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  • 3.6.1-COTTON MARKETING-LETTERS OF CREDIT

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  • Letters of credit

    Chapter 3 - Cotton marketing - Documentation (‘back office’) 

     
     
    Where payment against a letter of credit (L/C) is stipulated then the seller should obtain full details of the buyer’s L/C as soon as possible. This is to ensure that the required documentation is in fact obtainable, that there will be sufficient time to obtain such documentation, and that there are suitable shipping opportunities to the named port of destination within the stipulated period of shipment. Sellers should also ensure that the L/C remains valid for the presentation of documents for at least 21 days after the date of shipment.

    Buyers calculate all costs (from FOB through to delivery at final destination) to arrive at the final delivered price, taking into account any extra costs. For example, an origin that usually delivers documents late (i.e. after the vessel has arrived) is penalized, as the buyer will provide for this eventuality in the cost calculation to landed plant. In fact the importer actually saves money by not having to finance the goods for the expected period of time, but if the goods arrive before the documents then serious trouble will arise. If an L/C is demanded, the bid price will be lowered correspondingly to cover the costs. Such a bid will also be lower than that for similar cottons from other origins that do not require an L/C.

    Payment: credit policy

    Exporters must decide for themselves which payment conditions to accept. They must assess the financial status of their buyers and offer accordingly. Some information can be obtained from bank references that indicate a client’s creditworthiness. Although such reports are useful, they cannot provide all the desired information, nor do they place any responsibility on the bank that issues them. Exporters using borrowed working capital are usually subject to stringent conditions concerning the buyers they can sell to, and on what payment conditions.

    When entering into contracts and deciding on payment terms, sellers should investigate the identity of their buyers. International trading groups often work through foreign and local subsidiaries whose commitments are not necessarily guaranteed by the parent firm, even though they may trade under the same or similar names. When in doubt a seller can demand a guarantee from the parent firm that it accepts responsibility for contracts with a given subsidiary.

    In some countries the monetary authorities dictate payment policy for exports, for instance by insisting that all exports must be covered by L/Cs to avoid possible loss of foreign exchange. This kind of blanket regulation results in some of the world’s largest corporations with impeccable credentials being asked to establish L/Cs.

    Shipping advice

    As soon as the required information is available, the seller must advise the buyer about certain specific details of the shipment. The buyer is entitled to receive advice of shipment or delivery, or advice of delayed shipment or delivery, or advice of force majeure. For a shipment on terms other than CIF (which the seller insures), the shipping advice enables the buyer to insure the shipment and either to make the necessary arrangements to receive it at the port of destination or (where the bill of lading allows such a choice) to declare an optional port of destination in time for the shipping company to arrange discharge there.

    It is not uncommon for buyers of cotton to have proper advice of shipment, within contract terms, but still not know the name of the vessel that will deliver at the final port of discharge because the name of the transshipment vessel is not always known at time of loading. Larger buyers working on just-in-time supply require carriers to inform them directly by e-mail, within a given time limit, of all transshipment arrangements including the name of the mainline vessel and its estimated time of arrival (ETA) at destination.

    Delayed shipments

    The seller must advise the buyer of delayed shipment as soon as, for example, it becomes aware that a vessel may not load within the contracted period because of problems connected with the operations of the vessel itself such as a delay on the inbound voyage. The seller must also show, using independent documentary proof, that a late shipment is not its fault. Delays in shipment usually affect buyers adversely. Conversely, delayed receipt of buyers’ L/Cs affect sellers adversely.

    Occasionally a problem of a much wider scope and of a more serious nature arises that prevents the seller and other shippers from shipping within the contracted period. In addition to sending the notification of delayed shipment as soon as this becomes evident, under certain circumstances the seller may be able to claim force majeure. The effect of both an advice of delayed shipment (or delivery) and an advice of force majeure is initially to extend the period allowed for shipment. Experienced exporters know that quick and frank admission of shipping problems usually helps them to reach an amicable settlement with their buyers. Failure to ship is bad enough, but failure to keep buyers informed is even worse as it prevents them from making alternative arrangements in time.

    Upon completion of shipment and negotiation of the documents (the bill of lading being paid and in the hands of the consignee) any delay in arrival will become the buyer’s or consignee’s prerogative and it will be up to them to claim on the shipping line.