Developing forage standards
How standards serve our markets
Market standards and grades play vital roles in commodities markets. We discuss their value and how they emerge, introduce the concept of product definitions, and share our commitment to open, cooperative standards-development processes.
Developing hay standards
Globally-acceptable standards for grading hay have eluded market participants for over a century. Now, new analytical techniques and cooperation on creating a rigorous product definition for hay may finally make such standards a reality.
Contribute your knowledge
We've drafted a product definition for hay in an open format that anyone can edit, using the same software that powers Wikipedia. Contribute your knowledge and ideas. Let's create a free product definition that works for everyone.
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We cannot measure or determine any quantity, except by considering some other quantity of the same kind as known, and pointing out their mutual relation.
-- Leonhard Euler, Elements of Algebra
How standards serve our markets
Defining our terms
We frequently refer to "standards" and "grades" in commodities markets, and we introduce here a term that may be unfamiliar to some, a product definition. What do these terms mean in relation to commodities, and how do they differ? What is a product definition, and how does it relate to standards and grades?
Dictionaries provide multiple senses for standard and grade. A standard may refer to a song, for instance, and a grade to a slope.
Within the context of commodities markets, however, a standard is a concept or thing that serves as a norm, convention, benchmark, or quality level. A standard may be formal ("written") or informal ("unwritten"), though we usually mean formal standards when speaking of those for commodities. When discussing definite things, we will often evaluate the extent to which they conform to a standard.
A grade, on the other hand, is a type or special case of a standard. Grades, in the context of commodities, express qualitative differences among things of a similar type. For example, most of us are familiar with the three grades of gasoline that service stations sell: regular unleaded, super unleaded, and premium unleaded. Each of these refers to a standard notion of a particular type of gasoline ("unleaded"), yet represents a variation within that standard (typically, a variation in octane rating). Importantly, we even have standards for grading—that is, conventional or normative ways of assigning grades to commodities.
Standard and grade have similar etymologies. Among the origins of "standard" is the idea of standing upright or firmly in place. Among the origins of "grade" is the notion of taking a step. So we may reasonably think of a standard as a fixed position and a grade as a slight deviation or step from that fixed position.
A product definition is a list of the attributes of a good that account for its economic value, suitable for use in structured communications or databases. Like grades, product definitions, too, are standards: standard statements of economically-significant product attributes.
A good product definition is neither too general nor too verbose. For example, numerous members of the kingdom Plantae serve as agricultural commodities, but to characterize all goods from the entire kingdom by means of a single product definition would be inefficient, even if intellectually feasible. Despite the common genetic traits of all plants, in order to account for all qualifying commodities, such a product definition would need an extremely long list of attributes, the vast majority of which would be irrelevant—and thus contain empty or null values—for any particular good. Conversely, to create distinct product definitions for highly similar plants would also be counterproductive, resulting in large quantities of essentially duplicative standards.
To illustrate with examples at either extreme:
Moss and cotton are both of the plant kingdom, but their uses so distinct that they have little else in common from an economic perspective. Mosses have been used as packing material and insulation in times past, but these applications are obsolete. Today they are used decoratively, to stabilize certain landscapes, and in a few places for treatment of wounds, but have practically no other economic roles. Cotton, on the other hand, is one of the most valuable cash crops, with uses ranging from textile production to packaging to cooking oil to medicine. To even conceive of what relevant economic attributes moss and cotton have in common is difficult. Undoubtedly we could list a few—place of origin, time of harvest, and storage locale come to mind—but these common attributes are greatly outnumbered by their differences. Almost certainly, mosses and cottons should have distinct product definitions.
At the other extreme, consider the "Jiggs" and "coastal" cultivars of bermuda grass hay. In all likelihood, these should share a single product definition. Any economic attribute of one would also be an economic attribute of the other. They would differ only in the values producers assign to those attributes. To have different product definitions for Jiggs and coastal hay would be duplicative. Instead, in a single product definition we would have an attribute "cultivar," and we would identify real-world instances of hay as a product accordingly.
Designing good product definitions is an art akin to designing database or message schemas. Determining exhaustively what belongs to and what should be excluded from a product definition generally requires expertise from several fields—information science, economics, the market for the general class of the product at hand, and perhaps even other sciences, e.g., metallurgy, agronomy, or geology. Thus, in many cases, product definitions will benefit from broad collaboration, as well as from having a process for revision in response to changes in science, technology, or markets.
