A Buyers Guide to Sugar Trade Procedures

 

Whether a new or returning customer, it is our duty to ensure you are well informed of the procedures necessary to guarantee a successful trade. Setting the standard which other types of sugar are measured against, ICUMSA 45 sugar is the world’s leading consumer sugar. A highly refined sugar product, it is easily recognizable by its distinctive sparkling white color and pure sucrose taste. ICUMSA 45 is perpetually in high demand as it is the safest form of sugar, due to the fact that the refining process by which it is created removes the bacteria and contaminants often present in raw sugars which can pose a threat to human health. But what does ‘ICUMSA 45′ actually mean? ICUMSA is an acronym for the International Commission For Uniform Methods Of Sugar Analysis, an international regulatory body which sets the standard for sugar analysis tests thereby creating a system which can be used anywhere on the globe to accurately and quickly describe the properties of sugar.

 

This is an essential system due to the fact that the sugar trade is a global one, and often buyers and sellers will be operating in completely different parts of the world, not to mention sometimes contending with a language barrier which can complicate negotiations. The ICUMSA ratings method allows a meaningful and accurate description of the product which can be easily understood by interested parties no matter where they come from.

 

ICUMSA 45 Warning

Whilst ICUMSA standards are international, they do vary slightly in Europe from the rest of the world. In Europe, raw sugar is sometimes referred to as ICUMSA 42. This may prove confusing for buyers, but the simplest way to ensure that you understand what kind of sugar is being offered is to ask the seller the rating of the sugar according to the Brazilian SGS standard, which classifies highly refined sugar as a low ICUMSA 45, and increases proportionately with the rawness of the sugar.

 

Proof of Product

 

An essential document in the sugar trading negotiation process is the proof of product. The PoP is sent bank to bank, (from the seller’s bank to the buyer’s bank), and is documentary evidence that the product exists. The PoP is crucial from the buyer’s perspective, and buyers should care that the proof of product is authentic before agreeing to trade and/or signing any binding contracts.

 

Types of POP

 

There are many different types of Proof of Product, and a proof of product can include documentation such as a license to export sugar, which is issued by the Brazilian government, an approval to export – also issued by the Brazilian Government, a warehouse receipt indicating that sugar has been stored at a specific facility, a mill’s commitment to produce the product, or a carrier’s commitment to transport the product. SGS inspection certificates are also valid as a proof of product, and are probably the most reliable form of PoP, as SGS is an independent firm with an international reputation for honesty and reliability.

 

Sellers are sometimes reluctant to offer SGS certificates as a PoP, as SGS inspections are costly. If SGS inspection certificates are not available as a PoP, then be sure to ask for several of the above documents. Be aware that some types of documentation are more easily forged than others. For instance, a warehouse receipt from a foreign warehouse realistically carries very little weight unless it can be independently verified, and a carrier’s undertaking to transport the product does not prove the existence of the product as anyone can contract a carrier without providing proof to the carrier that the sugar exists.

 

POP Fraud

 

Unfortunately, PoP fraud does exist. In some cases fake PoP’s are issued by scam artists who wish to make off with the buyer’s funds in their entirety, and in other cases fake PoP’s are simply issued by brokers or mills wishing to entice the buyer further down the path towards sale before revealing that the original quantities are actually not available

 

Because PoP’s can be fraudulently provided, it is important to do research on the seller you are dealing with. Have they had many successful sales over the years? Are there reliable references which can be examined? If yes, these are good indicators that a seller is trustworthy, and that the PoP can be believed. If, on the other hand, a seller or broker is new to the market with little to no references and no previous sale history, then the seller should be more willing to provide concrete proof of product and answer any questions a buyer may have.

 

Beware of the seller that will only send a single document, and beware of inconsistencies between documents, as inconsistencies can sometimes indicate fraud. For example, do the details on the license to export and the warehouse receipt match? It is not entirely uncommon for people to obtain or purchase old PoP’s and use them for the purposes of scamming buyers, so dates should also be checked.

