By John Paul Hampstead / www.freightwaves.com / July 23rd, 2019
According to Trucking Freight Futures forward curves, the Chicago to Atlanta lane should see a run-up in September, while Los Angeles to Dallas will peak in November and Seattle to Los Angeles will hit its customary high in December.
One of the most interesting things about a futures exchange – whether the underlying commodity is wheat, natural gas or trucking spot rates – is that traders can get a transparent view into where the market thinks prices will move.
For many commodities, the forward curve isn’t really a forecast of future spot prices, because it has to take into account things like the cost of storing crude oil, for example, or the transportation costs of delivering cotton.
But the trucking freight futures contract, trading on the Nodal Exchange, is financially settled, meaning that physical trucking capacity is not delivered when the contract expires. Instead, money moves on the exchange according to the traders’ positions with regard to the monthly settlement price.
“Since Trucking Freight Futures are financial derivatives that are cash-settled with no delivery, there are no carry costs built into the Trucking Freight Futures rate,” said Gary Saykaly, senior vice president of trucking and freight derivatives at Lakefront Futures & Options. “The futures prices are entirely based on the expectations of future supply and demand and are derived from an exchange-hosted, transparent competitive bidding process [like all exchange-based stock prices and derivatives], reflecting everything the market knows today. Because of that, trucking rate futures prices reflect true market rates and will provide a very useful price discovery tool when determining which direction the market expects trucking rates to move.”
For example, a trucking carrier hedging its natural ‘long’ position (i.e., trucking carriers fundamentally want rates to go up) would sell a freight futures contract, or be ‘short’ the rate. If the carrier decided to sell August contracts on the Los Angeles to Dallas lane for $1.62/mile (or $1,620 for a standard contract of 1,000 miles), but the average price on that lane ended up being $1.50/mile, $120 would be transferred to the carrier’s account. The effect is the same as having the right to sell something in August for $1.62 but then finding out in August that it can be bought for an average of $1.50 – there’s an immediate profit of $0.12.
By looking at the Trucking Freight Futures forward curves, carriers, shippers and brokers can see where the market thinks prices are going. Because the Trucking Freight Futures exchange has multiple contracts for the national average, regions and major lanes, industry observers can get a sense of how seasonality is expected to affect different markets.
Keep in mind that Trucking Freight Futures contracts settle against the average monthly price. In the following paragraphs, peak prices during certain historical months will be noted, like September 2018, and these will always be higher than the average monthly prices expected by the futures market.
Contracts for the Chicago to Atlanta lane (FWD.VCA) reflect an inflationary environment in the fall and into the end of 2019, with the September 2019 contract currently bid at $1.96/mile. After that, Chicago to Atlanta moves up slightly to about $2.00/mile in December and January 2020 before dropping off in the spring of 2020.
Indeed, in 2018 dry van spot rates from Chicago to Atlanta (DATVF.CHIATL) reached a second-half peak on September 13 at $2.52/mile. After the Labor Day holiday in 2018, volumes outbound from Chicago (OTVI.CHI) surged 13.9 percent through October 5, supporting elevated rates.
Los Angeles to Dallas futures contracts (FWD.VLD) peak a bit later, in November 2019, at $2.05/mile. Last year, dry van spot prices from Los Angeles to Dallas (DATVF.LAXDAL) also peaked in November, albeit somewhat choppily; the 15-day moving average for the lane peaked in November at $2.29/mile. Volumes outbound from Los Angeles (OTVI.LAX) also surged in two separate spikes during November 2018, one at the beginning of the month and one at the end. This summer, inbound container volumes to West Coast ports have recovered and reached levels above 2017 and just below 2018 for the month of June, according to a recent report from Susquehanna.
“Both spot market and freight futures rates have decreased since the beginning of July, with the exception of the DAT South Van spot rate index and the DAT South Van Index March 2020 contract,” Saykaly pointed out. The ‘South’ regional contract averages Los Angeles to Dallas and Dallas to Los Angeles.
“The Trucking Freight Futures directional lanes and calculated indices are showing that the market expects truck rates to decrease through the end of the summer and start rebounding in September through the end of the year,” Saykaly explained. “The DAT East Van futures contract is an exception, with the futures prices showing that rates are expected to decline or remain flat until the end of the year.”
For Seattle to Los Angeles contracts (FWD.VSL), the futures market reflects the conventional wisdom about Christmas tree season, and the December 2019 contract is being bid at the highest price on that curve at $1.13/mile. In December 2018 the lane hit a high of $1.34.
FreightWaves will continue to monitor the forward curves as more information enters the market and sentiment evolves.
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