OUR VALUE PROPOSITION
Lakefront Futures’ Trucking & Freight Derivative Group advises key industry market participants – i.e. trucking carriers, shippers and 3PLs/Brokers – on how to best hedge their trucking rate and/or fuel cost volatility risk exposure via trucking freight futures and fuel derivatives so that they have increased revenue and cash flow stability and are not at the mercy of the significant rate/price fluctuations that occur in the trucking & fuel market.
Lakefront will help participants engineer and trade the optimal hedging position (s) from start to finish including but not limited to:
1) assessing trucking rate and/or fuel cost exposure at a company level or lane level,
2) analyzing the underlying indices which provide the best correlation to a participants’ exposure so that the best fit futures contract is used,
3) determining the optimal position size and contract month (s)
4) executing trades
5) monitoring hedged positions
Our team offers the best of both worlds – trucking derivative specialists with logistics/trucking backgrounds who understand our clients’ business. Key competitive advantages of our group include:
- Real Time Trucking Market Insight – proprietary real time insight on supply & demand conditions that are driving trucking rate direction in lanes throughout the country
- Analytical Expertise – The data analytical expertise to make well informed decisions on hedging or profiting position
- Logistics Trucking Derivative Specialists – Trucking derivative specialists that are logistics professionals by background who understand the trucking industry
- Technical Expertise – derivatives trading & position engineering expertise
- Leading trading execution
- Access to Counterparties – Deep base of potential counterparties for off exchange block trades
TRUCKING RATE & FUEL COST VOLATILITY RISK
Trucking rates and diesel fuel costs are extremely volatile and can change direction by 20-70% in a matter of months as evidence by what has happened during the last year. For trucking carriers, shippers and 3PLs, this volatility has serious negative ramifications to their revenues, cash flows and profit margins. In addition, they also can impact a participant’s competitiveness, market valuation and financing costs.
HEDGING: TRUCKING RATE VOLATILITY
At this point, the only available derivative to hedge against the trucking market’s significant trucking rate volatility are trucking freight futures which were launched on the Nodal Exchange at the end of March 2019. Trucking freight futures do not change anything about a participant’s operating business or its vendor/customer relationships. Instead, they transfer a participant’s financial risk to the futures market.
Trucking freight futures are a financial derivative with no delivery, cash settled and traded against one of DAT.com’s calculated rates for 7 directional trucking rate lanes and 4 calculated regional and national indices (linehaul rate only). Each contract represents 1,000 miles and will be traded in calendar month increments as far out as 16 consecutive months.0
DAT Directional Lanes: Los Angeles to Seattle, Seattle to Los Angeles, Los Angeles to Dallas, Dallas to Los Angeles, Chicago to Atlanta, Atlanta to Philadelphia, Philadelphia to Chicago.
DAT Calculated indices: National US Van, West US Van, South US Van & East US Van.
Market participants can either go long (expectation for a rate increase) or short (expectation for a rate decrease). Regardless of which way rates go in the futures, the participant is locked into a rate for a time in the future.
Trucking carriers – a carrier who sells its trucking capacity would protect its revenues from the risk of trucking rates decreasing by going “short” on the best fit trucking freight futures contract. If rates do decrease, the lost revenues would be offset by the profits of the “short” futures position (assuming it was properly hedged).
Shippers – a shipper who buys trucking capacity would protect itself from increased trucking costs resulting from a future increase in trucking rates by going “long” on the best fit trucking freight futures contract. If rates do increase, the increased trucking costs would be offset by the profit of the “long” futures position (assuming it was properly hedged).
3PLs – Given that 3PLs have the exposure of both a trucking carrier and shipper, their profit margins are at risk if trucking rates increase or decrease. To lock in a set profit margin, 3PLs would take a delta neutral position – offsetting short and long positions.
TRUCKING FREIGHT FUTURES BENEFITS
Trucking freight futures provide several economic and non-economic benefits including but not limited to:
- Reduced trucking rate volatility
- Increased revenue/cash flow stability
- Improved forecasting & decision making
- Increased competitiveness
- Higher market valuations
- Lower financing costs
- Price/ rate discovery