The Strategic Role of Quality in U.S. Grain and Oilseed Markets
Farm Management Update, April 1996
By Eluned Jones
Quality is a dynamic description of the composite of economic attributes in a commodity. Attributes of real or perceived value include information on the physical, intrinsic, nutritional, and sanitary (or safety) conditions of the commodity, either as final products or as an input into further processed products.
"Quality is the composite of attributes of the product that has economic or aesthetic value to the user."
Grades and standards influence the market price signals involved in price determination (market value) and price discovery (e.g. spot and futures markets).
Industry-wide grades improve marketing efficiency:
U.S. agricultural market infrastructures are changing in response to:
1970s - 1980s: markets price driven
1990s and next century: markets customer driven
Where processing requirements are highly specific, or a customer's preferences are unique, the market infrastructure should not absorb the costs of providing the additional information. However, if the information can be objectively obtained, i.e. measurement technology exists or can be developed to provide the data in a timely, cost efficient manner, then market efficiency is increased by making that information public and incorporating the information in the price determination and discovery process.
Price is determined by expectations regarding:
Price is discovered via Futures Trading Exchanges such as the Chicago Board of Trade and Kansas and Minneapolis Grain Exchanges. Traded futures contracts are based on the specified USDA grades and standards delivered to specified locations. Regional prices reflect demand and supply at market locations and transportation costs to points of delivery. Local markets (country elevator, river elevator, terminal export elevator, processing plants) will reflect differences in the value of the commodity in food and feed uses, as well as incentives and disincentives to deliver to that market.
The discount schedule should reflect the added risk to buyers of not receiving supplies with the underlying attributes described by the grades and standards. If the grades and standards provide an accurate description, the market determined price will reflect the value of the commodity in its end use. Thus, the higher the added value of the end product the greater the value of the commodity as an input.
The proliferation of value-added products is paralleled by the increasing complexity of the processing technology and increased requirements for consistent inputs. Discounts are applied in the market in an order of magnitude that reflects the importance of the attribute to the processor.
While discounts provide a disincentive, premiums are rarely seen in the market as an incentive except where the market is in short supply of quantities that meet the minimum requirements.
Government involvement in quality can vary from none to commodities requiring minimal governmental involvement to those commodities requiring government standards, grades, and research to operate.
Grades and standards should be considered a public good. Transference of costs of the government's role and responsibilities will discourage use and reliance on uniform grades and standards. Where consumers, marketing firms, and producers benefit from a public good, actions that will place this role in the private sector can result in significant transfer of welfare.
The need for and role of government involvement in each commodity market should be determined by a task force with representatives from industry, academe, and regulatory agencies. Appropriate classification of commodities will be influenced by:
Associated actions should:
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