational revenues and fixed carrier expenses. For 3PLs to remain competitive, they will need to install strategies for operational downside as well as protecting their contracted rates with their shipper customers.By taking multiple positions in the Trucking Freight Futures market, 3PLs will be able to create a hedge, helping to protect themselves and their customers.
Trucking Freight Futures will help bring transparency to the $726 billion North American trucking industry and help participants mitigate price risks.
The next Trucking Freight Futures Road Show event takes place this afternoon in Atlanta at the Metro Atlanta Chamber of Commerce, which is located at 191 Peachtree Street, Suite 3400. If you want to live stream the event, please follow this link.
For more information about Trucking Freight Futures, visit https://www.freightwaves.com/freight-futures.
