Engaging in agro product trading within the UAE market on a commission basis can seem daunting due to its intricate nature and associated uncertainties. This article aims to demystify the complexities and equip you with the knowledge needed to make informed decisions.
The Essence of Reverse Calculation in Trade Evaluation
Reverse calculation serves as a foundational step in assessing the viability of commission-based deals. By starting from the end – the final sale price – and working backward, traders can uncover the actual earnings after all deductions. The focal point here lies in the comparison of commission rates offered by various agents, particularly those operating in the prolific Al Aweer market in the UAE, known for its bustling trade activities. Mostly the rates of established commission agents are 5%. Commission agents in the UAE should not be considered direct buyers since they do not provide exporters with profit based on the invoice value. Instead, they offer profits based on the sales value of the products once sold in the open market. Consequently, these agents have the flexibility to import any quantity of materials, as their margins remain fixed. This situation allows them to capitalize on the broader market opportunities, whereas exporters might face varying degrees of profit or loss.
Now let's dive into a practical example to illustrate how exporters can calculate their profits
Let's consider the scenario where an exporter wants to ship green chillies to the UAE.
Let's assume that startups lack product knowledge, so they opt to purchase at a slightly higher rate to guarantee the supply of proper quality through cold storage. Moreover, the first shipment tends to be more expensive as startups often lack the experience to negotiate due to their limited background.
The details of the procurement and selling prices are as follows:
- HS Code (Harmonized System Code): 07096010 (for Green Chillies).
- Quantity: 3,816 boxes.
- Procurement Rate (FOB till port): INR 430 per box.
- Total Procurement Cost: INR 16,40,880 (by multiplying 3,816 boxes with the rate of INR 430 per box).
- Selling Rate in the UAE: 22 AED per box.
Understanding the Reverse Calculation for Green Chilli Exports to the UAE
Through this reverse calculation method, exporters can gain a clearer understanding of their financial standings in international trade.
In this section, we delve into the reverse calculation to analyze the financial outcomes for an exporter dealing with green chillies under the specified conditions in both the UAE and India. This systematic approach will provide exporters with a structured method to evaluate their profitability in international trade scenarios.
UAE Scenario Analysis
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Total Selling Price in the UAE: This is calculated by multiplying the number of boxes by the selling rate per box.
- Total Selling Price = 3,816 boxes * 22 AED/box = 83,952 AED
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Commission Deductions: A 5% commission on the total sales is deducted.
- Commission = 5% of 83,952 AED = 4,197.60 AED
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UAE Importing Costs: An additional fixed cost of 5,000 AED is deducted as importing costs like clearance charges, parking fees, etc. (This could increase if products are kept in storage with the anticipation of achieving higher prices when sold in the future.)
- UAE Import Costs = 5,000 AED
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Net Proceeds to Exporter: This is what the exporter receives after deductions.
- Net Proceeds = Total Selling Price - Commission - Fixed Costs = 83,952 AED - 4,197.60 AED - 5,000 AED = 74,754.40 AED
One might wonder why commission agents in the UAE are incurring charges for clearance or duties since their primary responsibility is to earn a commission by acting as agents, not buyers. Essentially, they are playing a supportive role in facilitating the sale of your products.
India Scenario Analysis
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Total Procurement and Shipping Cost (CIF): This includes the procurement rate till the port and the CHA shipping cost.
- Total Procurement Cost = 16,40,880 INR (FOR - Free On Road Till Port, with Packing)
- CHA Shipping Cost = 1,90,000 INR
- Total CIF Cost = 16,40,880 INR + 1,90,000 INR = 18,30,880 INR
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Conversion of Net Proceeds to INR: The net proceeds received by the exporter, calculated in the UAE scenario, are converted to INR.
- Assuming the exchange rate is 1 AED = 22 INR, then Net Proceeds in INR = 74,754.40 AED * 22 = 1,644,596.80 INR
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Final Amount Received by Indian Exporter: This is the amount after subtracting the total CIF cost from the net proceeds.
- Final Amount = Net Proceeds in INR - Total CIF Cost = 1,644,596.80 INR - 18,30,880 INR = -186,283.20 INR
It's crucial to note that this example results in a negative final amount, indicating a loss under the given conditions. Therefore, exporters must meticulously assess all costs and market conditions to ensure profitability.
