Physical agri commodity trading: from contract to payment

In physical agri commodity trading, a cargo moves from contract to payment in six steps: a contract on a GAFTA or FOSFA form, the nomination of vessel and superintendent, loading and inspection, the shipping documents, presentation of those documents to the bank, and payment. If quality or quantity is disputed at the end, arbitration settles it. Each step leaves a document, and the documents are what get paid.

Step 1: the contract

Most agri trades are agreed by phone or chat through a broker and written up as a recap, which names a standard form by its number. GAFTA publishes forms for grains, feeds and pulses; FOSFA publishes them for oils, fats and oilseeds. Two examples: GAFTA 100, a CIF contract for feedingstuffs in bulk, and FOSFA 54, a CIF contract for vegetable and marine oil. Which number applies to which goods is in GAFTA contract numbers explained and what GAFTA is. The form incorporates the rule sets for weighing, sampling and arbitration, so the recap is short and the form carries the detail.

The trade term, CIF or FOB, decides who books the ship and who insures; the form decides who pays for and accepts the inspection.

Step 2: nominations

On CIF terms the seller nominates the vessel, on FOB terms the buyer does; the superintendent is nominated in the same stage. Who appoints and pays, and whose certificate is final, differs per form and is set out in Incoterms CIF vs FOB. A nomination that names the scope, the port and the contract terms to apply saves argument later; see what a cargo surveyor does.

Step 3: loading and inspection

During loading the superintendent checks the space, samples, and witnesses or measures the quantity, to the contract: GAFTA 124 for GAFTA forms, the FOSFA methods for oils and fats. The checks per moment are in the cargo inspection checklist, the sampling in sampling rules in agri trade.

Step 4: the documents

On a CIF contract the seller performs by tendering documents. GAFTA 100 lists them as the invoice, a full set of on-board bills of lading or negotiable delivery orders, the insurance policy, certificate or letter of insurance on CIF terms, and any other documents the contract calls for (clause 12). In the agri trade that usually means:

Document	What it is for
Bill of lading	receipt for the goods, contract of carriage and, where negotiable, document of title
Certificates of quality and weight	the survey result at loading; see certificate of analysis versus certificate of quality and weight certificate
Insurance document	cover for the buyer during the voyage (CIF)
Certificate of origin	where the contract, the credit or the importing country asks for it
Phytosanitary certificate	for plant products, issued by the official national plant protection organisation of the exporting country under ISPM 12

The ICC's Incoterms checklist lists phytosanitary and origin certification among the documents that can be required.

Step 5: presentation under the letter of credit or collection

Two routes are common.

Letter of credit. The credit is normally subject to UCP 600. The bank examines the documents on the basis of the documents alone, has a maximum of five banking days after the day of presentation to decide whether they comply, and transport documents must be presented not later than 21 calendar days after shipment and before the credit expires (Article 14). An insurance document must be issued and signed by an insurer, underwriter or their agent (Article 28). The description of the goods, the quantity, the dates and the vessel name must agree across the documents.

Documentary collection. The seller's bank forwards the documents to the buyer's bank, which hands them over against payment (documents against payment) or against acceptance of a bill (documents against acceptance). The ICC's Uniform Rules for Collections, URC 522, apply. There is no bank promise to pay, and banks do not examine the documents, so the seller takes more risk than under a credit.

Step 6: payment

GAFTA 100 has payment in exchange for and on presentation of shipping documents, or in exchange for documents on or before arrival of the vessel at destination, at the buyer's option (clause 12). Payment is against documents, not against the cargo: the buyer pays for what the documents say and claims afterwards for what the cargo turns out to be.

When quality or quantity is disputed

The weight and quality found at discharge are the usual trigger. Which figure counts is decided by the form (see CIF contracts); the steps on the buyer's side are in cargo claims in bulk shipping, and unresolved disputes go to arbitration under the rules named in the contract: GAFTA and FOSFA arbitration.

Practical rule

Keep one folder per cargo with the recap, the form number and edition, the nominations, the certificates and the protests, and check the contract's weighing and sampling clauses on the day the vessel is nominated. The disputes that get lost are not those with weak measurements, but those where nobody can show which form, which edition or which certificate was agreed.

From nomination to certificate

Every step above leaves a document, and every document has to say the same thing. FOSS, short for Field Operational Services System, is the software from Operium for that flow, from nomination to certificate: offline entry on board, built-in calculation methods as used in the sector, document generation, and a client portal in which the client sees nomination, progress and documents. An audit log records who entered which value. See FOSS or get in touch.