Michigan State University Extension
Extenstion International Trade Res. - 12179501
03/31/96
Although the traditional farm commodities--soybeans, wheat, corn, rice--still account for three-fourths of U.S. agricultural export tonnage, a wide variety of high value products (HVP) are exported and these are growing in number and importance. As a share of the dollar value of U.S. agricultural and forestry exports, products such as beef, fresh fruits and vegetables, softwood lumber, and other HVP's represent almost one-half of the total. This fact sheet describes the "nuts and bolts" of exporting and is intended to help farmers and agribusiness firms gain a basic understanding of the process and to provide sources of additional assistance and information. The following topics are discussed:
1. Why Export? 2. Is there a Market for my Product? 3. Finding a Buyer. 4. The Sales Contract. 5. Getting Paid. 6. Promotion and Market Development.
Why Export?
Expanding world population and higher per capita incomes abroad should lead to greater export marketing opportunities, outpacing growth in the domestic market. Developing countries of the Third World represent future markets for U. S. agricultural exports. For some U. S. agricultural products, export markets already are crucial and for many others increased U. S. production will not be absorbed domestically and must be exported. So increased exports represent an opportunity for some and a necessity for others. Yet exporting has much in common with domestic marketing. Foreign customers expect to buy from a reliable supplier who provides quality products at competitive prices and has a commitment to good service.
However, exporting does pose some additional challenges. Language and cultural differences must be overcome in communications and business dealings. Foreign exchange rates; import regulations, requirements and restrictions; transportation; and payment are other differences to contend with. To be successful, an exporter must make a firm, long-term commitment to export markets and must possess or be willing to acquire the necessary management skills and knowledge. In return for meeting these challenges, exporters have an opportunity to increase profits because of increased volumes produced and to reduce their dependence on a single market.
Is there a Market for my Product?
The world market is incredibly diverse but market research can narrow the field to the countries with the greatest potential. Vital information about market size, major competition, recent trends in consumption and economic growth, exchange rates, prices,transport costs, seasonal factors, distribution, product form, sanitary and health regulations, and political stability should be obtained. The Foreign Agricultural Service, USDA, the U.S. Department of Commerce, state departments of agriculture, state departments of commerce, the Cooperative Extension Service and others can help answer many of these questions.
Questions not answered by this broad market study can be addressed in a more detailed and specific market survey. Specific questions about quality, buyer specifications, packaging and labeling, consumer preferences, and terms of sale can be answered. The market survey could be conducted by a trade association, such as the Southern U.S. Trade Association (SUSTA), a professional research firm or consultant, or other qualified organizations. It is important that the firm have first-hand knowledge about potential export markets.
The final step is to develop a specific business plan and an associated feasibility study to evaluate the impact of anticipated export sales on the operation and financial performance of the exporting firm under various scenarios. If the results are favorable then the nuts and bolts of exporting must be mastered.
Finding a Buyer
There are two basic approaches to exporting direct and indirect. Direct exporting involves selling the product directly to the foreign customer or through a company representative in another country who makes the sale to the foreign buyers. The risks are higher with direct exporting since the exporter is financially responsible for the entire process up to the final sale to the foreign customer.
Small scale or "new to export" (NTE) firms may find it easier and less risky to undertake indirect exporting, which can involve using an export management company (EMC) or broker. The NTE firm sells to an EMC which in turn re-sells the product to foreign companies or customers. EMC's may conduct market research and charge for their services only after a successful sale is made and usually operate on a commission. Export financing, documentation, and shipment are all handled by the EMC. Risk exposure is much lower for indirect export sales.
The Sales Contract
The export sales agreement is of prime importance. Some key elements in any export sales contract include: product definition, packaging and labeling requirements, currency to be used, and type of price quote. The product name, weight, quality, and grade should be specified, and other considerations may be included, such as procedures for dispute settlement and delivery instructions.
