FOB, CFR and CIF: what each one actually allocates

FOB, CFR and CIF appear on every fertilizer quotation, and the differences between them are usually understood at the level of “who pays the freight”. That is roughly right and it is not enough, because the term also decides who controls the carrier, who arranges insurance, and — most misunderstood of all — that risk passes at the same point in all three.

The three terms

FOB — Free On Board (named loading port). The seller delivers the goods on board the vessel at the named port and clears them for export. The buyer arranges and pays the ocean freight, nominates the vessel, and bears everything from that point.

CFR — Cost and Freight (named destination port). The seller pays the freight to bring the goods to the named destination port. Risk passes at the loading port, exactly as under FOB.

CIF — Cost, Insurance and Freight (named destination port). As CFR, plus marine insurance arranged by the seller. Unless the contract says otherwise, the cover is at the minimum level the term requires, which is frequently less than the cargo is worth.

What each one allocates

	FOB	CFR	CIF
Export clearance	Seller	Seller	Seller
Ocean freight	Buyer	Seller	Seller
Marine insurance	Buyer	Buyer	Seller
Risk passes	Loading port	Loading port	Loading port
Who nominates the vessel	Buyer	Seller	Seller

The last two rows are where the misunderstandings live.

Risk passes at the loading port in all three. A buyer under CIF who believes the seller carries the risk to destination will discover otherwise when a cargo is damaged in transit. CIF allocates cost, not risk.

Under FOB the buyer nominates the vessel, which means the buyer controls the loading window and therefore the demurrage exposure at the loading port. Under CFR and CIF the seller controls it, and the buyer’s protection is the delivery window in the contract, not control of the ship.

Why mixing terms makes offers incomparable

A quotation at FOB and another at CFR cannot be compared by looking at the numbers. The CFR price contains a freight cost the FOB price does not, and the size of that freight depends on the route, the container or the vessel, and the date.

The practical rule: ask every supplier for the same term, and compare within it. If one supplier only quotes FOB and another only CFR, ask the FOB supplier for a CFR number — most can obtain a freight rate — or ask the CFR supplier to break out the freight.

A second rule follows: a CFR or CIF offer is only as good as the freight rate behind it. If the rate was struck weeks ago and the shipment is months away, the offer contains a freight assumption that may not hold, and the supplier will either absorb the difference or find a reason to revisit the price. Asking what freight assumption sits inside a CFR number is a legitimate question, and the answer tells you something about the supplier.

Insurance, under CIF

CIF requires the seller to arrange cover, and the default level is the minimum the term specifies — typically 110% of the contract value under Institute Cargo Clauses C. That covers catastrophic loss and little else. It does not cover damage in handling, which is the risk a bagged fertilizer cargo actually faces.

If you want broader cover, it has to be written into the contract: a higher level of cover, or Clauses A instead of C. Otherwise you have insurance on paper that will not respond to the claim you are most likely to make.

Which term to use

FOB when you have a freight rate you trust, when you want to control the carrier and the routing, or when your own logistics arrangement is part of your cost advantage. It is the term most large importers use, for exactly those reasons.

CFR when you would rather see one delivered number and not manage the shipping. It simplifies the comparison between suppliers and it removes a task from your desk. The cost is that you have less visibility into the freight component.

CIF when you want the seller to arrange insurance as well as freight, which is common for buyers without an established marine insurance arrangement.

For a first shipment from a new supplier, FOB is often the safer choice: you nominate the carrier, you know what you are paying for freight, and the chain of responsibility is clearer if something goes wrong.

What to put in the contract regardless of term

• The named port, exactly — not “China” and not “Brazil”
• The Incoterms version, since the definitions change between revisions
• The delivery window, and what happens if it is missed
• The loading rate and laytime, for breakbulk
• The documents the seller provides, named individually
• The inspection regime, and who pays

Everything else is price. Those are the transaction.

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Trade terms described here follow standard Incoterms practice. For a quotation on a named term and port, ask the export desk.