 

If there is any doubt at all in your mind as to the authenticity of the PoP, then either obtain further information, or find a new seller. Buyers desperate to buy sugar at all costs are the ones who get caught up in scams and end up losing everything.

 

The PoP was fake, now what?

 

If you find that you have been issued with a fake PoP all may not be lost. If payment is to be made by letter of credit, then you have additional protection built into the trade. A seller will only be paid under the terms of the letter of credit after sugar has been shipped, and upon presentation of SGS certificates, a bill of lading, and other documentation. It is possible for these documents to be forged as well, but it is less common and harder to do. Even if the letter of credit is payable on sight, the bank is still allowed sufficient time to confirm authenticity of documents prior to making payment. If you are aware of a fake PoP having been issued, then it is highly unlikely that the sugar will have been sent and that the documentation will be accepted by the bank. If the contract is written correctly, a fake PoP will also void the contract, making the whole exercise pointless for the ’seller’.

 

Where one can loose money is in wiring down payments prior to delivery of sugar based on a fake PoP. For this reason it is highly advisable for the majority of buyers that no payment or guarantee of payment is made prior to the confirmed shipping of the sugar. Sellers may try to ask for down payments, or demand other forms of payment, but there is no need to deal with these persons. Standard sugar trading procedures do not require a down payment, simply a verified guarantee that payment will be made upon shipping of the sugar. At the time of writing it is estimated that there will be a global surplus of around 11 million tons in the 2008 period, so buyers should not waste their time with sellers trying to skew deals in their favor and put the buyer at unnecessary risk. If a buyer does not feel confident in the seller, their methods, or the documentation that has been provided, then the buyer is well advised to seek a different trading partner.

 

MT799 – What is a SWIFT MT-799?

 

SWIFT CODE MT 799

 

When trading sugar there are multiple documents and forms requested by both parties. One of the more commonly requested, but lesser understood documents is the MT-799. Many sugar sellers will request that the buyer issue an MT-799 before they provide proof of product, or proceed beyond the initial stages of the sale. For new traders who are not familiar with international banking systems, this can be a rather confusing request. This article provides information on the SWIFT system, as well as on the MT-799 itself.   

           

What does SWIFT stand for?

 

SWIFT is an acronym which stands for ‘Society for Worldwide Interbank Financial Telecommunications’. Formed in 1973, SWIFT is a Belgian creation, and its main offices are still in Belgium to this day. SWIFT was formed in response to a growing need for an internationally sound communications network that could facilitate business transactions across borders effectively, quickly, and securely. When SWIFT was first formed it linked 239 banks in fifteen different countries. Now in 2008, SWIFT has grown to be a world wide organization which facilitates communications between banks, corporations, and securities institutions. SWIFT communications are now the global standard for international banking transactions, and as such are utilized millions of times daily. It is estimated that more than eight thousand banking institutions currently use the SWIFT messaging system for their transactions, and SWIFT systems are now in place in two hundred and eight countries.

 

What has made SWIFT so very effective?

 

SWIFT’s success has primarily been the result of understanding and responding to the unique demands of a global market. The SWIFT system utilizes standardized messages, which increase efficiency, and is fully automated, which means that the days of lost messages are all but over. International transactions depend on security, reliability, and accuracy. The SWIFT system provides all these elements.

 

In addition to providing a safe and secure messaging system for the financial world, SWIFT also provides opportunities for companies to build revenue streams, and offers a wide range of services outside the messaging field. Some of these services include directories, market information, and market solutions.

 

SWIFT Codes

 

SWIFT Codes are actually very easy to understand, in spite of their unfathomable appearance. The ‘MT’ at the beginning of the code stands for ‘Message Type’, and the number indicates one of the many standardized message formats which comprise the SWIFT messaging system.

 

The MT-799

 

The MT-799 is a free format SWIFT message type in which a banking institution confirms that funds are in place to cover a potential trade. This can, on occasion, be used as an irrevocable undertaking, depending on the language used in the MT-799, but is not a promise to pay or any form of bank guarantee in its standard format. The function of the MT-799 is simply to assure the seller that the buyer does have the necessary funds to complete the trade.