There are four main types of price quote or terms of sale, each with a different set of obligations. The F.A.S. (free alongside ship) quote specifies that the selling price includes cost of product plus export packing, inland freight to port of export, and risk of loss or insurance until cargo is accepted at the port and delivered to the dock. The F.O.B. (free on board) vessel quote indicates that the exporter assumes all responsibilities and costs up to and including placement of the cargo on the vessel. C&F, (cost and freight) includes cost of product plus transport costs to the port of import. The buyer is responsible for insuring the shipment. A price quote of C.I.F. (cost, insurance, and freight) means that the seller's price includes cost of product plus the cost of marine insurance and transportation to the foreign port. Most new exporters prefer the F.A.S. or F.O.B. quote because there is less risk associated with them. C&F and C.I.F. sales are normally made by larger, more sophisticated firms with expertise in managing ocean or air freight, insurance, and foreign exchange.
Getting Paid
Getting paid must be on the top of every exporter checklist. One of the first things to undertake, usually through a bank with an international department, is a credit check on potential customers. This may turn up some very useful information and warn of potential payment problems. Most foreign customers, properly verified, pose very little threat of payment default. Clearly there are risks of non-payment when doing business in areas where economic stress, or social or political disorder exist. Insurance coverage is available if sales are made to those countries.
There are four basic methods of payment for export sales:
cash in advance, letter of credit, documentary draft, and open account. Varying degrees of risk are associated with each method. The least risky is cash in advance but most buyers are reluctant to enter this type of agreement for obvious reasons.
An irrevocable, confirmed letter of credit is the safest method of payment. The importer's bank issues a line of credit in the amount of the sale. This credit is confirmed by the exporter's bank and verified by the foreign bank. Both banks guarantee payment and the exporter is paid when proper documentation is presented to his bank showing that the goods have been properly loaded and stored on the vessel. In many cases, payment is received even before the goods are shipped.
A documentary draft places responsibility for payment on the foreign bank. Sight and time drafts are most common. The importer pays his bank which in turn pays the exporter's bank. The foreign bank issues documentation allowing the importer to receive the shipment only after payment has been made to the bank.
The open account is the most simple but most risky method of payment and should not be used until a good trading relationship has been established with the buyer. Goods are shipped before the buyer makes payment to the foreign bank, and the seller has little protection against the buyer's failure to pay.
There are several forms of government and private credit insurance which can be used. These can be examined prior to making any sale by contacting the Foreign Agricultural Service of USDA.
Promotion and Market Development
USDA has been promoting agricultural products in foreign markets for over thirty years. Most efforts include industry and individual firm opportunities to present their products to potential customers. Major activities include food shows, trade fairs, product technical assistance, and trade and retail promotion. Key sectors of the foreign market such as wholesalers, brokers, and retailers are involved. Individual firms can receive assistance from agricultural attachs and foreign commercial officers in over 65 countries. Lists of products, buyers, and export contacts are available from the FAS of USDA. Fees are charged for most of these programs. Finally, the Market Promotion Program of the 1990 Farm Bill provides funds for product promotion in specific countries where U.S. products face unfair competition or have market potential.
Summary
Exporting requires commitment, international expertise, and considerable management skill. It is challenging and yet the probabilities of success are good if risks are effectively managed.
Managing for tomorrow means developing a global perspective -- becoming an insider in the international market. Learning about potential markets and the competition will position U. S. farmers and agribusinesses to capture global opportunities.
Useful Addresses:
1. Foreign Agricultural Service
U. S. Department of Agriculture
Washington, DC 20250-1000
Tel: (202) 720-3935
FAX: (703) 690-2159
2. U. S. Department of Commerce
International Trade Administration
U. S. and Foreign Commercial Service
14th. St. & Constitution Ave. N.W.
Washington, D. C. 20230
Tel. (202) 377-3181
3. U. S. Agricultural Export Development Council
1300 L Street, N. W., Suite 950
Washington, D. C. 20005
Tel. (202) 371-5521
4. U. S. Small Business Administration
Office of International Trade
409 3rd. Street, S.W.
Washington, D. C. 20416
Tel. 1-800-827-5722
5. State Departments of Agriculture
6. State Departments of Commerce
7. State Cooperative Extension Service