While Island Leaf has officially operated for over one year, we bring over a decade's worth experience in recycled-plastics trade and manufacturing to our work. Successfully closing transactions with traders and end-users has also immersed us in logistics experience. Additionally, we've gained insights into regional pricing differentials for many materials. By late 2020, in tandem with the dictum that "diversification is the only free lunch" (advice given by an Island Leaf employee's graduate school advisor), we tapped our network and began offering access to traditional commodities.
After many months of assiduous market research, we concluded that adding agricultural commodities, such as soybeans, corn, sugar, and barley, to our product portfolio presented solid potential. One crucial thing we've learned is when comparing recycled plastics to agricultural commodities, differences in delivery methods, contractual procedures, and payment terms are as different as the products themselves. These differences all stem from how sellers procure and deliver the product, contract length and value, as well as international standards.
In this month's blog, we break down plastics and commodities procedures, and highlight the differences. We start with lead generation, and conclude with the differing procurement methodologies. Finally, we explain the reasons for the differences in the conclusion.
1. Lead Generation and Content Marketing in International Trade
Island Leaf has an extensive network of trusted suppliers and buyers. We do indeed chase new business for our international trade strategy, employing content-focused and direct-marketing strategies. Thus, we regularly publish content on our LinkedIn page and post a monthly blog to share insights.
From marketing agricultural commodities, Island Leaf has absorbed a copious amount of knowledge over the past year. While we've generated many leads from content marketing, another strategy we employ is through online direct marketing. By doing this, we find buyers who are explicitly searching for commodities.
We've learned that marketing plastics and marketing commodities are very different games. This is because of the international standards set for agricultural commodities, opposed to the multitude of dissimilarities apparent in plastics recyclables.
2. Direct Marketing, Business Development, and Initial Procedures
When customers approach us with requests for any plastic, we always follow the industry standard of providing recent picture or video evidence. For example, when asked for scrap plastic, Island Leaf includes basic information such as contamination levels, sorting methods (optical or hand), origin, volume availability, loading weight, price and payment terms, and other pertinent details (deposit grade, post-industrial, or post-consumer).
For customers chasing commoditized recycled plastic (pellets or flake), it is industry standard to provide a technical data sheet (TDS), or at the very least, basic product specification data. Sending a small 2 KG sample is industry standard for commoditized recycled plastic. It should be emphasized that Island Leaf only sends samples when the buyer has agreed to pricing and payment terms.
To demonstrate authenticity and professionalism, buyers should always know the needed volume, target price, and the destination port. Once we reach a consensus with the buyer on pricing and volume to be delivered, clients usually order a trial load which is no more than 2 full-container loads. Clients order trial loads to ensure that the material is quickly processed and produces the desired end product. After the client confirms quality, they usually order a set volume every month.
Island Leaf follows a much different marketing procedure for agricultural commodities. These commodities conform to standards set by the relevant authority for each export country. Examples of these relevant authorities include the United States Department of Agriculture (USDA) for the USA, and the Ministry of Agriculture, Livestock, and Supply (CONAB) for Brazil. Thus, the variance between agricultural products from differing countries is negligible. Ultimately, when a buyer requests a particular agricultural commodity, he or she already knows its specifications.
At this stage, it's crucial to note that sellers never provide photos or videos of their commodities to buyers. The seller will eventually, but not initially, provide an official 3rd-party verified proof of product (POP) in document form, with the possibility of photos and videos as well. Giving POP is only done after the buyer has proven that they have sufficient funds to purchase the commodity. Sellers never give any agent, buyer, or broker pictures or videos of their product at this part of the deal. In fact, the seller for whom Island Leaf is a mandate actually has a provision in all Full Corporate Offers (FCOs) explicitly stating that they will not send pictures or videos until the buyer establishes proof of funds—for reasons that unscrupulous brokers will use them to "shop" for buyers. If a deal finally reaches the payment stage, the seller's and buyer's banks will be intimately involved. The banks will confirm that all required documents are authentic and reflective of actual product. We'll discuss this in more detail below.
Next, both sides discuss and negotiate prices. If offers are genuine, there's not much variance between bids and the actual price. An agent or broker that offers a bid exceedingly below the current market price most likely does not represent a genuine buyer. Island Leaf weeds out these type of brokers early on in negotiations.
Finally, both parties agree upon commissions, usually amounting to about $1-$2 per metric ton per side. Often, unscrupulous or greedy brokers will demand a commission of over $20 a ton—another red flag indicating the broker is not close to any end buyer. We also must stress that our sellers NEVER require a deposit via telephonic transfer (TT) from a commodities buyer. Anytime a seller requires a deposit of any amount--1%, 3%, 5%, or whatever--buyers should immediately cut that seller off and notify everyone in their network about this "seller", as he or she is not a seller at all, but a scammer. International commodities payments are always done bank to bank.
