What are incoterms?

In the global food industry, understanding Incoterms (International Commercial Terms) is important for smooth trade between buyers and suppliers. These standardized rules, established by the International Chamber of Commerce (ICC), define the responsibilities of sellers and buyers in international trade contracts. Incoterms specify who is responsible for shipping, insurance, customs duties, and risk at each stage of the transaction.

For B2B food businesses, choosing the right Incoterm can mean the difference between a seamless transaction and costly misunderstandings. Whether you're dealing in bulk grains, frozen food, specialty ingredients, or processed products, using the correct Incoterm ensures clarity in cost distribution, delivery obligations, and legal responsibilities.

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What Are Incoterms?

Incoterms are a globally recognized set of trade terms that define the roles and obligations of buyers and sellers in international transactions. The latest version, Incoterms 2020, includes 11 terms that govern the transfer of risk, cost, and responsibility for transportation.

Since their introduction in 1936, Incoterms have been periodically updated to reflect changes in global trade. The most recent version, Incoterms 2020, clarifies responsibilities in international transactions, making it easier for food businesses to navigate trade logistics. The full details and official rules can be found on the ICC's official website.

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The 11 incoterms

According to the International Chamber of Commerce (ICC) Incoterms 2020, there are 11 Incoterms that define the responsibilities of buyers and sellers in international trade. These Incoterms are categorized into two groups:

1. Incoterms for Any Mode of Transport (Multimodal) – 7 Terms:
   • EXW (Ex Works) – Seller makes the goods available at their premises; the buyer bears all costs and risks from there.
   • FCA (Free Carrier) – Seller delivers the goods to a carrier or location nominated by the buyer.
   • CPT (Carriage Paid To) – Seller covers transport costs to a specified destination; buyer assumes risk after delivery to the carrier.
   • CIP (Carriage and Insurance Paid To) – Similar to CPT, but the seller also provides minimum insurance coverage.
   • DAP (Delivered at Place) – Seller delivers the goods to a specified location; buyer is responsible for import duties and clearance.
   • DPU (Delivered at Place Unloaded) – Seller delivers the goods to the destination and is responsible for unloading.
   • DDP (Delivered Duty Paid) – Seller covers all costs, including customs clearance and duties, delivering to the buyer’s location.
2. Incoterms for Sea and Inland Waterway Transport – 4 Terms:
   • FAS (Free Alongside Ship) – Seller delivers the goods alongside the vessel at the port of shipment; buyer takes over from there.
   • FOB (Free on Board) – Seller delivers the goods onto the vessel; buyer assumes risk from that point.
   • CFR (Cost and Freight) – Seller covers transport costs to the destination port; buyer assumes risk once the goods are loaded onto the ship.
   • CIF (Cost, Insurance, and Freight) – Similar to CFR, but the seller also provides minimum insurance coverage.

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Why Incoterms Matter in the Food Industry

In the B2B food industry, Incoterms are particularly important because they:

• Clarify who is responsible for transportation, insurance, and customs duties.
• Help suppliers and buyers negotiate contracts with minimal confusion.
• Ensure compliance with import/export regulations, which is crucial for perishable food products.
• Reduce risks related to temperature-sensitive goods, such as dried fruits.

A poorly chosen Incoterm can result in unexpected costs, delays, and potential product spoilage, making it crucial for food businesses to select terms that align with their shipping and logistics strategies.‍

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Commonly used Incoterms for the Food Industry

EXW (Ex Works)

• The buyer is responsible for all transportation costs and risks.
• Often used when buyers have their own logistics and freight handling capabilities.
• Not ideal for perishable food due to extended responsibility on the buyer’s end.

FOB (Free on Board)

• The seller is responsible for delivering the goods to the port of departure.
• The buyer takes responsibility once the goods are loaded onto the vessel.
• Commonly used for bulk shipments of grains, coffee, and frozen seafood.

CIF (Cost, Insurance, and Freight)

• The seller covers freight and insurance until the goods reach the destination port.
• The buyer assumes responsibility once the shipment arrives at the destination.
• Ideal for long-distance shipments of packaged food and raw ingredients.

DAP (Delivered at Place)

• The seller is responsible for delivering the goods to a named place.
• The buyer handles customs clearance and import duties.
• Useful for B2B buyers who require door-to-door delivery of food ingredients.

DDP (Delivered Duty Paid)

• The seller covers all costs, including customs duties and taxes.
• Ideal for high-value specialty ingredients with strict import regulations.
• Buyers benefit from an all-inclusive cost structure with minimal responsibility.

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How to Choose the Right Incoterm for Your Food Business

When selecting an Incoterm, food businesses should consider:

• Product type: Perishable goods require faster, more reliable terms.
• Logistics capabilities: Can you handle shipping, customs, and insurance yourself?
• Import/export regulations: Some countries have strict food safety compliance rules.
• Risk tolerance: Are you comfortable assuming responsibility for delays, damage, or additional costs?

For example, a European distributor sourcing organic cocoa from Africa might prefer CIF to ensure the shipment is insured and delivered to their local port, whereas a bulk rice exporter from Asia might opt for FOB to manage their risk.‍

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Common Mistakes to Avoid

Selecting the wrong Incoterm can lead to costly errors, shipment delays, and unnecessary risks. One of the most common mistakes is choosing an unsuitable Incoterm for perishable products. For example, relying on terms such as EXW (Ex Works) or FOB (Free on Board) without considering the logistics required for temperature-sensitive food products can expose shipments to extended risk. If the buyer lacks control over refrigerated transport, the goods may spoil before reaching their destination.

Another frequent issue is misunderstanding cost responsibilities between the buyer and seller. Some businesses fail to calculate additional expenses such as import duties, insurance, or inland transport, leading to unexpected financial burdens. For example, a buyer agreeing to a CIF (Cost, Insurance, and Freight) contract might assume all costs are covered, only to realize upon arrival that local port handling and import duties remain their responsibility.

Failing to secure proper insurance coverage is another mistake, particularly when using CIF. Although CIF requires the seller to provide insurance, the minimum coverage may not be sufficient for high-value or fragile food products. Buyers should always clarify insurance terms and consider additional coverage for protection against unforeseen incidents such as damage or contamination during transit.

Lastly, ignoring country-specific customs regulations can result in clearance delays, penalties, or even shipment rejection. Some countries have strict import regulations for food safety, labeling, and certification, and selecting an Incoterm without considering these requirements can disrupt trade operations. To avoid this, businesses must ensure their chosen Incoterm aligns with the destination country's regulatory framework and import procedures.

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