FREIGHT FUTURES EXPLAINED
The Call for North American Freight Futures
Freight markets are under attack from digitization, regulations, cyclical and secular trends. These factors are driving significant market volatility while also creating significant opportunities. If a product is going somewhere in the U.S., 7 out of 10 times it is getting there on a truck. According to the American Trucking Associations, over 80% of the nation’s nearly $900 billion freight bill became revenue for the trucking industry. With a market size of $726 billion, trucking is one of the largest industries in the U.S.
Nodal Exchange will be listing the world’s first trucking freight futures contracts in collaboration with FreightWaves, the leading provider of market data and analytics for the North American freight market. The contracts will be financially settled against DAT’s industry-leading spot rate indices.
What Exactly is a Freight Futures Contract?
A futures contract is legal agreement to buy or sell an underlying asset in a specified month. Each futures contract represents a specific amount and is standardized according to quality, quantity, time, and place, leaving the only remaining variable of price, which is discovered through an auction process in an electronic exchange trading platform.
The most widely traded commodity future contract, for example, is crude oil, which has a contract unit of 1,000 barrels. Each futures contract of corn, on the other hand, represents 5,000 bushels.
Trucking Freight Futures contracts each represent 1,000 miles.
Some futures contracts call for physical delivery of the asset, while others are settled in cash. Trucking Freight Futures are settled in cash meaning there will be no physical movement of a truck. In general, most investors trade futures contracts to hedge risk and speculate, not to exchange physical commodities; that’s the primary activity of the cash/spot market.
Originally, futures markets were designed to connect real producers and end-users of raw commodities. Central grain markets were established, and a central marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (spot-trading) or for forward delivery. These forward contracts helped protect farmers against the loss of crops and profits and stabilize supply and prices in the off-season.
Today’s futures markets are a global, electronic marketplace for not only agricultural goods, but also for currencies, metals, energy and financial instruments such as Treasury bonds and stock index futures.
While producers and end-users still use the futures markets, all types of investors and traders access the commodity and financial futures markets to hedge and speculate.
A futures exchange (Nodal Exchange for Trucking Freight Futures) is a financial hub that supports and facilitates the competition between buyers and sellers, and it also provides a center to manage each transaction as the exchange conducts
all trades and guarantees all transactions with zero counterparty risk.
How Does a Freight Futures Contract Work?
Each freight futures contract is specific to the underlying commodity or financial instrument and the date of delivery, and prices for each contract fluctuate throughout the trading session in response to economic events and market activity.
Nearly all futures contracts are cash settled and end without the actual physical delivery of the commodity, as is the case with Trucking Freight Futures.
For a classic example, assume you are a wheat producer trying to secure a selling price for next season’s crop. Additionally, there is a bread maker trying to pin down a buying price to determine how much bread they can make and at what profit.
You, the farmer, and the bread maker may enter into a futures contract requiring the delivery of 5,000 bushels of wheat (1 contract) to the buyer in May at a price of $4 per bushel. By entering into this futures contract, you and the bread maker secure a price you both believe will be a fair price in May.
It’s this contract, and not the wheat, that can then be bought and sold again and to different parties in the futures market.
What does ‘Short’ and ‘Long’ Mean in Freight Futures?
An important concept is that a freight futures contract is an agreement between two parties: one who holds a short position (the party who agrees to deliver a commodity) and one who holds a long position (the party who agrees to receive a commodity).
In the earlier mentioned scenario, the farmer would hold the short position because they agreed to sell their wheat, and the bread maker would hold the long position, since they agreed to buy the wheat. Even when no commodity is involved, a stock index future contract for example or Trucking Freight Futures in our case, buyers and sellers are still matched together.
There’s always a buyer for every seller, and a seller for every buyer, on every single trade.
This is a largely anonymous process. Electronic exchanges match buyers and sellers from around the world in real-time throughout each trading session. Keep in mind, most futures contracts are settled in cash before the contract expires, with no physical delivery taking place (no truck is ever involved).
Futures markets are also a place for people to limit risk when making purchases. Risks are reduced because the price is pre-set, therefore letting participants know how much they will need to buy or sell. This ultimately helps reduce the cost to the
consumer because with less risk there is less of a chance that shippers or carriers will raise prices to make up for any financial losses in the cash market.
Strategic Applications in the Freight Futures Market
For shippers, freight prices are on the lower end of the spectrum but you can now secure yourself against future transportation cost increases that could reduce your profitability. Read more about applying freight futures as a shipper and how K-Ratio can help advise you.
In the case of Carriers, freight futures can stabilize forecasted revenue by locking in future rates to protect against unrealized price recovery or unexpected price drops. K-Ratio’s strategic application for Carriers and freight futures can be found here.
If you are a 3PL, trucking freight futures can mitigate financial pressures arising from being exposed to both shipping and carrying price shift volatility. K-Ratio’s strategy for 3PLs and the freight futures market can be read here.
Get trading within 30 days and contact K-Ratio today for best-in-class freight futures advisory.