3. Invoicing and Packing in Plastics vs. Intents and Offer in Commodities
After the recycled plastics buyer has confirmed pricing, volume, terms, and other relevant info, the seller sends him or her a proforma invoice (PI). The buyer pays a deposit (30% or 50%), and packing begins.
Next, the recycled plastics seller secures a booking. Once the production site possesses shipping containers, packing begins. Upon completion of packing, the site provides crucial information, such as the net weight of the packed material, number of bales, loading photos, and the total price. The seller construes this information to the buyer on a packing list, commercial invoice, and final invoice.
A few days after the site delivers the containers to the port of origin, the shipping line provides a draft bill of lading (BL), which is a rough draft of a receipt that denotes the number of containers and their serial numbers, the material inside the containers, and the port of destination. For international recycled plastics transactions, the buyer usually pays the remainder of the balance owed to the seller upon presenting the packing list, invoice, loading photos, and draft BL.
It is vital to note that the scheduling of balance-payment-due dates differs significantly from client to client; the precise payment terms are usually determined by region, and how long the seller and buyer have worked together. However, as soon as the buyer of the recycled plastic material pays the entire balance, the seller has the shipping line release the containers and subsequently provides the buyer with an original copy of the final BL, which the shipping line produces after the vessel departs origin port.
For commodities transactions, the first document sent is not an invoice or a purchase order—in fact, the invoicing stage is quite far off at this point. Both parties need to first confirm clarity about volumes, destination port, and the number of shipments per month. They must also agree upon pricing and payment terms. The buyer's side puts all of these points into a Letter of Intent to buy (LOI), and sends it to the seller. It's imperative that the buyer or agent adequately address the LOI to the seller or seller's agent. LOIs that are not addressed to any specific party are looked down upon because they indicate a "broker chain," in addition to demonstrating both a poor level of professionalism and laziness. Usually, before the buyer's side sends an LOI, they also send a Non-Compete-Non-Disclosure-Agreement (NCNDA), which ensures that the brokers involved will not circumvent each other. An Irrevocable Master Fee Protection Agreement (IMFPA) between the seller and agents is also signed to ensure the seller pays commissions. After reviewing and confirming all details of the LOI, the seller will send the buyer a Full Corporate Offer (FCO), in draft form.
The FCO "officially" quotes the buyer. It's important to note that since all parties have ostensibly agreed to pricing and commissions, the specific procedures are now up for negotiation. In these negotiations, the parties will focus on procedures, not price. Both parties will agree to the type of letter of credit (LC)—usually documentary or stand-by—that the buyer will use to pay for the commodity, and a few other crucial details.
One recurring procedural negotiation point is when/how the seller gives the buyer proof of product. Many buyers want proof of product before the seller even sends an FCO. However, because agents and brokers play such an important role in connecting buyers and sellers, sellers will not provide any proof of product to someone who is not proven to be an actual buyer. Island Leaf's sellers require buyers to present a draft LC; this is a straightforward process and does not cost the seller an unreasonable amount of cash. Upon presentation of this, the seller will release proof of product.
Another procedural negotiation point is whether or not the seller will provide a performance bond (PB). We explained what a PB is, how it functions, and why many sellers aren't offering them anymore in a blurb we wrote on our LinkedIn page. Island Leaf is a mandated seller for a company that provides PBs.
Once the buyer and seller agree to all procedures, they each sign the FCO. Then, the buyer issues an Irrevocable Full Corporate Purchase Offer (ICPO), which legally binds the buyer to execute the contract under certain conditions.
At this point, it's essential to reflect on the differences between commodities deals and plastics deals. While it took a few relatively quick steps to begin and complete a plastics deal, commodities sellers have just offered official pricing. Much of these differences stem from the fact that the value of normal commodities transactions accumulates to tens of millions of dollars. A higher price tag incurs a higher risk.
Closer to Closure: The Sales and Purchase Agreement (SPA) and Draft Letter of Credit
The confirmation of the FCO and ICPO, respectively, represent the clearing of major hurdles because it denotes agreement between both parties on payment terms, delivery, and presentation of documents. Now, the seller is ready to issue an SPA, which explicitly lays out both parties' legal rights and obligations, product delivery times, and all other aspects of the deal. In some instances, the buyer might further negotiate points of the SPA. However, once both parties have signed the SPA, actual physical goods can start moving.
