Incoterms for Spice and Nut Buyers: FOB, CFR, CIF and DAP Explained

An Incoterm is three letters that settle an argument before it starts. It determines which party books the vessel, pays for the transportation of the goods, buys insurance for the goods, and at which point the buyer, not the seller, takes responsibility for damaged goods. All of this is determined by the term used in the contract and virtually nothing else. A large amount of the misunderstanding we experience regarding Incoterms is not due to the terms themselves, but rather due to people assuming what the terms cover. This article will provide insight into the four Incoterms most commonly encountered by buyers of spices and nuts. It also shows what each term decides and flags where food cargo behaves differently from machinery or textiles.

What an Incoterm decides, and what it does not

Incoterms are published by the International Chamber of Commerce (ICC), and the current edition is Incoterms 2020, which contains eleven rules. Of these rules, seven apply to all forms of transportation (EXW, FCA, CPT, CIP, DAP, DPU, DDP). The other four are applicable only to ocean/inland waterway transportation (FAS, FOB, CFR, CIF), according to the U.S. International Trade Administration.

Each rule answers a small number of questions: who arranges and pays for the main carriage; who insures; where the risk of loss or damage passes from the seller to the buyer; and who is responsible for customs clearance at both ends. This is all. An Incoterm doesn’t determine the price of the goods; it doesn’t state when or how you will be paid; and it doesn’t specify what occurs if the goods do not meet the agreed specifications. These are matters that should be included in your sales agreement and payment conditions. Additionally, an Incoterm is a contractual provision and not a law; therefore, it only becomes applicable if stated as such in the contract. To make a proper reference to an Incoterm, include the name of the rule, the location and the year of the edition (for example, “FOB Karachi, Incoterms 2020”). “FOB” alone creates the same types of disagreements that Incoterms were created to eliminate.

The four terms you are most likely to meet

Under FOB (Free On Board) the seller will deliver the products to the ship selected by the buyer at the stated port of shipment. The seller will also clear the products for export and then cease any further involvement. The buyer will book the transportation of the products, pay for it, and accept all risks associated with the products once they are loaded onto the ship. Buyers that currently use a forwarder and wish to control their carrier selection and transportation costs should consider this option.

CFR (Cost and Freight) looks different from FOB on paper but is identical on risk. With CFR, the seller arranges and pays for the international transportation of the goods from the country of origin to the named destination port. However, once the goods have been loaded onto the vessel at the port of export, the risk of loss or damage passes to the buyer. Therefore, it is important to remember that while the seller paid for the ship that carries your goods, you as the importer are responsible for those goods during the entire voyage. Additionally, unlike other types of contracts such as CIF (Cost, Insurance & Freight), CFR does not require either party to purchase marine insurance. If you as the importer choose not to obtain insurance, then no one will be protected against potential losses incurred during transport. CFR is also written as CNF or C&F, the older label for the same arrangement.

CIF (Cost, Insurance and Freight) is CFR with one addition: the seller must buy insurance for the buyer’s benefit. The position of where the risk passes from seller to buyer remains the same as for CFR – on-board at the port of shipment. There are different levels of coverage that can be purchased; however, the minimum amount that is acceptable under CIF terms is the Institute Cargo Clauses (C). The ICC describes this level as the default for CIF, with room for the parties to agree higher cover, and the cover must run to at least 110 percent of the contract value, as Maersk’s explainer puts it. In comparison, CIP, which is used for all types of transport, requires a broader form of coverage known as Clauses (A).

DAP (Delivered at Place) is a “door-to-door” option. This means that the seller arranges carriage to a named place in the buyer’s country and clears the goods for export. As long as the goods reach that point and can be unloaded, the seller carries all of the risks associated with the shipment. Once the goods arrive at the designated delivery point and can be unloaded, the buyer takes responsibility for the costs of unloading, as well as import clearance. Many smaller importers find DAP attractive since it allows them to receive quotes for shipping which are much closer to the total amount they will have to pay. However, even if you choose DAP, you must understand what “named place” refers to in terms of where the goods will be delivered, and what will be required of you once the goods arrive.

