FOB Pricing | The Good, The Bad, The Ugly (2025)
For agricultural exporters in Latin America and Africa, Free on Board (FOB) pricing is a crucial but often misunderstood concept. It determines how costs and risks are divided between sellers and buyers, directly impacting profitability. This guide breaks down FOB pricing, its historical significance, and its real-world implications for exporters.
What is FOB Pricing?
FOB (Free on Board) pricing defines the point at which the seller's responsibility ends and the buyer's begins in international trade. Under FOB terms:
The seller is responsible for all costs leading up to loading goods onto the shipping vessel, including production, packaging, inland transportation to the port, and loading fees.
When the goods are on board, the buyer assumes responsibility for sea freight, insurance, unloading, and final transportation.
Accurately calculating FOB costs is vital for growers and exporters to ensure they do not inadvertently assume expenses that should be the buyer’s responsibility.
Why is FOB so important?
International trade relies on standardized agreements to ensure clarity and efficiency. Free on Board (FOB) and other Incoterms play a crucial role in defining trade contract terms and helping exporters and buyers avoid ambiguities and unnecessary disputes.
FOB reduces misunderstandings and streamlines global trade processes by setting clear responsibilities for costs, risks, and logistics. In the fresh produce trade, where perishability adds urgency, FOB ensures that all parties understand their role in delivering goods efficiently and at predictable costs.
The Origins of FOB and Incoterms
FOB pricing dates back to the 19th century when maritime trade needed clear rules on cost and risk distribution. Over time, the International Chamber of Commerce (ICC) formalized these rules under Incoterms (International Commercial Terms), first introduced in 1936 and updated regularly, with the latest revision in Incoterms 2020.
Incoterms set global standards for trade agreements, clarifying who pays for what during transportation.
FOB is just one of 11 Incoterms used in modern trade:
How to Calculate a Fair FOB Price
To ensure profitability, growers and exporters need to account for all costs leading up to the FOB point:
Production Costs – The cost of growing, harvesting, and processing crops.
Packaging Costs – Materials and labor for export-ready packaging.
Inland Transportation – The cost of moving goods from the farm to the port.
Port Charges – Handling, documentation, and loading fees at the port.
Export Duties and Taxes – Government fees for exporting goods.
A miscalculated FOB price can lead to unexpected losses, as exporters may unintentionally absorb costs that should be the buyer’s responsibility.
Related Read: The Real Cost of FOB – How FOB Pricing is Squeezing Fruit Exporters
“Understanding FOB pricing is just the beginning. For many exporters, the real challenge isn’t just knowing their costs—it’s negotiating fairer terms in a system where buyers hold the power.”
How FOB pricing can be abused
While FOB provides structure and predictability to trade agreements, it is not immune to manipulation. This is particularly true in the fresh produce sector, where perishability and pricing fluctuations create opportunities for exploitation.
Buyers, especially those with greater market power, can use FOB terms to shift financial risks onto exporters while retaining complete control over pricing and shipment decisions.
Buyers Reject Shipments Over 'Quality Issues'
One of the buyers' most frequent tactics is rejecting shipments based on alleged quality issues. Once the produce arrives at the buyer’s port, they may claim that the goods do not meet agreed standards—even when the problem arose during transit, after the exporter’s responsibility had ended. Because the seller no longer owns the shipment, they have little recourse to dispute these claims effectively. Buyers then pressure exporters to accept a lower price or take a financial loss to resolve the issue.
Example
This will probably sound familiar: An exporter ships mangoes to a European buyer under FOB terms. Upon arrival, the buyer claimed the fruit was overripe and demanded a 30% discount, even though shipping logistics, not the exporter, caused the delay. Without control over the goods, the exporter must accept the discount or risk losing future business.
