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What are Contract Grades?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 September 2016
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Contract grades are standards that are associated with various types of investment commodity situations. Essentially, the contract grade helps to establish the status of a futures contract based on a given commodity as being deliverable within the terms outlined in the contract. Contract grades help to ensure that investors who deal in commodities get what they pay for.

Contract grades or standards are usually established on two fronts. First, the government of jurisdiction where the particular commodities exchange is located will provide relatively broad rules and regulations that apply to any commodity traded on the market. In addition, the actual market or exchange will also have some input into whether or not a given commodity offering meets the standards for trading set by the exchange. In both instances, the intent of the laws and regulations is to establish contract grades that are reasonable, help to represent the underlying value of the commodity realistically to potential investors, and in general make sure that all transactions are conducted with honesty and integrity.

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In some markets, contract grades are known as deliverable grades. This designation reflects the fact that the standards set for the commodities must be of a nature that will ensure the investor receives a final product that is at least as good as indicated in the original futures contract. In the event that the deliverable grade does not meet the terms of the contract for some reason, there are usually some mechanisms that can be employed to reverse the transaction.

While contract grades tend to be consistent, they are subject to change from time to time. Factors such as a change in the availability of the commodity may impact contract grades, as well as political and environmental factors that may inhibit or stimulate the creation of the commodities. However, both government regulations and the rules of the commodity exchange proper usually tend to amend contract grades in a manner that still keeps the investor aware of the current status of any given commodity, making it easier to determine whether investing in the commodity is viable or not.

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