Incoterms and Commodities: The Hidden Framework Behind Global Trade

If you work in commodities, whether that's grains, metals, or coffee, you have probably heard the terms FOB, CIF, or DDP thrown around. These aren’t just acronyms. They’re part of a standardized system called Incoterms®, short for International Commercial Terms. Think of them as the global dictionary for who does what in a trade contract. Sellers and buyers responsibilities clearly defined and ambiguities getting cleared up.

Getting them right helps you to manage risk, keep costs predictable and under control and ultimately achieve more trade efficiency.

What Incoterms® Actually Do

Incoterms® are standardized trade terms published by the International Chamber of Commerce (ICC). They define who—the buyer or the seller—is responsible for things like:

• Transport and logistics
• Insurance
• Export and import customs clearance
• Risks of damage or loss during transit

They don’t govern price, payment terms, or ownership, but they remove ambiguity about who does what, when, and at whose cost and risk.

In commodity trading, where contracts move huge volumes across borders and ports, choosing the wrong Incoterm can lead to missed shipments, surprise costs, or disputes about who was supposed to clear customs or pay for port storage.

When to Use What: A Commodity Trader’s Cheat Sheet

Here’s a simplified view for typical scenarios in commodity trading:

In short:

• Use FOB/CFR/CIF when trading bulk seaborne commodities with experienced counterparties.
• Use DAP/DDP if you’re a supplier delivering directly to customer warehouses or in consumer markets.
• Use CIP/CPT for containerized or multi-modal cargo when you want more flexibility.

Risk Transfers and Cost Pressures

As trade becomes more global, and more exposed to supply chain disruption, regulatory scrutiny, and freight volatility, understanding Incoterms is no longer optional.

The 2020 version of Incoterms introduced a few key updates:

• DPU (Delivered at Place Unloaded) replaced DAT, making it clearer that unloading must be included in the seller’s responsibility.
• CIP and CIF now require insurance coverage: at least Clause A (all-risk) for CIP and Clause C (minimal risk) for CIF incoterms.
• More flexibility for using own transportation, not just third-party carriers.

For commodity traders, this matters because the choice of Incoterm shifts risk and cost. In volatile markets, let’s say, fertilizer exports from Morocco or soybean shipments from Brazil, selecting DAP over FOB could mean absorbing or avoiding thousands in fees due to weather delays or new import duties.

Imagine a cocoa trader in Côte d’Ivoire selling a container to a buyer in the Netherlands.

• Under FOB (Free on Board), the seller is only responsible up to the moment the goods are loaded onto the vessel in Abidjan. If there’s a storm delay in the port of Rotterdam or the buyer faces new EU inspection requirements tied to deforestation rules (like EUDR), all those costs—demurrage, storage, inspections—fall on the buyer.
• But if the same trade is done under DAP (Delivered at Place) Rotterdam, the seller is responsible for all transport and logistics until the container is delivered to the buyer’s warehouse. So if a storm causes a 5-day delay, and port fees rise to €400/day, the seller would absorb an extra €2,000 in costs—plus any additional paperwork or rerouting fees.

How Trade Standardization Evolved

The ICC first published Incoterms in 1936 to bring clarity to global trade. Since then, updates have tracked changes in logistics, trade law, and technology.

For decades, FOB (Free on Board) was the go-to Incoterm in commodity shipping—especially for bulk cargo like grains, sugar, or coal. It meant the seller’s job ended when goods were loaded onto a vessel. From that point, the buyer took on all risks and costs.

But containerization, inland transportation, and complex customs processes have pushed traders toward more flexible or buyer-focused terms like CFR (Cost and Freight) or CIP (Carriage and Insurance Paid To).

In the coffee and cocoa trade, for example, exporters in origin countries are shifting toward DDP (Delivered Duty Paid) or DAP (Delivered at Place) to provide more value-added services and gain leverage in trade negotiations.

One Thing Most People Don’t Know

Here’s something you won’t find in most training slides: Incoterms can affect your access to trade finance.

Banks and insurers often rely on the selected Incoterm to evaluate the creditworthiness of a trade deal.

CIF Incoterms

When a seller uses CIF, they are responsible for arranging shipping, insurance, and export clearance. Because of this, they also control the key documents:

• Bill of Lading (shows goods are loaded and shipped)
• Insurance certificate
• Commercial invoice

Imagine a rice exporter in Thailand sells 10,000 bags under CIF to a buyer in Nigeria. The Thai exporter arranges the vessel and obtains a negotiable Bill of Lading. The Nigerian buyer uses this document to open a Letter of Credit (LC) with their bank, which releases payment once shipping is confirmed.

CIF gives the seller documentary control, which is critical when working with LC-based payment structures.

Ex-works Incoterms

Alternatively, under EXW, the buyer takes responsibility as soon as the goods are available at the seller’s warehouse. The seller doesn’t arrange transport, insurance, or export clearance.

Imagine a Kenyan fertilizer manufacturer agreeing to sell EXW to a German trader. The German buyer is expected to arrange a truck pickup, clear Kenyan export customs, and organize ocean freight. But the buyer’s bank refuses to issue an LC because the seller has no transport or customs documents to prove the goods were shipped abroad.

This can be a red flag for banks or tax authorities, especially if the seller is based in a country where export proof is required to avoid VAT or sales tax.

To conclude,

• If you're selling under CIF, you control the shipping and can issue documents that banks use for letters of credit (LCs).
• But under EXW (Ex Works), you’re handing everything off at your factory gate—no transport, no export clearance—which can make the trade harder to finance, especially across jurisdictions.

Also, compliance with tax authorities (especially in the EU) depends on having the right documentation. With EXW, the seller might not be able to prove the goods left the country—exposing them to VAT liability.

These examples show how Incoterms touch your legal exposure and financing options.

Incoterms are a strategic tool. In commodity trading, where margins are tight, risks are high, and time is money, the right Incoterm can protect you from major surprises and make your contracts bankable, insurable, and compliant.

Before your next trade deal, ask one simple question: “Does this Incoterm align with my control, my costs, and my risk tolerance?”