The North American grain market has experienced considerable difficulties in recent years. Severe droughts caused by record heats in 2011-2012 resulted in low yields and a deterioration in the quality of key crops such as corn and soybeans¹. In spite of this, interest and investment in the North American grain market continues to grow, with crops apparently being the "best performing commodities of 2012"². As much as one third of all grain produced in the US moves into export and in 2011 approximately US$42.3 billion of grains and oilseeds were exported from the US. It is expected that over 100 million metric tons, of primarily US corn, soybeans and wheat, were handled by the US grain export system in the calendar year 2012³.
As the market evolves, so too does the standardised legal documentation and contract forms that are intended to govern these transactions, but recent experience indicates to us that there are still issues. The North American Export Grain Association (NAEGA) issued its first standard terms for such transactions in 1915. The North American export market has tended to rely heavily on the NAEGA FOB form and is largely a "FOB market". Meanwhile, in destination markets for exports of North American agricultural commodities (which have increasingly gravitated towards Asia) the "international terms" published by the Grain and Feed Trade Association (GAFTA) and the Federation of Oils, Seeds and Fats Associations (FOSFA) continue to dominate.
Parties consequently find themselves buying North American exports on the standard NAEGA terms whilst selling on terms published by GAFTA or FOSFA.
The use of different standard contracts creates a disparity in governing law and standard terms. This can create legal risk and occasionally problems for trading houses which participate in the markets both at origin and at destination. These risks are manageable but require awareness of the key differences between forms.
The following client alert seeks to provide a summary and an easy guide to key differences between the NAEGA standard FOB terms and GAFTA/FOSFA FOB terms. In due course a further alert will follow with some suggested best practices in executing transactions when buying on NAEGA FOB terms and selling on GAFTA/FOSFA CIF terms.
Please click here for a snapshot tabular summary of the alert.