CAF in Shipping
International trade offers multiple benefits to businesses- from broadening a company’s customer base and boosting revenue to creating a hedge against risks associated with domestic demand. However, massive shipping charges are considered by many as the downside to exporting goods.
For instance, in addition to customs and freight charges, the Currency Adjustment Factor (CAF) is another surcharge applicable on export transactions.
What is the Currency Adjustment Factor (CAF)?
The fluctuating currency exchange rates are one of the biggest concerns associated with exports, which can cause losses for both shippers and procurers. To prevent significant losses, shipping carriers levy an additional charge in the freight bill called CAF. It is designed to meet gaps created due to changes in the currency exchange rates.
The CAF value differs depending on the export destination and gets added over the base exchange rate. As a rule of thumb, you should know that CAF increases when the value of the US dollar depreciates. This rate adjustment most commonly occurs for the passage of goods from the US to any Pacific Rim country. So, CAF compensates for the currency fluctuations and ensures that the shipping line doesn’t bear any loss due to increasing shipping costs resulting from these variations.
Since CAF offers price security against volatile currencies, shippers favor an all-inclusive agreement that includes all costs incurred along with currency adjustments to offset the impact of fluctuating currency rates.
What are CAF Surcharges?
The US dollar is the most common and widely used currency in international trade. However, carriers, importers, or exporters may have to pay additional charges in the local currency several times. In the circumstances like these, shippers usually resort to CAF surcharges as it offers financial protection against the risk of using local currency.
Currency Adjustment Factor Formula
The currency adjustment factor is usually a surcharge added to the ocean freight charges.
Here is the formula to calculate CAF:
Currency adjustment factor + freight rate = Currency adjusted freight rate
The freight rate is multiplied by the CAF percentage to derive the currency adjusted freight rate.
How to Calculate Currency Adjustment Factor?
The calculation of the currency adjustment factor depends on different aspects such as currency pair, trade lane, and the carrier itself. The carrier may charge CAF anywhere between 1%-10%. A carrier may charge CAF as high as 50% in highly unpredictable market conditions or volatile currency situations.
Example of CAF
Let’s say that a 20-foot-long container (TEU) is being shipped from Colorado in the US to Como, Italy. The ocean freight is estimated at US$ 3000. Additionally, a CAF charge of 2% is applicable to this shipment.
So, CAF will be US$ 3000 x 0.02 = $60
The calculation of the freight rate will be as follows:
Currency adjustment factor + freight rate = currency adjusted freight rate
US$ 60 + US$ 3000 = US$ 3060
When does the Currency Adjustment Factor (CAF) Apply?
Here are two situations where CAF applies:-
- At the discretion and demand of the carrier, post the completion of assessment and calculation of final charges.
- At a time when the freight charges are not all-inclusive.
How to Avoid Currency Adjustment Factor (CAF) Surcharges?
CAF depends on the requirements stipulated by the freight forwarder. There are two means to avoid CA or, at the very least, negotiate it:- Negotiate an 'all-inclusive' freight charge: Most carriers include this in the ocean freight rate, but you can compare the rates with the other market offerings. After that, you can negotiate to ensure that the interest of both parties is protected.
Pay the charges in the preferred currency: This means that the carrier charges should be paid in their domestic currency [mostly US dollars]. Any other local charges have to be paid in the local currency. This method would require a bank account and considerable cash reserves in the carriers’ local currency.
CAF in Supply Chain Management
With fast-paced growth in supply chain management, and the international trade sector, transactions have become more seamless. Companies trading globally often deal in US dollars and have a centralized and systematic payment arrangement.
But in several instances, these supply chain payments are settled locally. These include situations where there is no centralized payment system or when multiple subsidiaries of a company individually pay for a service.
When a 4PL provider manages a company's global payments, they may charge CAF surcharges. This ensures that service providers can easily convert the local currency into US dollars or other base currency.