Freight charge covers expenses related to storing and caring for physical goods, including physical storage, insurance, and interest rate futures. It also includes ancillary charges. Grain preservation is an example. Investors cover the costs, and any other cost related to proper maintenance is a cargo charge. If the commodity doesn’t generate enough revenue to cover costs, investors withdraw support.
Sometimes referred to as the freight cost, a freight charge has to do with the expenses associated with storing and caring for physical goods. This cost of caring for physical commodities can include important factors such as physical storage, insurance, interest rate futures generated by the commodities, and opportunity costs. In addition to these usual costs involved in the safekeeping of a cargo, other ancillary charges may also be included in the overall cargo charge.
An illustration of how carrying charge works can be found in the example of grain. Since grain is a valuable commodity subject to perishing, it is often necessary to take measures to extend the life of the commodity. One of the primary means of preserving grain is physical storage in a silo or other facility that helps minimize the impact of temperature and humidity on the grain. This means renting or building the storage facility, as well as installing systems that will keep the grain in peak condition.
Along with the physical structures that protect the grain, there is also a need to plan for some type of protection in case the silo is damaged or climate controls fail. This often comes in the form of insurance coverage. The premiums that are paid to maintain the grain insurance are part of the overall charge.
The resources used to care for a commodity are often generated by securing investors willing to cover the costs. Meanwhile, those resource investments are often generated with the expectation of a return. This return is often in the form of interest generated on the funds invested. Any interest paid to investors is considered part of the carrying cost.
In essence, any other cost that may be directly related to the proper maintenance of the goods can be correctly identified as a cargo charge. As long as the commodity generates enough revenue to cover all associated costs and still generates a net profit, the commodity is generally considered worth keeping. However, once a commodity ceases to cover the total cost of carrying, investors typically choose to withdraw support and seek other opportunities.
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