Incoterms: A Common Language in the International Cocoa Trade

In the world of trading, clarity and precision are paramount. Enter Incoterms – essential tools that streamline and simplify global trade by providing universally accepted definitions and rules that outline the responsibilities of buyers and sellers in international transactions.

For the cocoa industry, where cacao beans cross continents from plantations to chocolate factories, Incoterms ensure that every party knows exactly who is responsible for shipping, insurance, tariffs, and other logistical elements. This reduces misunderstandings, mitigates risks, and helps prevent costly disputes. By specifying critical details such as the point of delivery and the transfer of risk, Incoterms bring efficiency and transparency to cocoa trading contracts, fostering smoother, more reliable business relationships globally.

Cocoa bags being collected for transportation to the port of Diego Suarez in Madagascar 

WHAT ARE INCOTERMS?

Incoterms, or International Commercial Terms, are a set of rules published by the International Chamber of Commerce (ICC) that define where the risk, costs and responsibilities are transferred from seller to receiver for the delivery of goods under sales contracts. The most recent version, Incoterms 2020, includes 11 incoterms.

Seven of these 11 Incoterms are applicable to any mode of transport, including road, air, sea and train transportation: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four of these 11 Incoterms are applicable to sea and inland waterway transportation only: FAS, FOB, CFR and CIF.

WHY ARE INCOTERMS RELEVANT?

In commodities trading, including cocoa trading, the choice of Incoterm in a sales contract is crucial as it determines the division of responsibilities, costs, and risks between the seller and buyer. Each Incoterm defines specific points where these elements transfer from the seller to the buyer. This ensures clarity and helps prevent disputes.

Containers on the premises of dedicated cocoa warehouse Handelsveem Steinweg in Amsterdam

RESPONSIBLITIES & RISKS

Responsibilities: The Incoterm specifies which party is responsible for arranging transportation, insurance, and export/import customs clearance. For example, under FOB, the seller is responsible for loading the cocoa onto the vessel at the Port of Loading. From here onwards, the costs and the risks transfer to the buyer. While under CIF, the seller must also arrange and pay for insurance.
Costs: Depending on the Incoterm, costs can include freight, insurance, and duties. For instance, under EXW, the buyer bears all costs from the seller’s premises onwards while under DDP, the seller covers all costs up to the buyer’s named place of destination, including duties and taxes.
Risks: The Incoterm also defines the point at which risk transfers from seller to buyer. Under EXW, the risk transfers when the goods are changed from their place of storage, while under FCA, the risk transfers when the goods are handed over to the carrier at the named place. This means that if you buy EXW, you bear the risks during loading the goods, whereas under FCA, the seller bears this risk and the risk transfers to you from the moment the goods are loaded on the carrier’s vehicle.

Each sales contract in cocoa trading will include the Incoterm and the specific location where the transfer of costs and risks occurs. This ensures both parties are fully aware of their obligations and can plan the execution of the contract accordingly.

KNOW YOUR INCOTERMS

Below, we outline these Incoterms and explain how they apply to cocoa trading.

EXW (Ex Works): The seller makes the goods available at their premises. The buyer bears all risks and costs from there to the destination. This includes the risks during loading the goods at the premises of the seller. Export and import formalities are executed by or on behalf of the buyer.

FCA (Free Carrier): The seller delivers the goods to a carrier or another party nominated by the buyer at the seller’s premises or another named place. The risk transfers to the buyer at the moment the goods are loaded on the vessel or vehicle or at the moment this vessel or vehicle arrives at the other named place. The risks during loading and export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

CPT (Carriage Paid To): The seller pays for the carriage of the goods up to the named place of destination. Risk transfers to the buyer upon delivery to the first carrier. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

CIP (Carriage and Insurance Paid To): The seller pays for the carriage of the goods and for insurance against the buyer’s risk of loss or damage during transit. The transportation risks remain on the buyer’s account. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

DAP (Delivered At Place): The seller delivers when the goods are placed at the disposal of the buyer at a named place of destination. The seller bears all risks involved in bringing the goods to the named place and unloading these goods. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

DPU (Delivered at Place Unloaded): The seller delivers when the goods, once unloaded, are placed at the disposal of the buyer at a named place of destination. The seller bears all risks and costs involved in bringing the goods to and unloading them at the named place. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

DDP (Delivered Duty Paid): The seller is responsible for delivering the goods to the named place in the buyer’s country, including all costs and risks, and paying duties, taxes, and customs clearance. The buyer bears the risk of unloading the goods.

FAS (Free Alongside Ship): The seller delivers the goods alongside the vessel at the named port of shipment. The risk transfers to the buyer when the goods are alongside the ship. The buyer is responsible for loading the goods and all costs and risks thereafter. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

FOB (Free On Board): The goods are sold out of the port of origin. The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The risks and costs transfer to the buyer once the goods are on board the vessel. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

CFR (Cost and Freight): The seller pays the costs and freight to bring the goods to the port of destination. The risk transfers from the seller to the buyer once the goods are loaded on the vessel at the port of origin. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

CIF (Cost, Insurance and Freight): Similar to CFR, the seller pays the costs and freight to bring the goods to the port of destination, but the seller also pays for insurance to cover the buyer’s risk of loss or damage to the goods during transit. Standard insurance generally excludes damages due to acts of war (e.g. war and warlike operations such as hijacking) and acts of God (e.g. natural disasters). The risk transfers from the seller to the buyer once the goods are loaded on the vessel at the port of origin. Export formalities are the seller’s responsibility. Import formalities are the buyer’s responsibility.

A pallet ready to leave Amsterdam to a destination in Europe

At Daarnhouwer, we are committed to supporting our partners throughout the cacao value chain. Do you have any questions about which Incoterms might be best applicable to your situation? Don’t hesitate to reach out to us:

Email: cocoalogistics@daarnhouwer.nl

 

 

This free wallchart as well as other digital materials on INCOTERMS are available for purchase or download on the International Chamber of Commerce website