Export Essentials: Export Pricing, Quoting & Terms of Sale

Export Essentials: Export Pricing, Quoting & Terms of Sale Food Export Association of the Midwest USA & Food Export USA -Northeast Food Export Marketing Forum September 29 th, 2010 Chicago Illinois

Agenda Pricing Products for Export Markets Building Quotes for Trade Leads Trade Terms & Terms of Sale Integrated Export Transaction: Charlie Bueno

Part One: Pricing Products for Export Markets

Export Pricing Variety of methods Important to determine all components which make up the final cost of your goods and who is responsible to pay them Such costs may include:

Costs of Exporting Product modifications Export documentation Packing Drayage Inland freight Terminal handling Port to port freight Insurance Customs clearance Import duties

The List Could Go On An understanding of Terms of Sale, or Incoterms,, helps assess responsibility for all costs and how they are incorporated into your cost structure Costs may vary from country to country and customer to customer

Control Export Price Escalation Difference between product price and landed cost Build your internal export price and information on in-market costs, you can develop a landed cost Cost to importer to put the goods in their facility without profit margins

Landed Cost Variables Nature and size of the product Destination, mode of transportation Financing, tariff and non-tariff barriers Service provider fees, handling Documentation and other factors Effect export price escalation

Costs Add to Invoice Value In most countries tariffs (and taxes) are applied to the cost of the goods as well as the cost of freight and insurance to get it to port Suppliers who work at controlling price escalation often benefit from increased sales in the long term

Example of Export Price Escalation Expense Domestic Example Export Example Manufacturing net Transport (CIF) Tariff (20% CIF Value) Wholesaler landed cost Wholesale margin (33%) Retailer pays Retailer Margin (50%) Retail price $3.25 NA NA $3.25 $1.08 $4.33 $2.17 $6.50 $3.25 $1.10 $0.87 $5.22 $1.73 $6.95 $3.48 $10.43

Cost Plus Pricing Appropriate component of your domestic price and includes any export related costs Depends on the agreed terms of sale Basic approach without consideration of ultimate selling price in the export market Some products may not be successful in the export market Price structure is not competitive with local market prices

Top Down Pricing Top Down pricing turns the Cost Plus approach on its head Starts with pricing of competitive products in the export market Begins with retail pricing, removes distributor and importer margins, duties, freight, insurance etc, Determine desired price points across different terms of sale

Top Down Pricing (cont.) The Top Down approach helps determine the margin levels in different markets Some markets may require reduced margins to be competitive, other markets may present opportunities for higher margins Work with importer or distributor to set the pricing at a level in which your product will have the most success

Differential or Marginal Pricing Looks at fixed and variable costs in a business, how firms determine domestic pricing Factoring an allowance for increased export sales, the fixed costs are effectively reduced on a per unit basis

Domestic Differential/Marginal Pricing 100,000 units sold per year Fixed Costs: $200,000 per year Variable Costs: $5 per unit Total Costs: $700,000 Total Cost per unit: $7 per unit

Domestic + Export Differential/Marginal Pricing 150,000 units sold per year Fixed Costs: $200,000 per year Variable Costs: $5 per unit Total Costs: $950,000 Total Cost per unit: $6.33

Result? By allowing for increased production to cater for an export market, your total costs per unit are reduced Allowing you to potentially sell in an export market at a lower price level with the same level of profit

Part Two: Building Quotes for Trade Leads

Charlie Bueno Sauces is in the Market to Export Illinois based manufacturer of gourmet Barbeque sauces in 18oz (510gr) sizes Involved in promotional activities which have generated some interest from overseas markets, including requests for quotes Export prices are net net void of any domestic overhead Export costs are added on custom basis

A Typical Request for Quotation Source: Barbeque Sauces (Brazil) Posted: 06/22/10 0610 062210 PD0610 PD062210 Title: Barbeque Sauces (Brazil) HS Codes: 2103900000 HS2103900000 210390 HS210390 2103 HS2103 Commod: American Style BBQ Sauces (molho picante) Quantity: 3000-4000 bottles Large Size 500 grams minimum Quality: High quality Package: Standard Delivery: Monthly Quote: CIF Port of Santos Contact: Francis Hutt, Import Manager, Churrasco Paradise Tel: +55 (47) 2333-2171 Fax: +55 (47) 2333-8995 E-mail: frankie@churrasco.com.br (Ref Date & Number: 20102206-2010-TH6

Brazilian Churrasco

Using a Proforma Invoice on This Quote The requirements are clear The volume is present The port of destination is available The port of export needs to be determined The load to meet the requirement needs to be determined and will lead to the CIF price as well Check documentation and regulations

Identifying Costs Included in the Trade Term Selected Product packed for export Loading, blocking bracing Certifications or inspections Cartage or drayage Inland transport Pier delivery Loading the goods onto vessels International transportation (main carriage) Freight forwarder fees Documentation preparation Marine insurance Some fees inclusive

