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  • QA 231
    Question:
    How can small exporters obtain competitive ocean freight rates?
    Background:
    How does a new exporter obtain competitive ocean freight rates? Large exporters with large export tonnages obtain better freight rates so they can offer lower C&F rates than us. How can we deal with this?
    Asked by:
    Exporter - Brazil
    Answer:

    Ocean freight rates for coffee are generally linked to volume. They may also vary between different shippers or receivers, depending on who negotiates and pays the freight.

    Concentration of buying power in the coffee industry has over time changed the way ocean freight rates from many coffee producing countries are negotiated. Whereas previously exporters played a major role in negotiating and agreeing freight rates with groups of shipping companies serving their region, major receivers increasingly took over that role, arguing that in fact they pay the freight and so should negotiate freight levels.

    Whatever the pros and cons of this argument, the fact is that in most parts of the world coffee is today traded basis FOB with individual receivers negotiating their own freight agreements with shipping lines, sometimes on a worldwide basis. As a result actual rates of freight for many shipments are not general knowledge with many bills of lading simply stating 'freight as per agreement' or 'freight payable at destination'. On the exporter side only those shipping massive volumes are in a similar position of strength: they too can negotiate individual rates of freight, possibly by guaranteeing minimum volumes to be shipped. Where this is so then trading basis C&F (also called CFR) makes sense for both shipper and receiver.

    Brazil of course exports huge amounts of coffee and some of the world's largest exporters are situated there. It is our understanding that Brazilian exporters who are able to guarantee minimum shipments in the order of 1,000 or so containers per annum (a container contains approximately between 18 to 20 tons of coffee) can obtain rates of freight that may be comparable to what some of the major receivers would pay.  However, we also believe that medium and small exporters who shop around, and understand the shipping business, can also obtain rates of freight that are not hugely out of the ballpark so to say. Whilst of course not welcome, differences of USD 100 or somewhat more per container should not hugely influence one's overall business prospects.

    Of course, in theory groups of smaller exporters who trade C&F could try combining forces in freight negotiations, for example by jointly offering a minimum tonnage but, first of all, local anti trust legislation will determine whether this is at all feasible. Secondly, the logistics of such an arrangement would be complicated whereas its enforcement would probably necessitate a return to complicated freight formulas that shipping companies are unlikely to be interested in, even if they were comfortable with the principle in the first place.

    Generally speaking though exporters who sell basis FOB are not directly affected by freight rate issues, as it is their buyer (the receiver) who deals with this. Selling FOB means the exporter has nothing to do with the freight rate: their shipment will be charged whatever rate the receiver has negotiated. It is true that this rate may vary from receiver to receiver and between shipping lines, but it should be noted that in many importing countries anti trust rules prevent the negotiation of 'industry-wide' or 'group' freight rate agreements.

    Posted 28 August 2009


     

    Related chapter(s):
    Related Q & A:
    Q&A 025, 034, 046, 058