Deliverable Grade

Definition

The term deliverable grade refers to the minimum quality of a commodity delivered under a futures contract. The specifications for deliverable grades are critical to the pricing of a contract.

Explanation

Commodities are typically a product of the agriculture and mining industries. Consumers are familiar with agricultural commodities such as corn and wheat as well as energy commodities such as gasoline, electricity, and natural gas. Deliverable grades are the set of standard quality specifications established and maintained by commodity exchanges.

While speculators have little concern with the specification of a commodity, traders that intend on taking delivery, such as hedgers, will purchase commodities of a given deliverable grade. For example, if a fuel oil is used to generate electricity, the grade must conform to the specifications of the electric generating unit that will consume the oil.

Example

The following examples demonstrate the delivery grades under a futures contract for rough rice:

"All futures contracts shall be for U.S. No. 2 or better long grain Rough Rice as the same is established by standards promulgated by the United States Department of Agriculture (U.S.D.A.) at the time of the first day of trading in a particular contract. No heat-damaged kernels as defined by USDA FGIS Interpretive Line Slide 2.0 are permitted in a 500-gram sample. No stained kernels as defined by USDA FGIS Interpretive Line Slide 2.1 are permitted in a 500-gram sample. A maximum of 75 lightly discolored kernels as defined by USDA FGIS Interpretive Line Slide 2.2 are permitted in a 500-gram sample. No other grade is deliverable. To be deliverable, Rough Rice shall have a milling yield of not less than 65%, including not less than 48% head rice. Each percent of head rice over or below 55% shall receive a premium or discount, respectively, from the settlement price for long grain Rough Rice and each percent of broken rice over or below 15% shall receive a premium or discount, respectively."

Related Terms

differential, devaluation, default, daily trading limits, currency risk, credit derivative, closing range