Charlie Bueno Needs Some Help They need the service of an international freight forwarding company They need to get an LCL or less than container load freight quote They need to build a CIF price for the buyer This includes the product, freight, handling and marine cargo insurance

Freight Forwarders and Export Pricing Involved in over 80% of transactions in international trade Help with most of the costs for a pro forma invoice What pricing is needed based upon the trade term, the mode of transport, the destination and service level required

Less-than than-container-load (LCL) Cargo When volume and weight are below the capacity of a container Generally consolidated with other smaller shipments into a single container by a freight forwarder or a Non-Vessel Vessel-Operating Common Carrier (NVOCC) Forms a Full-Container Container-Load (FCL) Charges by weight (metric ton) or measure (cubic meter) whichever is greater

Palletizing Ocean Cargo A Unitized, Shrink-wrapped Pallet with its Four Corners Protected

Container Consolidation

A Typical Container Ship

This Shipment Less than container (LCL) load Will be consolidated Origin of shipment is Union IL. Origin of Bill of lading is Chicago Port of Export is New York Destination is Santos Brazil Ultimate destination is Sao Paulo

Part Three: Trade Terms & Terms of Sale

Standardized Trade Terms Series of abbreviations or acronyms such as FOB which, when followed by a named location, infers the transfer of risk and costs and the terms of delivery of the shipment Two sets of terms of sale are used and some variants: The American Foreign Trade Definitions of 1941 International Commercial Terms of Sale, or Incoterms

Trade Terms and Cargo Movement Cost; responsibility for the various costs involved whether prepaid or collect Control; possesses control (documentary or title) of the goods at any point in the shipment Liability; exposure with an insurable interest if the goods are lost or damaged Documentation; responsibility for arranging specific documentation

Trade Terms & Transfer of Title Don t address when transfer of title takes place Takes place when the parties have agreed upon it Number of problems may occur if the contract does not specify Include in the contract, the quote and/or pro forma invoice as well as the commercial invoice

Which Terms to Use? Still some confusion about which set should be or is being used on a given transaction Many still using the American Definitions, as well as older Incoterms, although trade experts advise against it Many unaware of the changes in international trade terms that took place in the year 2000 The Incoterms have been updated again in 2010, which could further complicate matters

American Foreign Trade Definitions Nine in Total EX (Point of Origin) The seller agrees to quote a price at the point of origin FOB Union Illinois FOB Named Inland Carrier Point FOB Container Freight Station, Chicago Illinois, dock receipt signed by carrier

American Foreign Trade Definitions (Cont.) FOB Named Inland Carrier at Port of Export FOB Chicago O Hare O Airport would be an example, with the origin actually having been Union IL. Free Along Side at Port of Export FAS Vessel Port of New York

American Foreign Trade Definitions (Cont.) FOB Vessel Named Port of Export FOB Vessel Port of new York Most buyers use this when they request FOB but unless they name a port after it and you are working on container size shipments you would need clarification This also matches the only Incoterm to use FOB in it

American Foreign Trade Definitions (Cont.) FOB Named Inland Point at Destination FOB Toronto would be an example of this term, and is commonly used by buyers there (easier than most) Ex Dock at Named Port of Import Ex Ex Dock Port of Santos Customs cleared, duty paid

American Foreign Trade Definitions (Cont.) Cost & Freight Port of Destination C&F Port of Santos Brazil Some importers use the older term CNF for this as well Cost Insurance & Freight Port of Destination CIF Port of Santos Brazil Insurance usually based on C&F or CIF +10%

Incoterms 2000 Published by the International Chamber of Commerce Incoterms 2010 has just been released earlier in September www.iccwbo.org In effect January 1 st 2011 Designed to create more certainty between parties regarding the transfer of costs and assumption of loss and risk

Incoterms 2000 Incoterms are divided into four main components Origin terms or E terms Pre main carriage terms or F terms Main carriage terms or C terms Post main carriage terms or D terms Note: They Revolve Around Main Carriage

Origin Terms: E Terms Ex works (fob factory, mill etc.) The buyer picks us the goods at the seller s s facility and delivery and risk transfers there All charges are collect Used for all modes of transport AES/EEI should be a buyer responsibility as this is routed This term should not be used when the buyer cannot carrier out the export formalities directly or indirectly

Pre Main Carriage Terms: F Terms FCA - Free Carrier Oriented toward ocean containerization or air freight FCA ORD Exporter delivers goods to carrier that importer selects, Responsibility shifts from exporter when goods are delivered to carrier s s vehicle, either at exporter s s plant or carrier s s premises

Pre-Main Carriage Ocean Incoterms FAS: Free Along Ship Exporter brings goods to port At port, importer takes responsibility for goods FOB: Free on Board Port of Departure Exporter responsible for goods until they are on the ship, then importer is responsible Dividing point is ship s s rail