 

The MT-799 is usually issued before a contract is signed and before a letter of credit or bank guarantee is issued. After the MT-799 has been received by the seller’s bank, it is then normally the responsibility of the seller’s bank to send a POP (proof of product) to the buyer’s bank, at which point the trade continues towards commencement.

 

The actual payment method commonly used is a documentary letter of credit, which the seller presents to the issuing or confirming bank along with shipping documents. Once the bank confirms the documents, the seller is then paid. An alternative method is to use a bank guarantee in place of a letter of credit. It is normally at the seller’s discretion which method of payment is used.

 

How Do I Issue A MT-799

 

The short answer is that you don’t. Approach your bank, and make an arrangement with them to have an MT-799 wired to the seller’s bank. Some banks are reluctant to issue MT-799’s, as these make them liable for the full cost of the trade, which can sometimes be in the millions. A bank will normally not issue an MT-799 without some form of collateral to secure their own interests, so be prepared to put up a hefty amount of collateral.

 

What Does A MT-799 Look Like?

 

An MT-799 is an automated message sent electronically from one bank to another, so you won’t really ’see’ an MT-799 at all. The paperwork associated with an MT-799 will vary from bank to bank, though most banks follow a similar format.

 

What Information Do I Need To Send A MT-799?

 

You will need the following information to send an MT-799.

 

• Name of the advising bank.

 

• LC Number.

 

• LC Amount.

 

• Tenor of Draft.

 

• Latest shipment date.

 

• Person or entity liable for confirmation fee.

 

• Whether the LC is restricted for negotiation or not.

 

• A description of the merchandise.

 

• Port and/or country where sugar will be loaded.

 

• Port and/or country where sugar will be unloaded.

 

 

SWIFT MT-103

 

SWIFT MT-103’s are the most commonly used form of SWIFT communication, and one which many people will have utilized without even knowing it. For most bank customers, they are known not as MT-103’s at all, but rather as wire transfers, telegraphic transfers, or SWIFT transfers. A SWIFT MT-103 is used by the bank when its customers wish to make payment to customers of another bank in another country.

 

What Is SWIFT?  

         

SWIFT is the Society for Worldwide Interbank Financial Telecommunications. This organization operates a closed network which operates between banks and financial institutions for the purposes of exchanging messages relating to financial information. SWIFT was founded in Brussels, Belgium, in 1973 at a time when it was fast becoming apparent that globalization was a major market force, but banks in various countries were having trouble keeping up with the emerging demand for quickly and efficiently sending money and communicating financial information across borders.

 

When it was first founded, the SWIFT network operated in just fifteen countries and had less than 300 banks and financial institutions associated with its network. Nowadays SWIFT operates in 208 countries and there are well over 8,000 banking institutions who make use of the SWIFT messaging network.

 

SWIFT Codes

 

SWIFT codes are simply a means of differentiating between different kinds of SWIFT messages. The SWIFT messaging network operates using a series of standardized message types. In order to send a SWIFT message, the banking officer simply fills in the appropriate information in the appropriate fields, and sends the message. In order to identify the different types of SWIFT message, there are numbers assigned to each of them. The ‘MT’ prefix stands for ‘Message Type’, and the three digit number that follows it represents a specific message type.

 

How Do I Send A MT-103?

 

An MT-103 is the most commonly utilized type of SWIFT message. In order to send one, simply contact your bank and let them know that you would like to send a telegraphic or wire transfer. They will require the recipient’s bank details, and also the SWIFT code of the recipient’s bank. If the recipient is not aware of their bank’s SWIFT code, it is a fairly simple matter for the recipient to inquire at their bank.

 

How Long Does It Take To Send A MT-103?

 

A MT-103 is sent almost instantly, and if you are the sender, the money is debited from your account directly. It usually takes somewhere between three to five business days for the recipient to see funds in their account, depending on their bank’s processing times, and the origin and destination of the message.