Key Information on Trucking Freight Futures
Nodal Exchange Trucking Freight Futures contracts provide risk management solutions for businesses with exposure to the trucking freight market, including:
- Third-Party Logistics Companies
- Financial Institutions
Freight Futures contracts can be traded on Nodal Exchange both on a central limit order book and via block trades.
All transactions on Nodal Exchange are cleared through Nodal Clear, using the same award-winning portfolio margining methodology.
Nodal Clear Risk Management tools will be available for trucking freight market participants; this includes portfolio margin limits and position limits.
DAT Freight Futures Indices
DAT will publish daily spot dry van rates in USD per mile for seven directional lanes from which there will be three calculated regional indices and one calculated national average.
|Los Angeles||900-908, 910-928, 930-931|
|Chicago||463-464, 600-611, 613|
|Philadelphia||080-086, 173-176, 179-181,|
|Index Name||Contract Code||Pickup XMA||Delivery XMA|
|Los Angeles to Seattle Van||VLS||Los Angeles||Seattle|
|Seattle to Los Angeles Van||VSL||Seattle||Los Angeles|
|Los Angeles to Dallas Van||VLD||Los Angeles||Dallas|
|Dallas to Los Angeles Van||VDL||Dallas||Los Angeles|
|Chicago to Atlanta Van||VCA||Chicago||Atlanta|
|Atlanta to Philadelphia Van||VAP||Atlanta||Philadelphia|
|Philadelphia to Chicago Van||VPC||Philadelphia||Chicago|
Regional and National Methodology
|Index Name||Contract Code||Pickup XMA|
|West US Van||VWU||(Los Angeles to Seattle Van + Seattle to Los Angeles Van) / 2|
|South US Van||VSU||(Los Angeles to Dallas Van + Dallas to Los Angeles Van) / 2|
|East US Van||VEU||(Chicago to Atlanta Van + Atlanta to Philadelphia Van + Philadelphia to Chicago|
Van) / 3
|National US Van||VNU||(West US Van + South US Van + East US Van) / 3|
Monthly Truckload Freight Contract (DAT)
|Monthly Cash Settled Truckload Freight Financial Contract (DAT)|
Los Angeles to Seattle Van; Seattle to Los Angeles Van; Los Angeles to Dallas Van; Dallas to Los
Angeles Van; Chicago to Atlanta Van; Atlanta to Philadelphia Van; Philadelphia to Chicago Van;
West US Van; South US Van; East US Van or National US Van
|Contract Code||VLS; VSL; VLD; VDL; VCA; VAP; VPC; VWU; VSU; VEU or VNU|
|Hours of Trading||As defined at http://www.nodalexchange.com|
|Unit of Trading||1 lot|
|Lot Size||1,000 Miles|
|Minimum Tick||$0.001 per mile|
|$0.001 per mile|
|Last Trading Day||The Eighth Trading Day after the contract month.|
|Contract Series||16 months|
|Fixed Price||The traded price of the previous day’s settlement price.|
|Determined by the Exchange based on exchange activity, other market data, and extrapolation to|
traded contracts, as appropriate.
|The final settlement price is the average of the Origin Point to Destination Point Van Rate Index|
published daily by DAT starting from the first business day of the month through the last business
|The first business day following the Last Trading Day.|
|Margin Limit||US Dollars|
Member Access Information
Firms wishing to trade Trucking Freight Futures must meet the Eligible Contract Participant (ECP) standards set forth by the Commodities Exchange Act (CEA), satisfy all other criteria set forth by the Nodal Exchange Rulebook and Participant Agreement, and have an eligible clearing account with one of Nodal Clear’s registered Futures Commissions Merchant (FCM). For additional information on trading on Nodal Exchange contact (703) 962-9820 or email@example.com.
Nodal Exchange is a derivatives exchange providing price, credit and liquidity risk management solutions to participants in the North American energy markets. Nodal Exchange is a leader in innovation, having introduced the world’s largest set of electric power locational (nodal) futures contracts.
Nodal Exchange currently offers over 1,000 power and gas contracts on hundreds of unique locations, providing the most effective basis risk management to its energy market participants. Nodal is now innovating the trucking freight industry by introducing the world’s first trucking freight futures contracts. All Nodal Exchange contracts are cleared by its wholly owned subsidiary, Nodal Clear, which is a U.S. Commodity Futures Trading Commission (CFTC) registered derivatives clearing organization.
Nodal Exchange is a designated contract market regulated by the CFTC. Nodal is part of the EEX group, a group of companies serving international commodity markets.
DAT operates the largest truckload freight marketplace in North America. Transportation brokers, carriers, news organizations and industry analysts rely on DAT for market trends and data insights derived from 270 million freight matches in 2018, and a database of $57 billion of market transactions.
FreightWaves is a data-centric company that provides products and solutions to help transportation industry participants efficiently manage risk, consume data, and absorb market insights and commentary. FreightWaves’ solutions enable both industry veterans and disruptors to succeed in the digital world.