The demand for commodities standards
Trading standards are commonplace in commodities markets, though better developed for some than others. Some commodities lend themselves readily to standardization, whereas others tend to frustrate such measures. Gold, for example, is elemental and identifiable by a number of means, many of these of longstanding use. Standards for gold trading are relatively straightforward and simple, as a result. Agricultural commodities, on the other hand, are more complex, mutable, and challenging to identify and trade by means of standards. Establishing standards for trading agricultural commodities is correspondingly more difficult.
The difficulty of creating standards and the value of such standards once established are separate matters, of course. All else being equal, trading standards for commodities that are complex in nature, difficult to store or transport, or that tend to diminish in value with the passage of time are arguably more valuable than standards for simpler goods with easier supply chains and greater durability.
The demand for standards springs from both producer and consumer interests.
Standards help to remove uncertainty and reduce friction in commodities transactions. They inform producers as to what consumers prefer to know about their goods and to shape production and delivery accordingly. They guide producers in the characterization of products, so that they can disclose as fully and fairly as possible the information consumers need in order to make informed purchases. Standards also teach consumers what qualities, conditions, and characteristics are meaningful and merit their attention.
By promoting disclosure in a systematic way, standards reduce the time and effort buyers and sellers would otherwise expend in ad hoc discovery processes, making decisions whether to trade more efficient.
Standards promote mutual understanding and agreement, and continue to perform valuable services after agreements are struck. They also function as a benchmark for the fulfillment or settlement phase of contracts. Even mutually-well-intentioned counterparts can suffer misunderstandings. Standards help to ensure disclosure of all material product characteristics and terms of trade so as to minimize the risk of such misunderstandings. Adherence to a well-conceived standards regime lowers the risks not just of malicious conduct but also of innocent disagreements.
Standards also lower search costs. By providing a common structure for the presentation of information concerning commodities, they enable consumers to more readily find the information of most importance to them. Consumers can thereby avoid commencing negotiations with producers that have little or no prospect of being fruitful for either side.
Importantly, standards provide a sound basis for valuation and pricing, which helps producers and consumers alike operate more economically. The value of prices as signals for production and consumption activities varies directly with identifiability of the goods to which the prices apply. Standards ease such identifications. For example, a report that "oil traded for $100 per barrel" has meaning only to the extent one understands more about the transaction to which the statement refers than the statement conveys at face value. What kind of oil? Where did it trade and in what volume? When was the trade effected? How large is a barrel? What were the settlement terms? But observe that when commodities trade under well-developed standards, statements of comparable brevity speak volumes. To say that "West Texas Intermediate opened this morning on CME at $100" conveys a wealth of information to market participants, virtually all of which is implicit rather than explicit because of the existence of well-developed standards.
The benefits of grading
Grading is the classification, segmentation, or grouping of specific types of commodities in accordance with a pre-defined standard. People occasionally use the terms "standards" and "grades" interchangeably, but a grade generally expresses a relation between or among goods of the same type, where such type admits of meaningful variation.
For example, to speak of "grades" of silver per se would be vain. Silver is a chemical element. Something either is or is not silver. Manufactured bars of silver, on the other hand, are sensible objects of grading. Buyers and sellers of such bars may wish to classify them on the basis purity, date of manufacture, bar shape or dimensions, or even the identity or reputation of the manufacturer.
Grading is a form of shorthand communication useful for its ability to carry potentially large volumes of information implicitly. It enables buyers and sellers to negotiate terms of trade for goods of a certain grade without speaking explicitly of all of the information that such a grade implies. To return to a prior example, if a seller speaks of "West Texas Intermediate," he means not just "crude oil" but oil meeting a definite, detailed, prior definition.
As with standardization more generally, grading removes uncertainty, reduces friction, and lowers search costs. But grading provides another, less obvious service for producers and consumers—one that is nonetheless remarkably powerful and valuable: it allows for meaningful price discrimination on the basis of variations in particular types of commodities. By so doing, grading helps to ensure that the market uses commodities as economically as possible.
To understand this important role of grading, consider hardwood lumber traded in North America. Among the factors in the grading of such lumber is the defect-free length and width of certain boards. Board size is the primary difference between the "FAS One Face" and the "Selects" grade, with the former being larger typically, as well as suitable for more aesthetically-sensitive uses, such as furniture making. All else being equal, lumber of FAS One Face grade should trade at a higher price than lumber of Selects grade. But suppose that natural market conditions narrowed the price differential excessively. An arbitrage opportunity might then arise that could be captured by trimming FAS One Face for the Selects market and selling the scrap for other uses. Arbitrageurs would intervene to bring the market back to a "normal" spread, helping to ensure that lumber is put to its highest and best use, given its natural variations. Without grading, these price discrepancies would be invisible and the lumber would be used less than economically.