 

Are MT-103’s Reversible?

 

No. Once a MT-103 has been made, it is not reversible. Sending a MT-103 is the equivalent of handing someone cash in many respects, so due care should be taken when initiating a MT-103.

 

Are MT-103’s Common In Sugar Trading?

 

Yes and no. If the buyer and seller have a good relationship, then they may use a MT-103 to make payments, however standard practices dictate that payment for sugar shipments is made via a letter of credit. Letters of credit are documents which guarantee that the seller will be paid once the sugar has been shipped, and documentary evidence of this has been provided. Paying by MT-103 in advance can leave a buyer open to fraud, and few, if any sellers, will send sugar before they receive payment or a guarantee backed by a major world bank that payment will be made upon shipping.

 

Shipping Documentation

 

When sugar is shipped, there are many documents which accompany it. Some of these documents are required in order for the seller to be paid, others are required in order that the shipment can be imported into a foreign country, and still others provide assurances that the sugar meets the requirements set out in the contract, has been properly handled, and is being shipped aboard a seaworthy vessel. This is a list of the most commonly provided types of shipping documentation, along with explanations of their function.   

 

Signed Commercial Invoice

 

A commercial invoice is made out from the seller to the buyer. It details the specifications of the product being shipped and the total cost of the shipment. This invoice is normally required in order for the seller to receive payment under the terms of a letter of credit, and functions as a tax invoice for the buyer.

 

Clean on Board Bill of Lading

 

A bill of lading is a document which is issued by a carrier or transporter. The document confirms the specifications of the shipment received, the port where it was loaded, and the destination port. It also outlines the terms of carriage. Bills of lading can be negotiable or non negotiable. A negotiable bill of lading enables the holder of the bill of lading to change the destination port of the shipment. A non negotiable bill of lading means that the shipment will be delivered to a specified port, and this port cannot be changed.

 

Packing List

 

A packing list is simply a document which outlines the quantity and type of product shipped. This document is normally very detailed. In order for the seller to obtain payment it is important that the packing list is identical to the terms of the contract and those set out in the letter of credit.

 

SGS Certificate of Weight Grade, Quality, and Condition

 

SGS is an international independent inspection company which will inspect the sugar shipment before it leaves the port and verify that the sugar is of the correct weight, grade, quality, and condition as stated in the bill of lading, packing list, and contract. If all is in order, they will issue an SGS certificate which states that the sugar met certain standards when it was shipped.

 

Certificate of Origin

 

A certificate of origin states where the sugar is from. This is essential when importing sugar from one country to another. The certificate of origin is often issued by the exporter, although it can sometimes be issued by a government agency.

 

Phytosanitary Certificate

 

A phytosanitary certificate states that the shipment meets the phytosanitary requirements which are in place in the country it is being exported to. Phytosanitary certificates are always required for plants and plant products, as these can represent a potential hazard to the ecosystem of the country to which they are being exported.

 

Loading / Stowage Supervision Certificate

 

 

A loading /stowage supervision certificate is offered by SGS, and covers the following elements of loading:

 

• A thorough check of the the overall appearance of the cargo and any packaging.

 

• Verification that all sugar is being loaded by checking the number and size of containers against the contract.

 

• Ensuring that proper handling procedures are followed during loading.

 

• Ensuring that the transport medium is clean and sanitary.

 

• Ensuring that the shipment is adequately stowed and secured, and that it is protected from the elements.

 

The loading/stowage certificate provides the buyer with peace of mind that not only was the sugar in good condition when it left the mill or warehouse, but that it was handled properly prior to shipping. It is also important from the seller’s perspective that a loading/stowage certificate be obtained as it is additional proof in case of mishap in transit that all due care was taken to ensure successful delivery to the buyer.

 

Certificate of Radiation

 

A certificate of radiation states that the shipment is within internationally acceptable radiation levels.

 

Crop Certificate

 

A crop certificate states the crop from which the sugar was produced. This allows the sugar to be traced right back to the exact point of its origin where it was grown.

