Incoterms 2020 for commodity buyers: FOB, CFR and CIF without the fine print
The three-letter term on your contract does not set price or quality. It sets where the seller's risk ends and yours begins. Getting it wrong is expensive.
By Hugo Amanajás
Incoterms do not set the price and they do not set the quality. They settle one question: where the seller's responsibility ends and the buyer's begins. Get that wrong and you end up arguing about who pays for a problem after it has already happened. Three terms cover most physical commodity trade, and the difference between them is worth understanding before you sign, not after.
Risk and cost are two different lines
The point most buyers miss is that risk and cost do not always transfer at the same place. Under FOB, CFR and CIF alike, risk passes when the goods are on board the vessel at the load port. What changes between the three terms is who arranges and pays for freight and insurance from that point on. Read the term as two questions at once: who carries the risk if something happens at sea, and who is paying the freight bill.
The three that matter
- 01FOB
Free On Board
The seller delivers on board at the named load port. From there the buyer books and pays the ocean freight and arranges insurance. Risk passes on loading. This is the term for a buyer who has freight relationships and wants to control the vessel.
- 02CFR
Cost and Freight
The seller pays the freight to the destination port, but risk still passes at the load port, on board. The seller books the ship; if the cargo is damaged in transit, that is the buyer's risk, so the buyer still needs its own insurance.
- 03CIF
Cost, Insurance and Freight
As CFR, plus the seller buys marine insurance for the buyer's benefit. Note the default cover under Incoterms 2020 is minimal (Institute Cargo Clauses C) unless you agree otherwise in the contract. Risk still passes at the load port.
The trap in CFR and CIF
Here is the counterintuitive part. Under CFR and CIF the seller pays to get the cargo to your port, which makes it feel like the seller's problem until it arrives. It is not. The risk already passed to you at loading. If the vessel is lost, you or your insurer bear it, and if the documents conform you still owe payment under the letter of credit. That is exactly why inspection at loading and adequate insurance are not optional details. They are what stand between you and a total loss you have already paid for.
/ The term is only as good as the contract
CIF on its own means little. CIF Jebel Ali, Incoterms 2020, insurance at 110 percent of CIF value under Institute Cargo Clauses A means something. Name the port precisely, name the Incoterms edition, and spell out the insurance cover. Precision at signing is what prevents the argument at arrival.
The full documentary procedure referenced here is published on our Procedures page.
View Procedures/ About the author
Hugo Amanajás
Hugo Amanajás is an engineer and commodities broker, and the founder of Juros e Bolsa, a CVM-authorised investment advisory in Brazil. He works on the origination and structuring of Brazilian commodities and writes Duna Trading's Insights on how the physical trade actually works, from documentary procedure to compliance.
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