Now that the seller and buyer have inked their names on the SPA, financial transactions can begin. First, the seller works with his or her bank to guarantee that they can provide the payment amount specified in the SPA. Once the bank consents to work with the buyer as per the terms of the SPA, the buyer will receive a draft LC from his or her bank. The draft LC indicates the bank recognizes and confirms that the buyer has enough capital needed for a certain number of purchases. Finally, the buyer presents the draft LC to the seller, and the seller can now rest assured that the buyer does indeed have the liquidity needed for the contract.
With proof of funds confirmed, the seller can provide the buyer with a proof of product (POP). Thus, the seller obtains certification from grain consortiums, siloes, farms, or whomever is holding the commodity. This certification states that the commodity physically exists at the volume specified in the SPA. It is not uncommon for the seller to provide current videos and photos (time-stamped for authenticity) as well. As soon as the buyer's bank receives and confirms the POP, they open the LC. By opening an LC, the buyer's bank assigns the amount of money stipulated in the contract for the first shipment.
Procurement, Logistics, Inspection and Loading: Sell-side Risk
At this point, the seller needs to organize road or rail transportation from the storage location to the port, book a bulk vessel to transport the commodity from origin to destination, and schedule a 3rd-party inspection. The seller may also have to reserve warehouse space at the port to consolidate the entire order, especially if the commodity is coming from several regions. If the order is substantial, the risk of incurring demurrage charges increases as well, further heightening the seller's risk.
Once the seller has consolidated all the cargo, it's ready for loading. Loading machinery drafts the commodity onto the bulk vessel. The commodity can either be packed in bags of various sizes (25KG, 50KG,1MT super-sacks etc.), or loaded as-is into the cargo hold of the bulk vessel. Packing is mainly the buyer's prerogative, and the SPA clearly states the commodity's packing requirement.
Near the end of loading, a 3rd party inspector such as SGS or CCIC boards the vessel, inspects the goods, and tests a few random samples. The inspector then certifies the results generated and presents them to the seller. Finally, the load is sealed but can only depart port upon bank approval, which follows after the seller brings a collection of documents to his or her bank. These documents include:
1. The original Bill of Lading
2. Signed Commercial Invoices
3. Advice from the shipper that the bulk vessel is no older than 15-20 years
4. The packing list
5. Seller's export licenses
6. Several 3rd-party inspector certifications:
7. Certification of the sealing of the bulk vessel's hatch
8. Phytosanitary certificate
9. Radiation-Free certificate
10. Non-GMO certificate (for this particular shipment)
11. Fumigation service certificate
12. Certificate of Quantity
13. Certificate of Origin
14. Insurance Certificate
15. Any other document or documents stipulated in the SPA
The seller's bank reviews and confirms these documents and then sends them to the buyer's bank, who in turn checks and confirms them. When the buyer's bank approves the documents, it releases the previously allocated payment to the seller. Once the seller confirms reception of funds, the ship departs, and the buyer now has legal possession of the commodity on board.
It should be noted that sometimes, the buyer will release the money allocated in the LC only after the cargo arrives and passes inspection at the destination port.
48 hours after receiving payment from the seller, the buyer pays commissions to agents or brokers involved, as per the IMFPA.
Conclusions
Comparatively, recycled plastics deals happen relatively quickly and require very little documentation compared to the mountain of documents required by commodities deals. The fact that commodities contracts are often valued in the hundreds of millions of dollars accounts for this. Commodities sellers often go a few million dollars out of pocket—this never happens in recycled plastics transactions.
Thus, commodities sellers need to know that they are communicating with the actual buyer or a buyer mandate, not just a broker that knows a guy, who knows another guy that talked to a person on LinkedIn three months ago who was a buyer. Bank-to-bank confirmation facilitates all document processing as well.
The second reason for this complexity is that recycled plastic material usually comes from no more than two processing sites while a commodity can come from several different locations, sometimes hundreds—or even thousands—of miles apart.
Thus, the seller of a commodity assumes more risk than the buyer, for the facts that the buyer is:
1. Responsible for purchasing each shipment of the commodity from farms, silos, or consortiums, out of pocket
2. Responsible for organizing all transport from the commodity storage location to the port
3. Responsible for booking a bulk vessel
4. Responsible for renting port-warehouse space, and loading the commodity onto the bulk vessel
5. Responsible for any demurrage fees that come with loading
6. Responsible for arranging 3rd-party inspections
Because of all these differences, we hope each reader can understand why commodities procedures are very much unlike those of recycled plastics. Island Leaf knows procedures well, and after years of experience, we are accustomed to explaining these procedures to potential business partners and new clients. At Island Leaf, we embrace all aspects of commodities trading and international business.
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