FOB vs CIF Explained
What the three-letter terms in a buyer's offer mean for a West African exporter of cashew, shea, sesame or ginger, and where risk and cost change hands.
A first-time agricultural exporter from West Africa receives a purchase offer for a locally grown commodity. The headline price catches the eye, but alongside it sits a three-letter term: "FOB Tema", "CIF Rotterdam" or "EXW Accra". These shipping terms look alike, but they shift cost and risk at different points, so the same price per tonne can mean very different money in the exporter's pocket.
What the four terms mean
The terms are Incoterms rules published by the International Chamber of Commerce (ICC); the current edition is Incoterms 2020. FOB, CFR and CIF are for sea and inland waterway transport only, while EXW can be used for any mode.
- FOB (Free On Board): the seller clears the goods for export and loads them on board the vessel nominated by the buyer at the named port of shipment. The buyer books and pays the ocean freight.
- CFR (Cost and Freight): the seller also books and pays freight to the named port of destination, but risk still passes when the goods are on board at the port of shipment.
- CIF (Cost, Insurance and Freight): like CFR, but the seller must also buy cargo insurance for the buyer's benefit from the port of shipment to the port of destination.
- EXW (Ex Works): the seller only makes the goods available at its own premises or another named place. The seller does not have to load them or clear them for export.
Where risk and cost pass
| Term | Who books main freight | Who buys insurance | Risk passes to buyer | Named place |
|---|---|---|---|---|
| EXW | Buyer | No obligation | Goods made available at named place | Seller's site |
| FOB | Buyer | No obligation | On board vessel, port of shipment | Port of shipment |
| CFR | Seller | No obligation | On board vessel, port of shipment | Port of destination |
| CIF | Seller | Seller | On board vessel, port of shipment | Port of destination |
The most common misunderstanding is that under CFR or CIF the seller carries the risk until the goods arrive. It does not: the seller pays freight to Rotterdam, but if the cargo is damaged at sea, the loss is the buyer's, who must claim on the cargo insurance. Under CIF the seller only has to provide minimum cover, Institute Cargo Clauses (C) or similar, for at least 110% of the contract price. The buyer can ask for wider cover, but this must be agreed in the contract.
EXW is often the least suitable term for an exporter even though it looks simplest. It gives the seller the minimum obligation, but the buyer becomes responsible for export clearance in the seller's country, which a foreign buyer may not be able to handle. The ICC suggests FCA (Free Carrier) when the buyer expects difficulty with export clearance. For goods packed in containers and handed to a carrier at a terminal before loading, the ICC also points to FCA rather than FOB, because under FOB the seller keeps the risk until the goods are on board.
What to check before signing
Always check that the contract names the exact port or place and states "Incoterms 2020". Remember that Incoterms decide delivery, cost and risk only; they do not cover payment, the transfer of ownership, product standards or export permits. Export registration, phytosanitary certificates and customs rules still apply, so confirm them with the national export authority, such as the Ghana Export Promotion Authority, and with plant protection and customs services before quoting a price.
