Tariff Delay Means Shippers Can Hedge Against Rising Rates, Freight Futures Broker Says

Date: Wednesday, August 21, 2019
Source: Sourcing Journal

K-Ratio, a Chicago-based commodities adviser for carriers and shippers on hedging strategies, said Thursday that July retail sales and a delay in new tariffs are signs of a solid holiday season that could increase futures trading on Los Angeles-Dallas freight.

The company said the push back in implementation of tariffs on approximately $300 billion in consumer goods from China is expected to have an immediate impact on the freight futures market, which saw 50,000 miles of contracts for the LA-Dallas lane and 15,000 miles of contracts for the LA-Seattle lane traded in recent weeks.

However, the American Apparel & Footwear Association (AAFA) on Thursday said analysis of the Tranche 4A and 4B lists of products that will be hit with an additional 10 percent tariff on Sept. 1 and Dec. 15, shows that 77 percent of all apparel, footwear and home textile products imported to the U.S. from China will be hit with an additional 10 percent tariff on Sept. 1. Another 23 percent of all apparel, footwear and home textile products imported to the U.S. from China will be hit with an additional 10 percent tariff on Dec. 15.

“By no means is this a win or a de-escalation,” Rick Helfenbein, president and CEO of the AAFA, said. “The administration is imposing an additional 10 percent tax on U.S. businesses and U.S. consumers. This is a tax that will hurt every American.”

In addition, Helfenbein said, some items that were removed from previous tariff lists are now being freshly taxed, including machinery and textiles used to make products in America.

The seemingly ongoing confusion of trade policy enactment has often caused trends such as sourcing strategies to be developed in reaction to expectations and not actual actions.

Kyle Lintner, K-Ratio’s director of markets, said, “The LA-Dallas lane in particular is a strong indicator of freight rates for the holiday retail season and the market has begun to price-in an expected increase of imported goods that will work their way through the domestic supply-chain, as the LA market is the preferred port destination for Chinese manufactured goods.”

There is currently an excess of carrier capacity, he noted, adding, “but if we do see a significant increase in volume, coupled with very little available warehousing on the West Coast, it means spot rates are going to begin to climb.”

Established in March, the Freight Futures Market is a tool for shippers, carriers and third-party logistics (3PLs) firms to move their risk from business operation into the financial market. This could protect them against freight rates that are prone to high volatility from external factors such as weather, construction and tariffs.

“July Retail Sales were up just a bit higher than expected as was the Consumer Confidence Index, which meant shippers, especially big box stores, could anticipate a healthy holiday season,” Lintner said. “This perception of greater demand would lead those shippers to take a long position in the market, protecting their transportation spend against rising rates. I would expect to see considerable volume growth in the freight futures market by sophisticated businesses as this is exactly why it was opened, to hedge against price volatility.”

Retail sales were up 0.9 percent in July seasonally adjusted from June, according to the National Retail Federation. Clothing and accessories stores were down 1.6 percent year-over-year.

The Trucking Freight Futures Market was developed in partnership between three companies. DAT Solutions specializes in the spot market freight rates in the trucking market and is responsible for publishing daily spot dry van price assessments that will be used for the final settlement of the Trucking Freight Futures contracts.

Nodal Exchange and Nodal Clear are the regulated exchange and clearing house respectively for the Trucking Freight Futures market. Nodal’s role is to provide the trading platform and risk management for Trucking Freight Futures trading. The system is fully electronic.

Nodal also provides the regulatory compliance for the market, exchange activities and clearing house.

 

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