FOB, CFR & CIF Incoterms: Complete Guide for Commodity Traders
Incoterms (International Commercial Terms) define responsibilities between buyers and sellers in international trade. Understanding FOB, CFR, and CIF is crucial for commodity trading success.
What Are Incoterms?
Incoterms are standardized trade terms published by the International Chamber of Commerce (ICC). They clarify:
Who pays for shipping, insurance, and customs
When risk transfers from seller to buyer
Who handles loading and unloading
Documentation responsibilities
Current Version: Incoterms 2020 (effective January 1, 2020)
FOB: Free On Board
Definition
Seller delivers goods on board the vessel at the named loading port. Buyer assumes all costs and risks from that point forward.
Seller Responsibilities (FOB):
Product quality and quantity
Export licenses and customs clearance at origin
Loading costs up to the vessel
Costs until goods pass ship's rail at loading port
Export documentation
Buyer Responsibilities (FOB):
Ocean freight from loading to destination port
Marine insurance (if desired)
Unloading costs at destination port
Import customs clearance and duties
Inland transportation from destination port
Cost Breakdown Example (12,500 MT Urea 46% - FOB Jebel Ali):
Product Cost: USD 380/MT × 12,500 MT = USD 4,750,000
Seller Pays: Loading, export clearance (~USD 5,000)
Buyer Pays: Freight USD 45/MT (~USD 562,500), Insurance (~USD 7,000), Discharge (~USD 15,000)
Total Buyer Cost: ~USD 5,339,500
When to Use FOB:
Buyer has better freight rates or shipping relationships
Buyer wants control over vessel selection and routing
Buyer's country requires cargo insurance from domestic insurers
Buyer handles multiple shipments and can consolidate shipping
Long-term supply contracts with regular shipments
Advantages for Buyer (FOB):
Control over shipping schedule and vessel choice
Potential cost savings with own freight contracts
Flexibility in routing and transshipment
Direct relationship with shipping line
Disadvantages for Buyer (FOB):
Must arrange shipping logistics
Bears all risks from loading port
Responsible for demurrage if vessel is delayed
Must understand shipping contracts
CFR: Cost and Freight
Definition
Seller pays for transportation to the destination port. Risk transfers when goods pass ship's rail at loading port (same as FOB), but seller pays freight.
Seller Responsibilities (CFR):
Everything in FOB, plus:
Ocean freight to named destination port
Booking vessel and shipping arrangements
Buyer Responsibilities (CFR):
Marine insurance (if desired)
Unloading costs at destination port
Import customs clearance and duties
Inland transportation from destination port
Risk of loss/damage during ocean transport (even though seller paid freight)
Cost Breakdown Example (12,500 MT Urea 46% - CFR Mumbai):
Product Cost + Freight: USD 425/MT × 12,500 MT = USD 5,312,500
Seller Pays: Product, loading, export clearance, ocean freight
Buyer Pays: Insurance (~USD 7,000), Discharge (~USD 15,000), Import duties (~USD 50,000)
Total Buyer Cost: ~USD 5,384,500
When to Use CFR:
Buyer wants price certainty including freight
Seller has better freight rates
Buyer prefers not to deal with shipping logistics
Buyer wants to arrange own insurance (cheaper than CIF sometimes)
Important CFR Consideration:
Risk vs Cost Split: Buyer bears risk from loading port but didn't arrange shipping. This can create complications if cargo is damaged in transit - buyer claims insurance, but seller arranged the vessel.
CIF: Cost, Insurance and Freight
Definition
Seller pays for transportation and minimum insurance to destination port. Risk still transfers at loading port (like FOB and CFR).
Seller Responsibilities (CIF):
Everything in CFR, plus:
Marine insurance (minimum coverage - Institute Cargo Clauses C or equivalent)
Insurance certificate provided to buyer
Buyer Responsibilities (CIF):
Unloading costs at destination port
Import customs clearance and duties
Inland transportation from destination port
Additional insurance if seller's coverage is insufficient
Cost Breakdown Example (12,500 MT Urea 46% - CIF Mumbai):
Product Cost + Freight + Insurance: USD 426/MT × 12,500 MT = USD 5,325,000
Seller Pays: Product, loading, export clearance, ocean freight, marine insurance
Buyer Pays: Discharge (~USD 15,000), Import duties (~USD 50,000)
Total Buyer Cost: ~USD 5,390,000
When to Use CIF:
Buyer wants complete price certainty for delivered goods
Buyer doesn't want to arrange insurance
Simpler for inexperienced buyers
Required by buyer's country regulations
Letter of Credit specifies CIF
CIF Insurance Standard:
Seller must provide minimum coverage (Institute Cargo Clauses C):
Fire, explosion
Vessel stranding, sinking, capsizing
Collision with external object
General average sacrifice
Important: Minimum coverage may not be sufficient. Buyers often purchase additional "all risks" insurance.
