How To Buy Cheap Commodities From Exporters In Africa: A Guide For Importers
Most international buyers looking to purchase commodities like agricultural products and solid minerals from countries in Africa, like Nigeria, are always looking for extremely cheap deals, whether the exporter makes any profit or not. They go against fair trade practices that should enable the exporters grow their business with every successful sale, but rather forcefully push for ridiculously low prices that leaves the exporter with little to no profits from the trade, while the importer goes on to process and resell the commodity to international buyers in Europe and America for a 100% to sometimes more than 300% profit margin.
Consistently trying to make exporters in Africa sell their goods at the cost of nothing will always lead many international buyers right into the hands of scammers that leverage their greed, and in the process, cause them to part with their money while they get nothing of value in return.
But while chasing cheap prices is a great risk, many international buyers are doing this successfully with the exporters still growing their businesses fast.
How Is This Possible?
First, the standard secure international trade process for importers and exporters would usually be something like this:
Step 1: Buyer and seller signs sales and purchasing agreement.
Step 2: Buyer issues an irrevocable Letter of Credit (L/C).
Step 3: Seller sources, loads, and ships the commodity as per either FOB, CIF, CFR, or any other agreed incoterm.
Step 4: Seller submits all shipping documents to their bank to redeem payment as per L/C terms.
Now in this step-by-step process above, the international buyer places a Letter of Credit, after which the exporter upon getting the Letter of Credit initiates their financier, whether bank, individuals, or private organisations, to fund the purchase, transportation, blending, port loading, and shipping of the commodity to the international buyer. Since the exporters almost always work with financiers and must pay financing, logistics, blending, and shipping costs, their profit margins, in the end, can be very low, despite even initially offering fair prices to the international buyers. International buyers who go on to want to drastically cut the offered price puts the exporter in a position where they will either absolutely make nothing from the transaction or in the case of an inexperienced exporter, might make a great loss in the process.
Since the exporter must pay its financier their margin for financing the trade and must also cover a lot of expenses in the process, how then can an international buyer purchase products for even lower than the price that’s ideal?
There’s only one way. And that’s to partner directly with the exporter.
How Does This Work?
Since exporters are reliant on their financiers for funding and must cover so many other charges, international buyers can choose instead to partner with them locally to fund the entire export. This way, they completely fund and monitor the purchasing, logistics, loading, and shipping of the goods from the source country to the destination.
To make this process safe and secure, the international buyer and the exporter would need to first have a contract, then both setup and maintain a mutual bank account in the same bank that’s located in both their countries. Standard Chartered Bank, for instance, is an international bank that’s in many countries around the world and is a great financial institution for any party carrying out this type of international trade arrangement to use.
Here, the international buyer will set up a joint account with the exporter in the same bank in the exporter’s country. This joint account would have a mandate for both the international buyer and the exporter to have to co-approve any payments from the account to any external account, and this could easily be done via internet banking.
Since the international buyer already has a separate bank account in their own country in the same bank, their bank officer can be in direct communication with the bank officer of the joint account and any disputes can easily be resolved since it is the same bank.
Now, the exporter would need to make direct payments to their local suppliers strictly via bank to bank payments which would be co-approved by both them and the international buyer. For security and protection of interests, the exporter could appoint a company that is responsible for the local suppliers, so that the company receives payments, procures, and then supplies the goods to the exporter’s warehouse. This way the international buyer will not easily be aware of the exporters’ direct local supplier.
So How Does The Exporter Earn Reasonable Profits?
The funds being used for the entire purchase, logistics, and export to the international buyer’s country would need to be maintained in the joint-account in the mutual bank. Here also, the exporter’s income of a pre-agreed amount would also be blocked in the joint account, only to be released after the cargo has successfully sailed from the port of loading.
When a method like this is used, the exporter would literally be acting as an agent for the international buyer, while the buyer uses the exporter’s licence to export the commodities.
Another option is for the exporter to agree on an FOB price with the international buyer. This way, when the international buyer funds the export of the commodity, the exporter’s goal would be to execute the entire transaction at the lowest possible cost, so that the total amount left is their income, which could be substantial since traditional financiers who would have taken a large chunk of the profit margins are completely out of the picture.
Irrespective of the margin the exporter makes from any transaction done with this arrangement, they will tend to benefit greatly from the trade in different ways; with an important one being that every transaction would read as a track record for the exporter to use in securing better finance or a credit line in the future and also since the exporter would be cutting off all forms of financiers, bank interest, and expenses to be incurred in the entire process, but basing everything on the provided funds, the exporter could instead focus on earning their agreed income from the trade, which could very likely be more than double the income they would have earned if all previous expenses and financiers would have come into play.
A system like this does not only benefit exporters but also benefits international buyers because they’d get a far better price deal which could be a further 15% to 30% discount from an already offered low price, and if the transaction is successful, they’d have an exporter they can trust for far larger volume transactions on any commodity they aim to procure from that particular African country using the same transaction process.
It is key to note that every country has its own laws regarding funds that enter a bank account in its country from another country irrespective of it being from the same bank. In Nigeria, for instance, the funds would be seen as an investment for export, and so, the bank would have to help the exporter get a Certificate of Capital Importation first so that it is recognised as a foreign investment and not an illegal in-flow of funds. Secondly, after the export is done, the funds must be repatriated to the local joint bank account before being withdrawn totally from the country if the importer is no longer interested in dealing, all to show that goods did not illegally leave the country without a full trade cycle of repatriation. Else, the bank could get penalised, the exporter could have their licence suspended, and the international buyer found culpable could be banned from purchasing anything again from the country or may even be banned from ever investing in the country again.
This is just one example. But many countries around the world, especially from Africa, have their own policies regarding international trade, repatriations, foreign currency inflows, and how it is all managed. So, it is important that as an international buyer, you understand the laws of the country your exporter resides in before you commit to a funding relationship with them in a bid to procure cheap commodities.
To Sum It Up
Buying solid minerals like muscovite mica or agricultural products like Sesame Seeds, Cashew Nuts, Ginger, Dry Hibiscus, Peanuts, Tiger Nuts, Soybeans, and much more at ridiculously low prices is extremely difficult for any international buyer. But when a partnership structure as explained above is put into place, the exporter could still earn more profits than they normally would have from a different financing arrangement, and the international buyer could still procure the commodity at lower prices than they should have. This way, the pricing is realistic and both parties are in a win-win situation.
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A Key Point To Note
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What are your thoughts on how to buy cheap commodities from exporters in Africa, Nigeria? Let me know by leaving a comment below.