Between exporters, importers, agents, and shipping lines, the US dollar is the most widely used currency around the world. In fact, you’ll notice that a lot of charges, such as freight charges, Terminal Handling Charge (THC), Peak Season Surcharge (PSS) and others are denominated in United States Dollars.
However, there are also a number of charges that are paid by the carrier in local currencies, typically for services rendered at origin or destination. Additionally, some exporters or importers prefer to be billed in local currencies. Under these conditions, carriers would impose a currency adjustment factor surcharge.
The Currency Adjustment Factor (CAF) is an accessorial percentage surcharge used by carriers to account for potential exposure to foreign currencies. This additional fee is usually introduced if the agreed payment between transacting parties is not in United States Dollars.
Typically multinational carriers who conduct business globally, can face direct impact in terms of financial exposure, if they do not hedge against fluctuating currencies. In these situations a CAF would be charged. Let’s explore this in more detail.
Currency Adjustment Factor Formula
The currency adjustment factor is a percentage charge that is typically added to the ocean freight rate. Therefore the CAF formula is as follows:
Freight Rate + CAF = Currency Adjusted Freight Rate
In order to calculate the currency adjusted freight rate, the CAF percentage is multiplied by the freight rate.
How to Calculate Currency Adjustment Factor Surcharges
The actual percentage charges of CAF varies by carrier, trade lane and currency pair. On average, carriers would charge between 1% to 10% depending on the aforementioned criteria.
In the past, some carriers have charged more than 50% CAF, to hedge against extremely volatile currencies and unstable markets. Let’s take a look at one example on how to calculate the CAF using the formula.
Let’s assume the ocean freight for a 40-foot reefer container from New York, United States to Manila, Philippines costs $4,000. The freight forwarder imposes a CAF charge of 2.5% for the shipment.
To calculate the currency adjusted freight rate, one would have to calculate as below:
|Ocean Freight||$4,000.00||Freight charges|
|CAF (2.5%)||+ $100.00||($4,000.00 x 0.025) = $100.00|
|Currency Adjusted Freight Rate||= $4,100.00||Ocean Freight + CAF (%)|
When does the Currency Adjustment Factor (CAF) Apply?
Currency Adjustment Factor surcharges are imposed at the discretion of carriers, after they have completed their assessment and final charges have been computed. CAF charges are usually applicable if freight rates are not all inclusive.
CAF Example in Shipping
Let’s take an example for an export shipment from the United States to Malaysia. In this scenario, the arrangement is door-to-door, and the carrier is arranging the pickup of cargo, sea freight and final delivery.
We assume the term of this shipment is prepaid and the shipper has appointed the carrier or freight forwarder for the full service. The carrier is tasked to arrange:
- Origin pickup
- Export customs clearance
- Sea freight
- Import customs clearance
- Destination delivery
In this example, the carrier would outsource the destination activities such as import customs clearance and final delivery through a local vendor in Malaysia. As the carrier is charged in the local currency of Malaysian Ringgit (MYR), they impose a CAF charge to the shipper back in the United States, to account for possible currency fluctuation between USD and MYR.
How to Avoid Currency Adjustment Factor (CAF) Surcharges?
There are several ways to avoid paying a currency adjustment factor surcharge to your carrier or freight forwarder. The easiest and most common way is to negotiate for “all inclusive” freight rates. Even though carriers may price this into the ocean freight rate, you’ll be able to compare these freight rates with other market offerings.
A second way is to pay charges in their base currency. This would mean that you pay carrier related charges in United States Dollars, and local charges in local currencies. However, this would imply that you are required to have a bank account and cash reserves for the respective local currency.
Currency Adjustment Factor Charges in Supply Chain Management
As supply chain management is revolutionizing global trade, boarders have become more seamless, and financial transactions take place in many different regions and countries.
Certain 4PL service providers may render a global service of managing an entire supply chain of a company. Typically, most companies that have global or regional payment arrangements tend to transact in United States Dollars and have centralized payment facilities.
However, there are scenarios where companies prefer to settle supply chain related payments locally (when they don’t have a centralized payment facility or when each subsidiary pays for a portion of the service).
In these types of arrangements, the 4PL service provider may also charge a currency adjustment factor surcharge, as they receive local currencies that they would have to eventually convert back to United States Dollars, or to another base currency.