Quick Comparison Table
| Aspect | FOB | CFR | CIF |
|--------|-----|-----|-----|
| Freight Cost | Buyer pays | Seller pays | Seller pays |
| Insurance Cost | Buyer arranges | Buyer arranges | Seller provides minimum |
| Risk Transfer | Loading port | Loading port | Loading port |
| Seller's Cost | Lowest | Medium | Highest |
| Buyer's Control | Maximum | Medium | Minimum |
| Complexity for Buyer | High | Medium | Low |
| Typical Price Difference | Baseline | +USD 45-50/MT | +USD 46-51/MT |
Which Incoterm Should You Choose?
Choose FOB if:
You have competitive freight rates
You want maximum control over shipping
You're an experienced importer
You handle multiple regular shipments
Your country requires domestic insurance
Choose CFR if:
You want freight included but prefer own insurance
Seller offers competitive freight rates
You want some control (insurance) while outsourcing logistics
You're in a market with cheap local insurance
Choose CIF if:
You want complete simplicity and price certainty
You're a first-time importer
Your LC or regulations require CIF
You trust seller's insurance coverage
You prefer minimal involvement in logistics
Common Misconceptions
Misconception 1: "CIF means seller bears risk until destination"
Reality: Risk transfers at loading port for FOB, CFR, and CIF. Seller paying freight and insurance doesn't mean they bear the risk during ocean transport.
Misconception 2: "FOB is always cheapest"
Reality: Large sellers with volume freight contracts may offer CFR/CIF at better rates than you can get independently.
Misconception 3: "CIF insurance is comprehensive"
Reality: Seller only provides minimum coverage. Buyers often need supplementary insurance.
Misconception 4: "CFR saves money versus CIF"
Reality: Savings are minimal (USD 1-2/MT). Arranging insurance separately may cost more than the CIF premium.
Practical Tips for Commodity Traders
For Buyers:
Compare Total Landed Cost: Calculate FOB + your freight + your insurance vs seller's CFR/CIF quote
Verify Insurance Coverage: If accepting CIF, check insurance certificate limits and exclusions
Consider Your Expertise: First-time? Go CIF. Experienced? FOB might save money
Check LC Requirements: Some LCs specifically require CIF terms
Factor in Logistics Effort: Time spent arranging shipping has a cost
For Sellers:
Get Competitive Freight Quotes: If offering CFR/CIF, ensure your freight rate is market-competitive
Minimum Insurance for CIF: Don't over-insure; buyer can get additional coverage if needed
Clear Documentation: Provide complete shipping documents (B/L, insurance certificate, invoice)
Vessel Nomination Timing: For FOB, give buyer adequate time to nominate vessel
Demurrage Clauses: Include clear demurrage/detention terms in SPA
Special Considerations for Bulk Commodities
Laytime and Demurrage:
Laytime: Agreed time for loading/unloading
Demurrage: Penalty if laytime exceeded
Despatch: Bonus if completed under laytime
FOB: Buyer's vessel, buyer pays demurrage if loading is slow
CFR/CIF: Seller's shipping contract, but buyer may face demurrage at discharge if unloading is slow
Bill of Lading Issues:
FOB: Buyer has direct relationship with carrier
CFR/CIF: Seller receives original B/L, must send to buyer (creates timing risk)
Insurance Claims:
FOB: Buyer deals directly with their insurer
CFR: Buyer insures but didn't arrange shipping (complicates claims)
CIF: Buyer must claim against seller's insurance (may face resistance)
Incoterms 2020 Updates
Recent changes affecting FOB, CFR, CIF:
Clarified that FOB/CFR/CIF are for sea and inland waterway transport only
Updated insurance coverage requirements for CIF
Clarified security-related clearances
Better alignment with Letter of Credit practices
Not changed: Risk transfer point remains the same (ship's rail at loading port)
Conclusion
FOB, CFR, and CIF each serve different needs:
FOB: Maximum control, best for experienced traders
CFR: Freight included, buyer arranges insurance
CIF: Complete package, best for simplicity
There's no "best" Incoterm - only the best fit for your specific situation, capabilities, and transaction requirements.
Trading with Stratoma Interchange? We offer all three terms and can advise which best suits your needs based on your location, experience, and volume.
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Keywords: Incoterms, FOB, CFR, CIF, shipping terms, international trade, freight costs, marine insurance, commodity trading, Incoterms 2020