Grading, then, is the application of a standard to create categories of given commodity types on the basis of economically-meaningful variations within those types.
How standards emerge
The demand for standards arises naturally, generally as a result of broad-based uneasiness, frustration, or other dissatisfaction or else out of a desire to bring about network economies. This demand may originate with producers or consumers. In the best case, proponents cooperate to develop standards out of a shared conviction that the standards will improve the market for all concerned. In the worst, proponents cooperate for exclusionary purposes, whether to thwart new market entrants or impede what they would deem to be innovations deleterious to their interests. A remarkable aspect of standards is that their development generally requires cooperation not just among competitors but also between producers and consumers. Sometimes standards arise on a de facto basis. For example, "good delivery" requirements promulgated by a commodities exchange may become industry standards.
In many cases, proponents of new standards will form an organization to act as the standards developer or else request the assistance of an existing standards organization. Sometimes government agencies will take the lead in standards development. The World Wide Web Consortium ("W3C") and the International Organization for Standardization ("ISO") are examples of successful, international, standards development organizations. The United States Department of Agriculture ("USDA") is an example of a government agency that has promulgated multiple standards for commodities trading.
In order to be successful, standards development must usually follow a formal process and have the active support both of experts in the field and a range of market participants, including producers and consumers. Standards may emerge "bottom up" or "top down." In the former case, interest in and demand for the new standard is widespread; in the latter, interest may originate with a narrower group that then promotes the benefits to the market at large. Both approaches are workable. Standards addressing particularly complex or technical subjects may only succeed by starting with a top-down approach and substantial, expert leadership. For example, that standards for web-browser development, which by all appearances have been incredibly valuable, would be as beneficial or even feasible if of "grass roots" origin is unlikely.
Successful standards, even those of top-down genesis, will usually provide opportunities for participation on a broad basis, but incorporate contributions on perceived merit only. Since standards will invariably affect market participants differently and, for at least some period of time, generally confer an advantage to those from whom the least amount of work is necessary in order to comply, perceptions of fairness of process are important to reaching consensus and ultimately acceptance and implementation.
One of the important services that many standards provide is a definition of terms. Without clear and unambiguous definitions, frustration ensues and standards compliance suffers.
In fact, definitions comprise a significant component of many standards. When used for electronic communication, for instance, these definitions may take the form of required, conditionally required, and optional fields; the types of data such fields may contain; and, the types of values such data may represent. To illustrate, a standard for electronic communications concerning rice may have a required field for specification of USDA grade, a data type for that field of "text," and finite range of possible values for that data corresponding to the several grades of rice provided by the USDA standard.
A common aim of standards is to remove uncertainty and reduce friction. One of the approaches that standards developers use to achieve these purposes is judiciousness concerning discretion. All else being equal, the more discretion a standard allows, the less "standard" will be the resulting good or process. Yet, for most standards, some level of discretion is desirable if not also essential.
Standards for web-browser development, for example, require that browsers display certain text in a certain order. But, they leave to the discretion of the browser developer what default font to employ for the display of that text. In this case, the developers of the standard consider the action—"display text in this order"—to be what matters; how that text appears has no bearing on the utility of the standard.
How grades are established
The grading of commodities necessarily involves elements of discretion, judgement, or even arbitrariness concerning economic value. Suppose that a particular quality of a commodity varies continuously across a range of possible values. By their nature grades are discrete phenomena, not continuous. It is impossible to segregate a continuous range into discrete subsets without making more or less arbitrary distinctions. Doing so carries with it the risk of information hiding or obfuscation. But this is not to suggest that grading is undertaken for purposes of deception. On the contrary, the object of good grading is to improve understanding and comprehension to the extent possible, while also promoting economic efficiency.
