Freight forwards, derivatives are on the table, but will shippers take part?

The LogisticsExchange's launch last week added weight to other entrants trying to smooth rate volatility in freight markets through forward-looking mechanisms.

Freight forwards, derivatives are on the table, but will shippers take part?

The LogisticsExchange's launch last week added weight to other entrants trying to smooth rate volatility in freight markets through forward-looking mechanisms.

Freight forwards, derivatives are on the table, but will shippers take part?

The LogisticsExchange's launch last week added weight to other entrants trying to smooth rate volatility in freight markets through forward-looking mechanisms.

 
If the tangible signs that the transportation and logistics industry is willing to truly turn its back on a history laced with rate volatility are rare, there are signs that options for those looking for more rate stability are increasing.
    Last week, a new entity backed by trucking industry veterans unveiled a new platform to transact so-called forward contracts for dry van capacity. The entity, called the LogisticsExchange, adds to other such recent entrants looking to develop market-based mechanisms to control rate volatility in the freight transportation space.
    They include TransRisk, which in 2017 launched a trucking futures contracts and settlement platform using reference price data from DAT Solutions, and the New York Shipping Exchange (NYSHEX), which last year unveiled a forward contract platform for the liner shipping industry.
    These entities are primarily taking their cues from the way futures markets in other industries has provided overall benefits to buyers and sellers, whether it be commodities, securities or vessel capacity.
    The LogisticsExchange will focus initially on forward contracts (analogous to the NYSHEX model) to allow truckload carriers and shippers to gain more certainty about shipment patterns over the short- to medium-term, founder and chief executive officer Anshu Prasad said in a briefing with American Shipper.
   Prasad, who spent 10 years at the consultant A.T. Kearney advising logistics and transportation clients, said he sees development of the forwards market as a stepping stone to building a futures market for freight contracts (also known as derivatives).
    “From an operational standpoint, you need functional liquidity on the forwards,” he said. “Using those forwards, you can use futures.”
    Prasad said he and his team have kept the LogisticsExchange “under wraps by design” over the past year. The company has been working with a closed private pool of shippers and carriers to fine-tune the product. He also personally reached out to a wide array of experts in futures and forwards markets across industries to get a sense of what has worked and what hasn’t.
    Coloring that research is Prasad’s own experience in the trucking industry. He said there are structural and emotional reasons why the industry has yet to embrace anything other than annual or multi-year contracts that are often not honored by one or both parties.
    “People don’t trust the guy on the other side of the table,” he said. “Is the shipper going to tender me a load? There’s a deficit of trust. Structurally, the truck is a fungible quantum of capacity. The driver can go after shale versus what Dow wants him to haul. It’s different in ocean freight and the Baltic Dry (Index), where there are specific trade lanes.”
   Prasad said there are also “structural things that have been overpromised in this space” around automation and analytics that have prevented shippers and carriers from matching supply and demand through pure optimization.
    While areas like routing and transportation management systems are undoubtedly more sophisticated than they were 10 years ago, Prasad argues the industry still needs a pricing mechanism that drives efficiency for carriers and more predictable rates for shippers.
    TransRisk’s model is based on historical rates from DAT, the most used trucking index in North America. The company, also backed by a team of veteran trucking executives, is trying to create a derivatives market across freight modes.
    In a blog post Jan. 24, Prasad laid out the case for why volatility persists in trucking.
    “Outside of the spot market and dedicated fleets, the vast majority of truckload spend is managed through non-binding contracts negotiated in annual requests for proposals (RFPs): a shipper and carrier may agree to move 1,000 loads annually between Chicago and LA at a rate of $2/mile, but if the shipper tenders only 600 of those loads, the carrier is still expected to honor the contracted rate,” he wrote. “Likewise, if the carrier accepts only 600 of 1,000 tendered loads, or simply refuses to honor the contract rate, the shipper’s only option is to find another carrier, potentially at a much higher price.
   “Now say shipper and carrier enter into one-year LE Forwards to move four loads per day on this lane. This contract is a binding commitment: if the shipper tenders only two loads on a given day, they still owe the carrier for the other two loads. And if the carrier fails to accept a load, they are responsible for paying the difference between their contract rate and the rate at which the shipper moves the load with another carrier.”
    Prasad told American Shipper that the forward contract essentially resembles dedicated fleets, where contract carriers allot a specific amount of capacity to a shipper on a one- to two-year basis. The benefit to both parties of the forward contract versus dedicated is the length: it entails a similar contract commitment but could be structured for a few weeks or months rather than a year or more.
    The overarching goal behind all of these approaches is to enable shippers to smooth out the rates they pay week-by-week (a particularly acute pain point in the currently sky-high rate environment), while allowing carriers to better utilize their assets and reduce driver turnover.
    As Prasad put it, a way to get out of the cycle of shippers extracting their pound of flesh when demand is low or supply high, and carriers getting theirs when the dynamics are reversed.
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Demand for air cargo grew by 3.5 percent in 2018, a significant deceleration from 9.7 percent growth in 2017, while January 2019 saw a year-over-year drop of 1.8 percent, according to IATA.

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Freight forwards, derivatives are on the table, but will shippers take part?

The LogisticsExchange's launch last week added weight to other entrants trying to smooth rate volatility in freight markets through forward-looking mechanisms.

on Jan 29, 2018AmericanShipper.com

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Freight forwards, derivatives are on the table, but will shippers take part?

The LogisticsExchange's launch last week added weight to other entrants trying to smooth rate volatility in freight markets through forward-looking mechanisms.

on Jan 29, 2018AmericanShipper.com