Formula
Below is a step-by-step formula to calculate profitability for exporters:
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Calculate the Total Selling Price in the destination country:
Total Selling Price = Quantity * Selling Rate per Box
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Deduct the overseas commission and fixed costs from the Total Selling Price to find the Net Proceeds:
Net Proceeds = Total Selling Price - (Total Selling Price * Commission Rate) - Fixed Importing Costs
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Calculate the Total CIF Cost in the exporter's country:
Total CIF Cost = Total Procurement Cost + CHA Shipping Cost
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Convert the Net Proceeds into the exporter's local currency:
Net Proceeds in Local Currency = Net Proceeds * Exchange Rate
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Determine the Final Amount Received by the exporter by subtracting the Total CIF Cost from the Net Proceeds in local currency:
Final Amount Received = Net Proceeds in Local Currency - Total CIF Cost
This formula can be adapted for any product and market scenario by updating the respective values. By consistently applying this formula, exporters can make informed decisions to optimize their international trade strategies.
The strategy is straightforward: obtain the selling prices of similar agro products from multiple commission agents within the market. This variance in rates serves as a critical indicator, not only of the potential market value but also of the negotiating space available with commission agents. The essence of this comparison is to identify a benchmark or average rate that will guide the subsequent financial planning and decision-making processes.
To make this trade profitable, considering the Indian scenario's procurement and shipping costs remain the same, we need to calculate the break-even selling price in the UAE. The objective is to determine the minimum selling price per box that would allow the Indian exporter to cover all expenses and potentially make a profit.
Here’s how you can calculate the break-even selling price for green chillies in the UAE:
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Determine the Total CIF Cost in India: This remains the same as previously calculated, which is 18,30,880 INR.
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Determine the Desired Net Proceeds in AED: Since we want to at least break even, the desired net proceeds should equal the Total CIF Cost converted into AED. Assuming the exchange rate remains 1 AED = 22 INR:
- Desired Net Proceeds in AED = Total CIF Cost in INR / Exchange Rate = 18,30,880 INR / 22 = 83,221.82 AED
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Calculate the Required Total Selling Price in the UAE: This price must cover the net proceeds needed plus the commission and fixed importing costs. If we assume the same commission rate (5%) and fixed costs (5,000 AED), we can reverse-calculate the required Total Selling Price:
- Let the required Total Selling Price be X.
- Then, X - (5% of X) - 5,000 AED = 83,221.82 AED
- Simplifying, 0.95X = 88,221.82 AED
- Therefore, X (Total Selling Price) = 88,221.82 AED / 0.95 ≈ 92,860.86 AED
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Calculate the Break-even Selling Price Per Box: Now, divide the Total Required Selling Price by the number of boxes to find the break-even selling price per box.
- Break-even Selling Price per Box = Total Required Selling Price / Number of Boxes = 92,860.86 AED / 3,816 boxes ≈ 24.34 AED per box
Therefore, to break even, the exporter would need to sell the green chillies at a minimum of 24.34 AED per box in the UAE. Any selling price above this would result in a profit for the exporter.
Remember, the actual selling price may need to be adjusted based on market conditions, demand, and competition in the UAE. Additionally, keeping costs as low as possible and negotiating better commission rates or fixed costs can also help increase profitability.
To ensure profitability exporters should:
By adopting these strategies, exporters can enhance their chances of achieving profitable trades in the UAE market in the long term.
If you have established your own setup and network in the UAE, you can focus on the following aspects to ensure the profitability of this trade with your partners
Strategic Discussion Mailing Format:
Strategic Discussion on Enhancing Profitability of Agri Product X Trade Dear [Buyer's Name], We appreciate the ongoing collaboration between our companies and your dedication to promoting Agri product X in the UAE market. We have been reviewing the financial outcomes of our current commission-based trade arrangement and seek to discuss potential strategies to ensure mutual profitability. As per our understanding, under the current terms, you are charging a Y% commission on the sales value of Agri product X, along with covering the import duty and clearance charges. Our company is responsible for the clearance charges and documentation fees, with the CIF price set at [X price]. Upon reviewing recent sales figures and costs, we have observed that the current arrangement results in a financial loss for our side, primarily due to the commission deductions and expenses incurred on your end after sales in Dubai. In light of this, we would like to explore the following options to make this trade more sustainable:
1. Reduce the Supply Price: We propose discussing the possibility of reducing the supply price for Agri product X to alleviate some financial pressure and move towards a no-profit-no-loss model.
2. Cost Assistance: We are open to exploring ways to provide assistance with cost reductions, whether through helping with the Clearance, Customs Agency (CHA) requirements, or by finding ways to reduce logistics and packaging costs.
3. Seasonal Strategy: If current market conditions are not favorable, we suggest identifying the most profitable seasons for exporting Agri product X. This approach could help in planning shipments during times of higher market demand, potentially increasing profitability.
4. Diversification: We welcome your suggestions on different products that may present a more profitable opportunity for both parties. This could diversify our trade portfolio and reduce dependency on the performance of a single product.
Our priority is to ensure a beneficial and profitable partnership for both our organizations. We believe that by addressing these areas, we can improve the financial outcomes and continue our successful collaboration.
Best regards, [Your Name] [Your Position] [Your Contact Information]