One honest note about containers. The ICC wrote the ocean-only terms for non-containerized cargoes, but points containerized cargoes toward FCA, CPT or CIP. In reality, FOB, CFR and CIF are still commonly used for containers, and you’ll find them in many spice and nut quotes. If you choose one of these terms, know that the formal fit is imperfect, because “on board” is a poor description of a box that sat in a terminal stack for days beforehand.

The decision table

A buyer comparing terms should price the same eight cost layers under each one: inland haulage to the port of shipment, export clearance, loading on board, sea freight, cargo insurance, unloading and port handling at destination, import clearance and duties, and delivery to your warehouse. Our printable PDF has these layers as a blank worksheet, because freight rates, transit times and insurance premiums change too often for any printed figure to stay accurate. Fill it with real quotes for your own route and compare totals, not headline prices. Click here to Download the PDF.

What is different about spices and nuts

Food cargo has its own failure modes. Spices and nuts are vulnerable to moisture. A container moving between climates can produce condensation on its inner walls even when the product went in dry. Delays and rough handling add to that. This is why insurance cover matters more for ingredients than a buyer used to shipping hardware might expect.

Two cautions follow. First, CIF’s minimum cover is narrow, and wider cover can be agreed between buyer and seller. If your contract says CIF and you assume full protection, read the actual policy before the cargo sails, not after. Second, insurance typically will not provide compensation for issues related to the inherent nature of the product. A lot of dried red chili, sesame seeds or dried fruit shipped with moisture above a safe level is typically a quality issue, not an insured event. This is why pre-shipment moisture testing carries so much importance, and why it is beneficial for the parties to agree in their contracts on which type of test, what the limits of the test should be, and which party’s lab is to be used. We explain how we think about that in What Does Export Quality Actually Mean? The same logic applies across our other spices and natural seeds, from black seeds to Himalayan pink salt.

The other end of the transaction is the destination side. Under CFR and CIF, the buyer typically pays the charges that arise after the ship arrives: unloading, port handling, import clearance, and possible storage or demurrage if the goods remain on the dock. These charges may exceed the buyer’s initial expectations, especially for first time buyers. Be sure to check each of these charges against your contract instead of assuming that the quoted price includes the entire route.

Common mistakes, and a checklist

The mistakes we see most are these. Contracts that name a term but not the place or the edition. Buyers who read CIF as “fully insured”. Buyers who treat an Incoterm as a payment term, when it says nothing about when or how money moves. Destination charges that nobody budgeted for. And sea-only terms used on air freight, where FOB, CFR and CIF do not fit and FCA, CPT or CIP are the proper choices.

Before you sign the contract, make sure all three items (the term, the named place, and the edition) are included within the contract. Find out which party is responsible for holding the risk of loss or damage during the different parts of the voyage. Check what insurance exists, who bought it and for what value. Then, identify all destination charges associated with the shipment; determine who will pay for each charge; and come to an agreement regarding the moisture content and quality specifications that will be acceptable prior to loading. Our own export process provides detailed information about the documentation typically required when making a shipment, and our recent shipments page illustrates examples of actual shipments and their final destinations.

How to ask a supplier to quote

A well-written quote request can reduce many rounds of email exchanges. In addition to specifying the product and grade, quantity and packaging, the Incoterm (with place and edition) or request for comparison of up to three Incoterms, the destination port or delivery address, and the target shipment window; please also ask the quote to state what is and is not included in the price, as well as the types of quality documents that will be provided with the shipment. Our shipping locations are Karachi and Port Qasim. FOB, CIF and CFR/CNF terms are available where applicable, confirmed according to order size, destination and product. For more information regarding term comparisons for your particular route, please contact our export department.