Hidden Charges at Destination
Another standard abuse method involves unexpected fees not initially disclosed in the contract. Some buyers deduct costs such as port handling fees, additional inspections, or import duties from the final payment, reducing the exporter’s expected earnings. Since the goods have already been shipped and the buyer controls the receiving end, the exporter has no leverage to dispute these extra charges.
Example
We hear this one often: An exporter from Kenya sells avocados FOB. Upon arrival in Europe, the buyer deducts additional "handling fees" from the payment—fees that were never included in the original agreement. The exporter, unable to effectively challenge the deduction, must absorb the loss.
Manipulating Market Prices
Price manipulation is another way buyers exploit exporters under FOB terms. Since fresh produce prices fluctuate, some buyers delay shipments or claim sudden market price drops to renegotiate lower payments. This puts exporters in a difficult position, as rejecting the lower price could mean the shipment is left to spoil.
Example
A typical case involves a buyer who agrees to purchase bananas from a Latin American exporter at €10 per box FOB. When the shipment arrives in Europe, the buyer claims that the market price has fallen and insists on paying only €8 per box. The exporter, unable to reclaim the fruit or find another buyer in time, has no choice but to accept the lower price, taking an avoidable financial hit.
Freight and Insurance Manipulation
Some buyers exploit their control over freight and insurance costs by inflating these expenses and deducting them from future payments to the exporter. This is particularly problematic in FOB agreements where buyers manage logistics beyond the port of departure.
Example
In some cases, buyers use subpar shipping services to cut costs, increasing the risk of spoilage or damage, only to later blame exporters for quality issues.
By manipulating freight and insurance costs, buyers create additional financial burdens for exporters, eroding their profit margins while maintaining their financial advantage.
Many small exporters lack negotiating power, pushing for fairer FOB pricing terms difficult. This is where greater transparency in trade becomes essential. This is precisely why we created SAFTA Standard: to help small and medium-sized growers trade under terms normally only accessible to large organizations.
FOB Pricing & The Future of Ethical Trade
FOB pricing plays a pivotal role in shaping the power dynamics of international trade, particularly for growers and exporters in Latin America and Africa.
While it provides a standardized framework for cost and risk distribution, it can also reinforce existing inequalities when buyers dictate terms without considering the realities producers face. Ethical trade in the context of FOB means ensuring that pricing structures reflect the actual costs borne by exporters rather than shifting financial risks disproportionately onto them.
A more balanced FOB framework would involve
Greater pricing transparency and clear cost breakdowns to ensure that sellers clearly understand all costs before shipping their goods.
A shift in the structure of trade relationships allowed small and medium-sized exporters more negotiation power to set fairer terms. Ethical trade in fresh produce should not be a privilege of large corporations but an accessible standard for all participants in the global supply chain.
FOB pricing is more than just a trade term—it directly influences who holds power in global trade. Many small exporters are pressured into accepting FOB terms dictated by larger buyers who control logistics. This imbalance leaves producers vulnerable to unfair pricing structures.
Final Thoughts: Taking Control of Your FOB Pricing
FOB pricing is not inherently unfair, but its implementation in global trade often favors buyers with more market power and financial influence. For exporters, especially those dealing with perishable goods, FOB can be a double-edged sword: It provides structure and clarity while also creating opportunities for manipulation. Understanding the full scope of FOB pricing, from cost calculation to contract negotiation, is essential for exporters to navigate these challenges effectively.
A fair trade system requires that exporters be equipped with the knowledge and tools to negotiate better terms. This includes access to transparent pricing structures, fair dispute resolution mechanisms, and the ability to work with buyers who respect the true costs of production and logistics. While Incoterms like FOB will continue to shape global trade, the focus should be on ensuring that their use leads to sustainable and equitable trading relationships rather than reinforcing imbalances in power and profit distribution.
FOB pricing can be a smart strategy or a financial trap—the difference lies in understanding how costs and risks are distributed. By staying informed, negotiating wisely, and choosing the right Incoterm, exporters can protect their profits and strengthen trade relationships.