Main Carriage Terms CFR- cost & freight port of destination* CPT- carriage paid to port of destination CIF- cost, insurance & freight port of destination* CIP- carriage & insurance paid named place *Designed for non-containerized maritime and inland waterway only (bulk)

Post Main Carriage Terms: D Terms Bulk Ocean Term: DES Delivered ex Ship Exporter responsible for goods (usually bulk commodities) until importer gets them at port of destination DEQ Delivered ex Quay Usually bulk commodities for which exporter pays for ship unloading Non-Bulk Ocean & Other Term: DDU Delivered Duty Unpaid Exporter performs most tasks in shipment except unloading costs DDP Delivered Duty Paid Exporter pays for everything in the shipment Door to Door

Land Incoterm: DAF Main Carriage is domestic Delivered at Frontier Most exports to Mexico from the USA Transfer of responsibility from exporter to importer is at city named in Incoterm DAF Laredo Texas

Incoterms 2010 Implementation for January 2011 Clarifications on transport mode Fewer in number Domestic use (no more FOB ) UCC eliminated shipping terms in 2004 Includes new cargo security and marine cargo insurance clauses Now officially called Rules Using the new term Omnimodal

RULES FOR ANY MODE OR MODES OF TRANSPORT EXW Ex works FCA Free carrier CPT Carriage paid to CIP Carriage and insurance paid to DAT Delivered at terminal DAP Delivered at place DDP Delivered duty paid

RULES FOR SEA AND INLAND WATERWAY TRANSPORT FAS FOB CFR CIF Free alongside ship Free on board Cost and freight Cost insurance and freight

Now Based on Departure and Group E: Departure EXW Arrival Group F: Main Carriage Unpaid FCA, FAS, FOB Group C: Main Carriage Paid CPT, CIP, CFR, CIF Group D: Arrival DAT, DAP, DDP

Part Four: Integrated Export Transaction For Charlie Bueno

Product Details 1260 ct Charlie Bueno Original BBQ Sauce 1260 ct Charlie Bueno Sweet Wine Sauce 1260 ct Charlie Bueno Ring of Fire Sauce EXW export packed - $2.38 per bottle 12 bottle per case - $28.56 per case 105 cases per pallet - $2998.80 per pallet Total order - $8996.40 EXW Union IL.

Charlie Bueno BBQ Sauce @ $2.38 per bottle from Union IL. to Santos Brazil 315 cases on 3 heat treated pallets w/certificate Gross weight 7249 lbs. Chargeable weight 3288.12 kgs Pallets total 193.33 cubic feet 5.4745 cubic meters: W/M pricing Metric ton or cubic meter whichever is greater

Formulas to Know for Containers Dry 20 = 1172 Cubic Feet/33.18 Cubic Meters This shipment is 193 cuft/5.47m Represents 16.4% of container volume

Export Quotation from Freight Forwarder Service Description Rate Total Ocean Freight Inland Drayage Inland Fuel Export Handling Courier Service New York to Santos 5.4745m (based on measure not weight) Transport from Union IL. Via Chicago to New York Bunker Fuel surcharge for Inland Drayage (BAF) Bill of lading preparation and assembly of export documents Air shipment of document pouch to customs broker or importer $123.00 $673.39 $465.00 $465.00 15% $69.75 $95.00 $95.00 $45.00 $45.00

Export Quotation from Freight Forwarder (cont.) Service Description Rate Total AES Security Fee Certificate of Origin Total CFR Santos Total CIF Santos Exporter Electronic Information (EEI) filed in Automated Export System (AES) C-TPAT and warehouse security fee per B/L Chamber of Commerce seal on general use form required for Brazil Cost & Freight value for insurance to be applied for CIF price Cost & Freight Value +10% and apply insurance rate $25.00 $25.00 $12.50 $12.50 $25.00 $25.00 Add all costs $1410.64 $ 64.10 $1474.74

Determining the Value to Be Insured EXW Invoice value $ 8996.40 Ocean Freight $ 673.39 Inland drayage/fuel $ 534.75 Handling/Documentation $ 202.50 Total CFR/CPT Santos $ 10,407.04 Add 10% $ 11,447.74 Insurance rate $ 0.56 per $100 Insurance value $ 11,447.74 x.0056 Insurance premium $ 64.10 Total CIF/CPT Santos $ 10,471.14

Sometimes things do go Wrong.

