Global shipping challenges prompt Chilean packers to change tack on sales

June 16, 2022

For years, Chilean walnut handlers sold their product on a Cost, Insurance, and Freight (CIF) basis, meaning they managed the transportation of the product to buyers in global markets. 

It worked well until sending containers overseas became nearly unmanageable for companies everywhere, including walnut packers in Chile. Seeing no signs of relief, Chilean packers have now pivoted from offering products CIF to Free on Board (FOB). 

The pivot marks a significant change in the global walnut trade. Buyers of Chilean walnuts must now manage their own freight, while sellers can separate out the freight logistics from their offer prices.

The shipping problems started with the Covid pandemic, resulting in rolled shipments, delayed arrivals, increased costs, and other disruptions for buyers and sellers. Shipping companies began to raise rates without warning last year amid container shortages and logjams. 

Chile wasn’t spared. 

Before the freight problems began, booking a 40-feet dry container from San Antonio, Chile, to Europe cost from $1,000 to $1,500 (2-3 cents/lb or 5-8 cents/kg). The cost is now about $6,000 (13 cents/lb or 30 cents/kg) for each container. 

Meanwhile, shipping a container on a vessel doing the extra distance to the port of Mersin in Turkey, a popular destination for Chilean inshell, costs about $6,700 (15 cents/lb or 34 cents/kg).

While hedging is regarded as a potential solution to mitigate freight price risk in larger agricultural markets, the practice hasn’t gained ground in the walnut market and would likely only work for players who sell big volumes.

Edmundo Valderrama, president of Chilenut, described the industry’s move from CIF to FOB as a gradual process, which started during the 2020-21 crop year when freight bottlenecks emerged during the pandemic.

“At the time, one or two guys said they would start to quote only FOB, and little by little, people started to think it was a good idea and followed,” Valderrama said.

Rationale for switching

The move from FOB to CIF means walnut sellers in Chile are no longer exposed to volatile freight rates. By transferring shipping price risk to the buyer, Chilean packers say they can post offers based on the product’s characteristics minus the freight component.

“Because we were not able to forecast [freight prices] and we were unable to get long-term quotes from freight forwarders or shipping lines, there was no other option than to start quoting FOB,” said Cristóbal Socías, sales, and marketing director at Santiago-based La Invernada, which handles about 14,000 mt of walnuts annually.

Socías said if his company was still quoting CIF or CFR, it would likely use the most expensive shipping line.

“We could of course, eventually secure a cheaper offer or rate and take the margin but that’s not the point,” said Socías. “The point is to be fair with the customer.”

The shift to FOB price quotations does not mean their walnut buyers have been left to navigate the freight market by themselves, Chilean packers said. 

Socías says La Invernada still handles logistics for customers but separates this service from the price of walnuts. The company provides potential freight cost quotations and gives buyers the option of choosing their preferred shipping line after advising them on what line is more likely to ship on time and what line could be delayed. 

“We put all the information on the table, and we make the decisions together,” Socías said. 

Handlers advise customers of potential freight costs, which can change based on factors such as current demand and bunker fuel costs, Valderrama said. 

“While the price may change and end up being more expensive for the consumer, for the importer, there’s not really an issue to pay 10-20 cents/kg more as long as there is a market price,” Valderrama said. “Importers always want to be competitive against other importers and as this change is a general rule that will apply to everybody, I don’t think it will be a big issue.”

For example, an Indian walnut buyer currently paying $14,000 (31 cents/lb or 70 cents/kg) for a Chile-India container could be prepared to absorb higher costs because their competitors face the same economics. 

Impact on buyers

While large-volume walnut buyers are taking the change in stride, smaller buyers who previously bought containers on a CIF or CFR basis could be struggling. 

“It is going to make life much harder for them, and effectively you can’t really lock in freight,” said the U.K.-based trader referred to earlier. “If freight rates continue to move higher, as a buyer, you are effectively paying more money for the product.”

The transition may have contributed to a slight slowdown in Chile’s current sold position, a U.A.E.-based trader said. Chilenut reported that its members were 49% sold in mid-May, 17% lower than at the same stage in 2021, when early sales accelerated after the Chilean crop estimate was reduced.

“No customer wants to buy something for which they don’t know the final price,” the trader said.

While it’s natural for a significant change in how the global market trades to create nervousness, Chilenut has received no negative feedback or warnings from buyers that they will buy less product as a result, Valderrama said.

The pivot to FOB could be here to stay. “I never understood why shippers liked to include freight in their price, it makes much more sense to me that they all do FOB,” said the U.K. trader. 

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