For example, USDA inspectors assign beef grades ("Prime," "Choice," "Select," and so forth) in accordance with the age ("maturity") of the animal at slaughter and the amount of fat ("marbling") within the muscle tissue ("meat"). Maturity and marbling are both continuous ranges. Yet, for grade-assignment purposes, the USDA subdivides the continuous range of possible maturities into five discrete categories, "A" through "E," and the continuous range of fat fractions into seven discrete marbling categories ("Slightly Abundant," "Moderate," "Modest," "Small," "Slight," "Traces," and "Practically Devoid"). The agency then creates a five-by-seven matrix (see Figure 1 below), using marbling for the vertical scale and maturity for the horizontal. Finally, it overlays the matrix with the possible grades, further dividing nine of the thirty-five cells for grading differences.
The application of the maturity categories varies by type of carcass: steer, heifer, cow, or bullock. That is, these distinct carcass types will be evaluated on the "A" through "E" maturity scale (with only "A" being applicable to bullocks), but the age range within each category varies by carcass type.
As discussed above, grading systems such as the USDA employs for beef withhold certain information that could otherwise be made available to downstream users, but do so not to deceive but to help participants in the supply chain economize their time. Identifying cuts of beef by precise ages is possible at the retail delivery point, but doing so would confront consumers with distinctions without meaningful difference. All else being equal, whether a steer is 765 or 766 days old at slaughter is insignificant from a quality perspective. These ages can be lumped together in the "A" maturity category for simplicity and without harm.
Advances in technology may provide a more scientific basis for grading. Data clustering and comparable techniques may supplant more arbitrary methods of commodity categorization as we improve analytical methods and can equate results of such methods to commodity value.
Grading systems frequently use marketing terms to enhance the perceptions of certain grades. Imagine a system that segments a commodity into four groups by quality appraisal. These four groups could simply be labeled "Grade 1," "Grade 2," "Grade 3," and "Grade 4," but for marketing purposes might instead be labeled "Supreme," "Excellent," "Premium," and "Fair," or words to that effect.
Fieldgram's role in standards development
Fieldgram’s mission is to perfect the sourcing and supplying of nature’s most beneficial goods. Contributing to the development and improvement of market standards in an open and cooperative way is vital to fulfillment of our mission and a core operating principle of our firm. As evidence of our commitment to open, freely-available standards, our first public act as a business was publication of a draft product definition for hay in wiki form that anyone can edit. Our team has significant experience in the development of standards for electronic trading, including the extension of such standards into new markets, and in the structuring of data for improvement of electronic communications. It is our privilege to share our experience and knowledge with other market participants and hope that we may assist in making the markets we address better for all concerned.
One of the valuable roles that standards play is in definitions of terms. But as noted above, standards can also play an even more valuable role in the definitions of products. By product definition we mean a thorough, rigorous, systematic explication of the features, attributes, and other qualities of a product that matter commercially to producers and consumers alike. Such definitions are essential to efficient price formation and in turn to economic production and consumption. Further, product definitions must be able to evolve over time to reflect changes in technology and other market phenomena.
For example, we now have tests for quantifying the protein fraction in grains. Prior to the advent of these tests, including such an attribute in the product definition for wheat would have been nonsensical. But once such tests became feasible and their utility known, a well-designed product definition for wheat would have been expanded to allow for expression of protein values.
Good product definitions allow us to provide structure and meaning in lieu of jumbled, chaotic, or even invisible information. Such a definition is itself a standard and as such, should be developed in a way that allows for broad participation, inclusion of meritorious ideas, and openness.
Fieldgram welcomes the opportunity to collaborate with all market participants to improve market standards. We believe that in developing standards we should use tools such as wikis that promote and encourage collaboration, and that the results of standards efforts should be openly and freely available under liberal licensing terms. Please review our current draft of a product definition for hay and join us in moving that definition to a broadly-acceptable and useful state.
Developing hay standards
For at least as long as farmers have shipped hay by rail or wagon to distant buyers, market participants have debated and sought standards for the grading of hay.
Frustrated by the proliferation of inconsistent, local standards in destination markets, farmers came together in the 1890s to form the National Hay Association. The association has provided many useful services for the market over the ensuing decades, but is yet to achieve its original goal of promulgating broadly-accepted standards.
The USDA launched its own standardization initiatives in the early twentieth century, but widespread acceptance eluded these as well.
Though standards tended to be local in nature, at least there were standards—well-specified, at that—and even organized market centers for hay in many major cities.
With the emergence of cars and trucks and the urbanization of the population throughout the twentieth century, the need for urban hay markets declined. The city markets faded away, and numerous brokers and dealers who once performed independent grading and other valuable services for farmers and consumers alike slowly disappeared.