Total Door to Port Charges All In @ $1474.74 Divide by 3780 =.39 per bottle $2.38 add.39 = $2.77 per bottle Excludes duties, taxes, customs clearance and brokerage, port fees, delivery and margins

PRO FORMA INVOICE Charlie Bueno BBQ Sauces Shipper: Charlie Bueno BBQ Sauces Baker Drum Way Union IL. 60118 Consignee: Churrasco Paradise Francis Hutt Import Manager Rua Santa Justina, 352-80 andar Sao Paulo, 04545-041 041 BRAZIL BILL TO: CONSIGNEE FORWARDING AGENT: EXPORT TECH S VIA: OCEAN FREIGHT COUNTRY OF ORIGIN: USA PRO FORMA P.O. DATE: June 29 2010 P.O. NO.: 062910 INVOICE DATE: June 30 2010 INVOICE NO.: Pro Forma 063010 TERMS OF SHIPMENT: CIF SANTOS BRAZIL ALL DOOR TO PORT FEES PREPAID BY SHIPPER MARKS: CHURRSASCO - 1

PRO FORMA (Cont.) QUANTITY UNIT PRICE DESCRIPTION OF GOODS TOTAL PRICE 105 Cases 105 Cases 105 Cases $28.56 $28.56 $28.56 Bueno s s Original BBQ Sauce 12 ct. per case Bueno s s Sweet Wine Sauce 12 ct. per case Bueno s s Ring of Fire Sauce 12 ct. per case $2,998.80 $2998.80 $2998.80 Total Dimensions: 3 pallets each 193.33 Cu. Ft. (5.4745 Cu. Meters.) Total Gross Weight: 7249 Lbs (3288.12kg) Total EXW Union IL. w/packing Inland Drayage/Bunker (IL./NY.) Documentation and Forwarding Fees Ocean Freight via New York Port Total CFR Port of Santos Insurance @ CFR + 10% @.0056 per $100 $8996.40 $534.75 $202.50 $673.39 $10407.04 $64.10 Total CIF Port of Santos $10471.14 Thank You for Your Interest in Bueno s s Sauces

Landed Cost Estimate for Importer Value Description Rate Total EXW Origin Price Freight & Handling Insurance CIF Price of Product Import Tax (Duty) 315 cases of BBQ sauces packed for export from Union Illinois Inland drayage, bunker, ocean freight documentation & handling CFR +10% = $11,447.74 @.0056 per $100 Cost Insurance & Freight Santos $28.56 $8996.40 Total $1410.64.56 per $100 $64.10 Total $10,471.14 WTO rate of duty on HS 210390 17% $1780.09

Landed Cost Estimate for Importer (cont.) Value Description Rate Total Import License AFRRM Port Handling Customs Broker Fee Delivery License fee required of imports, obtained by importer Merchant Marine Tax based on freight and handling charges Port Authority, Customs Agent Syndicate and Port Tariff surcharge fees Customs clearance and filing of entry for importer paying fees Local transport from Santos to Sao Paulo $75.00 75.00 25% $352.66 Varies $487.73 $275.00 $275.00 $500.00 $500.00

Landed Cost Estimate for Importer (cont.) Value Description Rate Total Container Unloading Local Insurance Labeling adhesives PIS/Pasep Tax COFINS Tax Devanning, demurrage, container positioning $500 per 20 Insurance from arrival to final destination Original labeling not required, applying stickers to bottles Formation of Public Workers Wealth Programs on CIF + Duty Contribution for the Financing of Social Security on Duty + Import License Fee 16.4% 82.00 $180.00 $180.00 $50.00 $50.00 1.65% $246.52 7.6% $171.94

Landed Cost Estimate for Importer (cont.) Value Description Rate Total Value Added Tax Landed Cost Importers Margin Selling Price Exchange Rate Tax on CIF + Duty + PIS + COFINS Taxes CIF price plus all additional duties, taxes and fees Averages 30% + VAT of 18% (on margins only not turnover tax) Averages 30% + VAT of 18% USD to BRL Exchange rate on 09/14/10 for example 18% $2781.15 Varies $17,453.23 Varies $24,888.61 Varies $33,116.55 1 BRL = 58.5 $ 1 USD = 1.709 R$

Value EXW Origin Unit Price in Stages Description Percent Over EXW Amount $2.38 each packed for export N/A $8996.40 CIF Santos $2.77 each CIF Santos 16.4% $10,471.14 Landed Sao Paulo Importer Margin Selling Price $4.62 each Landed in Sao Paulo 94% $17,453.23 $6.58 each with 30% + VAT of 18% $8.76 each with 30% +VAT of 18% 176.7% $24,888.61 268% $33,116.55

Unit Price Retail Pricing Summary EXW Origin = $2.38 or R$4.06 CIF Santos = $2.77 or R$4.73 Landed Sao Paulo = $4.62 or R$7.90 Import/VAT = $6.58 or R$11.25 Selling Price/VAT = $8.76 or R$14.97 Average U.S. Price = $6.95 or R$11.88 26% higher than U.S. retail

Export Essentials: Export Pricing, Quoting & Terms of Sale Thank You!

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