 

Shipping Company Statement

 

A shipping company statement relates to the ship aboard which the sugar will travel. It normally states that the ship is of a certain age, and that it is well maintained. This document is designed to provide assurance that the vessel is sea worthy.

 

Firm Corporate Offer (FCO)

 

The following article details the basic elements of the standard FCO (Firm Corporate Offer also known as Full Corporate Offer) which we issue to buyers prior to signing a final contract. This is for the reference of potential buyers who may wish to gain a greater understanding of our trading procedures.

 

FCO Details . We trade in Brazilian ICUMSA 45 refined cane sugar with a polarity of 99.8%. Our sugar is from the latest crops, those harvested in the current season. It has a maximum 0.04% ash content, and maximum 0.04% moisture content. The price of sugar is to be determined in negotiations and will depend upon quantities ordered, the current going rate of sugar on the international market, and other relevant factors. On average, we can ship a maximum of 300,000 metric tons per month, for a total of three million six hundred thousand metric tons per year. The sugar is to be packed in 50 kilogram bags, and shipped in new polypropylene or polylined ethylene packaging

 

Ordering Procedures

 

Procedures relating to payment terms and conditions and contract negotiations will be detailed in the Firm Corporate Offer, and for your convenience are also outlined below.

 

Once the buyer receives the Soft Offer (or simple price and terms quotation), they will need to send an ICPO (Irrevocable Corporate Purchase Order), and permission for the seller to conduct a soft probe on their accounts. Bank Comfort Letter (BCL) might also be required. Once the soft probe has been conducted, the seller will send the buyer a FCO (Firm Corporate Offer) within three days. After the buyer returns the signed FCO, seller will issue the draft contract. In some cases the FCO step might be skipped and negotiations can go directly to draft contract.

 

The buyer is free to review the contract at their leisure, and make any desired changes. The contract, with changes, is sent back to the seller, and the seller reviews the changes, makes any additional corrections, sends it back to the buyer for their review, and so on and so forth until both parties are satisfied and the draft contract is agreed upon.

 

Within five days of the draft contract being received and signed, the buyer’s bank should send a SWIFT message MT799 to the seller’s bank with a notification that the buyer is RWA (Ready Willing and Able) to issue the necessary financial instruments.This step is also known as POF (Proof of Funds).

 

Once this is received, with buyer’s bank approval of the buyer’s financial instruments, the seller will produce six hard copies of the contract and send them to the buyer who must review and initial each page within two days, then send four copies back to the seller. The buyer’s bank must also SWIFT a non operational financial instrument to the seller’s bank at this time (Stand by Letter of Credit, covering a predefined number of monthly shipments).

 

Within five days after the non operational financial instrument is received by the seller’s bank, the seller will SWIFT POP (Proof of Product) which includes a license to export and an approval to export, both issued by the Brazilian government, a warehouse receipt or a refinery’s commitment to produce the sugar.

 

Payment for sugar is made via a documentary letter of credit which is issued or confirmed by a Top 25 major world bank, payable on sight. If shipments are to take place over the course of several months, then the letter of credit should be revolving. A standby letter of credit for the value of (at least) two shipments is also required to cover the seller in the event of the buyer breaching the contract. The buyer will also receive a stand-by letter of credit from the seller as a performance bond. The performance bond is equal to two percent of the total value of the contract, and is valid for the duration of the contract with an additional thirty day extension.

 

Once a contract is signed, and the buyer’s financial instruments have been activated, shipments begin within twenty eight to forty five days. Before shipments leave the port they are inspected by qualified and independent SGS inspectors, and the buyer will receive the following documentation upon shipping of the sugar, SGS Certificate of Weight Grade, Quality, and Condition, Certificate of Origin, Phytosanitary Certificate, Certificate of Radiation, Crop Certificate, Signed Commercial Invoice, Clean on Board Bill of Lading, Packing List, and a Shipping Company Statement. The buyer is also welcome to inspect the product in person at this stage.