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Commodities and Incoterms
This is the first in a series of articles explaining the world of trading. The first article was an Introduction to Trading. We will now take a closer look at commodities and Incoterms.
What is a commodity?
Commodities are the raw materials used by everyone, such as wheat, gold, oil and gas. The prices of raw materials have important consequences for us all. For example, an increase in the price of wheat can decrease food security in poor countries. Commodities are traded on spot or in derivative markets. Some raw materials have a universal price that varies according to supply and demand, such as copper. Others like wheat or oil depend on the quality of the production.
Overview of some raw materials :
- Natural gas
What is an Incoterm?
An Incoterm (or International Commercial Terms) defines the rights and duties of buyers and sellers participating in international and domestic exchanges.
It defines the responsibilities and obligations of a seller and a buyer, particularly in regards to loading, transportation, types of transport, insurance and delivery. It is therefore also a breakdown of transportation costs.
The second role of Incoterms is to determine the transfer of risk. For example, the agreement will define where during transportation the seller or the buyer will have to bear damages in the event of something happening during transportation. In this regard, the place of transfer of risk also corresponds to the place of delivery of the goods.
The Incoterm’s rules also define the timing of delivery obligations incumbent on the seller.
Another function is the provision of documents and information. It covers whether the seller or the buyer must provide which document for the transaction. This function is important in terms of safety. The general rule of provision and, above all, responsibility for information related to the safety defined by the Incoterms rules are simple. Everyone, the seller and the buyer, is responsible for the information that will be useful to him or her.
However, the Incoterms do not define the moment of the title of transfer, but only the moment of transfer of the risks related to the transport, the different expenses and the organization of the transport. They define in particular if the buyer or the seller must possibly bear the insurance for the transport of goods.
It is a set of rules updated as world trade evolves and allows the buyer and seller to agree quickly and unambiguously on the terms and conditions of the transaction. Consultations have begun on a new set of Incoterms, and are planned to come into force in 2020.
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