Frequently Asked Questions
- What are forward contracts and why should I use them?
Forward market contracts are contracts between buyers and sellers of a product (in this case, seafood) that allow for the two parties to buy and sell that product in the future.
One benefit of the contracts is certainty of price – each party knows what they will receive / pay for a specified period of time in the future for a specific quantity and quality of seafood. By entering into these contracts, buyers and fishermen can identify exactly how much a pound of fish will be worth before actually harvesting.
Forward contracting allows for business decisions to be made with a greater degree of certainty.
- Does Open Ocean Trading buy seafood?
No. A common misunderstanding concerning the role of Open Ocean Trading in the seafood industry is that we are a buyer, much like other already established wharf-side businesses. We simply provide an open and transparent marketplace for all interested parties (buyers and sellers) to use as a tool in order to increase the efficiency and profitability of their own enterprise, while minimizing their risk. Open Ocean Trading does not take title of the product, we simply act as a third party who facilitates product trade and provides the legal and financial structure that ensures the reliability and security of these transactions.
- How do I know a forward contract will not be broken?
There are rules and regulations governing our forward contracts. Each executed trade forms a legally binding contract between vessel and buyer in which nonperformance can result in arbitration or other remedies as specified in the contract.
- What are the responsibilities of a vessel under a forward contract?
Sellers, just like Buyers, must honor their contracts. Failure to honor a contract can have significant consequences depending on the reason(s) for the failure.
If a Catastrophic Event or Casual Event (see next few questions) occurs, then the contract might be able to be terminated or delayed without any penalty to either Buyer or Seller.
To avoid violating a contract, Sellers and Buyers should only contract what they conservatively believe they can catch / procure.
- What happens if a Catastrophic Event occurs - the captain dies, a vessel is disabled or severely damaged, or regulatory action prevents a fisherman (seller) from performing the contract?
If there is a valid claim, the contract will be terminated without penalty to Buyer or Seller. In the event a fisherman (seller) becomes unable to fulfill its obligations under a contract as a direct result of a Catastrophic Event, the seller must notify Open Ocean Trading of the Catastrophic Event within 24 hours of the event occurring. No request can be made after Landing End Date (last day of contracted landing period). Open Ocean Trading will investigate to determine the validity of the claim and will notify the buyer of a valid claim.
- What happens if a Causal Event occurs – an act of God come to pass, the captain or crew suffer severe illness or injury, necessary Harvesting Gear fails or is severely damaged, or government sanctions are legislated, with the result of preventing a fisherman (seller) from fulfilling, on time, his or her obligations under the contract?
If a Causal Event occurs (assuming buyer and fisherman (seller) have agreed within the contract to allowing Causal Events), a Permitted Delay can be requested to delay Harvest and / or delivery of contracted product. The Permitted Delay will be the same amount of time as the Causal Event (ex. If a hurricane prevents boats from leaving port for three days, the Permitted Delay would be three days).
If a delay is allowed, the Buyer may choose to terminate the contract with no penalty to Buyer or Seller (fisherman).
- What happens if a Casual Event or Catastrophic Event does not occur and the fisherman failed to catch enough quality seafood to honor the contract?
There are several different possibilities that can occur if a Seller fails to deliver the seafood contracted under the terms of the forward market agreement. They include, but are not limited to:
(1) After contacting an Open Ocean Trading representative about a Default, the Buyer and Seller could reach a second agreement that reduces the amount of Product that is required to be delivered under the Forward Contract to the amount of Product the Seller was able to catch.
(2) If no agreement is possible, Buyer would notify Open Ocean Trading that an Event of Default has occurred. Open Ocean Trading would notify both Buyer and Seller, determine how much Product (seafood) was or could soon be delivered under the contract, and figure out how much money the Buyer actually lost as a result of the Default. At same time, the Buyer must make a good faith reasonable effort to limit its losses from a default.
(3) If a deposit was not waived by the Buyer and Seller, then actual loss to the Buyer would be taken from the Sellers deposit and delivered to the Buyer.
(4) If the deposit was waived, the matter would go to arbitration.
- How much does it cost to use a forward contract?
Open Ocean Trading only earns a fee when a contract is executed and product is delivered. Fees are established on a per pound basis at the time the contract is negotiated and paid by the Buyer (typically upon product delivery). Fees usually range from $0.10 to $0.50 per pound depending on the species.
Open Ocean Trading may also earn a fee from Sellers for factoring payments, which is an optional service that Sellers can elect.
- What if the contract price turns out to be higher or lower than the auction price?
Forward contracts are meant to provide a negotiated hedge against price fluctuations. Buyers and Sellers should strive to mutually agree upon a price that works for each, irrespective of the volatile auction markets. If each side instead strives to "beat the auctions", the zone of possible agreement will be reduced to nothing and the contract will not be consummated. In other words, the "bid-ask" spread will widen to a point where no agreement can be reached, and the hedge will fail.
Inherently, every transaction comes with certain risks. If auction prices fall below the contract price, then buyers assume the risk of overpaying relative to what they could have purchased on an auction. Conversely, if auction prices rise above the contract price, then sellers assume the risk of receiving less relative to what they could have sold on an auction. The optimal outcome for a well negotiated contract price in a volatile market is for buyers and sellers to each "win" and "lose" 50% of the time. In that way, they can work together to mute the volatility of auction markets and ensure that 100% of the time they are paying / receiving a price that works for them and their business.