What is a 'Grading Certificate'

A grading certificate is a document issued by inspectors or an approved grading panel that formally signifies the quality of a commodity. The grading certificate is vital because a product must be identified as exchange grade to be deliverable for futures trades. Commodities exchanges issue detailed guidelines describing the characteristics that qualify a commodity as exchange-grade.

BREAKING DOWN 'Grading Certificate'

​​​​​​​A wide variety of authorized inspectors or panels may issue a grading certificate. The use of the most appropriate inspector will depend on the commodity involved. Many government agencies or officials perform these services, but enlisting the services of an inspections services company can also fulfill this role.

These commodity grading certificates serve valuable purposes which are helpful to both the buyer and seller of a commodity in the futures market. The document provides an official, objective determination of the product's value, quality, and condition. It not only establishes the status for a sale or exchange but can also serve as valuable documentation necessary to obtain loans or submit claims in case of a loss. 

Grading certificates may also help justify an increased price, in the case of a higher-quality product. Conversely, they may support the rejection of, or decrease payment for a commodity deemed not up to par.

Information Contained in a Grading Certificate

The exact details outlined in a grading certificate will vary depending on the materials or products evaluated by the inspector. For example, a grading certificate for cocoa would indicate:

  • It's country of origin
  • A description of the product
  • The condition of the product such as hammy, smoky, or dry
  • The grade, such as the percentage of defective beans in the total lot
  • An amount, indicated by the count and expressed as the number of beans per kilogram

Also, the document will state whether the cocoa meets the commodity exchange's standards. The certificate is valid for a limited time as determined by the exchange and the commodity.

A state agricultural department may have a commodity inspection and grading division which will perform voluntary inspections for a set fee, paid by the user. These same departments might also offer a grading certificate training and testing program for those who want to obtain the credentials to perform evaluations. Once receiving a commodity tester certificate, there will be periodic continuing education programs or testing to maintain current status as an approved inspector.

 

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