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How Commodity Prices Are Quoted: Terms, Basis and Premiums

A price in bulk commodity trade is never just a number. It comes with a unit, a delivery term, a quality basis and a period, and two offers can only be compared when these match.

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The unit and the currency

Most bulk commodities are quoted per metric tonne, and some by another unit that the market uses, such as the bushel for some grains or the barrel for crude oil. The currency is usually the US dollar, but the contract names it. Always check that two offers use the same unit before you compare them.

The delivery term

The price depends on what it includes. An FOB price covers the goods on board the ship at the loading port, and the buyer pays the sea freight. A CFR price adds the freight to the discharge port, and a CIF price adds the insurance too. To compare an FOB offer with a CFR offer you must add the freight and the cost of insurance to the FOB price. See FOB vs CFR vs CIF for the split of costs.

The quality basis

A price is for a stated quality: the grade, the content of the main ingredient, the moisture, the size and the other limits in the specification. Products often have a basis and a scale: if the delivered cargo is better or worse than the basis, the price is adjusted by premiums or discounts that the contract lists. Ask which quality the price is for before you judge it.

Reference prices and premiums

Many commodities are priced against a public reference, such as an exchange price, a published index or a tender result, plus or minus a premium or discount for the origin, the grade and the delivery. In this case the offer is stated as the reference plus or minus a difference, and the final price is worked out on a day or an average that the contract names. For a flat price, the number is agreed once and does not change with the market.

Quantity, tolerance and validity

The quantity comes with a tolerance, for example five or ten percent more or less at the seller's or the ship operator's option, and the total value follows the final quantity. An offer is valid only until the date it names, and the market can move quickly, so the validity period is part of the price. A counteroffer starts a new round with a new validity.

Payment and other costs

The payment terms change the real cost: payment in advance, against documents through a bank, or on credit are not the same for the buyer or the seller. Port charges, loading and discharging costs, inspection fees and import duties may or may not be included. Add the costs that the delivery term leaves out before you compare.

How to compare two offers

Write both offers on the same basis: the same unit, the same delivery term, the same quality, the same payment terms and the same shipment month. Then compare the total landed cost at your port. On Comdity a sell offer is on FOB terms and a buy request is on CFR and CIF terms, so use offer and counteroffer to bring the two sides to the same terms. Comdity does not publish market prices.

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