Hay eventually lost its status as the largest cash crop, but as the population grew and with it the demand for beef and dairy products, the hay market remained vital. Today hay is one of the five largest cash crops in the United States and is one of the leading export crops.
Technology reignites the debate
When local standards and centralized, urban markets prevailed, hay grading relied on visual inspection. While it was possible to relate visual appraisals to the apparent palatability of hay and results of feed trails, scientific measurement of nutritional value was impractical for the market at large.
Ultimately, scientists and engineers developed chemical and spectroscopic tools for analyzing hay quality. The costs of quantitative analyses fell, and nutritional testing became practical for virtually all market participants.
Today, numerous labs with National Forage Testing Association certifications will provide near infrared spectroscopy testing for less than thirty dollars—a small fraction of the value of most harvests. Widespread availability of inexpensive nutritional analyses has lead to renewed calls for industry standards for hay grading.
The USDA continues to publish grading standards, both for alfalfa and grass hay. The agency standards were updated to account for laboratory testing, but they still provide only superficial guidance to underlying product quality. Kentucky has a promising, new grading program that utilizes laboratory analysis and physical inspection. Other states and associations have created standards initiatives for certification of organic and weed-free hay. Canada and Australia have guidelines for export markets and both Japan and Korea have standards for imports. Larger exporters have proprietary programs for ensuring product consistency and their own quality standards. Each of these initiatives is beneficial and demonstrates continued demand for broadly-acceptable standards.
Benefits of hay standards
Interest in hay standards is sensible whether from the producer’s or consumer’s perspective.
Standards facilitate disclosure of salient product qualities in a systematic fashion and the relation of those qualities to pricing and animal health. Disclosure of meaningful product characteristics is at least as important for hay as for any other commodity. After all, hay is not just food for animals but a part of the food chain for people as well.
Standards are also essential to the development of market-data systems for hay. Message-board announcements to the effect "hay for sale—$10 per bale" are certainly better than nothing, but pale in comparison to market data standards and systems that benefit other commodities. The lack of standards leads to market communications that lack structure and are relatively primitive, frustrating the needs of producers and consumers alike.
As they have done for other commodities, standards will encourage full and fair disclosure of hay characteristics and make for a better, more liquid market for all concerned. The severe supply dislocations that afflict the market so frequently stem in part from poor price signaling. This problem can only be solved by better market data systems, and those depend on better standards and adherence to such standards.
Industry standards for hay will also help attract new capital to the market. Equity and debt finance for commodities depend upon price transparency, regularity, and well-defined products. Lenders must have a sound basis for valuing collateral. Investors must be able to judge risks and the prospect of returns. Financial tools long-established for other commodities are untenable for hay without better standards and the market data such standards make possible.
Realizing the benefits of hay-grading standards
Developing widely-accepted standards for hay grading is feasible, but cannot reasonably be achieved without the market first coalescing around a standard product definition. What is to be graded must first be defined, and then that definition must be used as a basis for market data analysis. Only after we have an agreeable standard and reliable market data can we have workable grading standards.
A product definition is a detailed, reasonably complete statement of the features, characteristics, and attributes of a good that have commercial significance for buyers and sellers. By way of illustration, how hay is packaged for distribution—whether in small square bales, large square bales, round bales, or some other method—is an important, commercial consideration for buyers and sellers alike. Method of packaging rightfully belongs in a rigorous product definition for hay. On the other hand, the name of the manufacturer of the tires the farmer uses on his baler is almost certainly not a commercial consideration for buying or selling hay. While that information may be interesting for one reason or another, it most likely would be excluded from a standard product definition for hay.
Product definitions may need to change over time in response to advances in technology or other market developments. For hay, for example, scientists may someday develop new tests that help consumers better judge nutritional value. The market needs a process for updating product definitions to reflect such beneficial developments.
As producers and consumers turn in greater numbers to electronic media for supplying and sourcing hay, users interfaces must improve to allow for full expression of the standard product definition. These interfaces, whether graphical for human interaction or machine for computer-to-computer communications, will likely require formal application program interfaces and messaging specifications. The standard product definition must take into account the needs of system developers accordingly.
Hay grading standards can be determined less arbitrarily and more on the basis of actual market practices once a standard product definition and market data are available. Standards developers can employ an array of quantitative tools to solving the problem and increase the prospects for widespread market acceptance by doing so.
Contribute your knowledge
Fieldgram has drafted a preliminary product definition for hay and welcomes your comments, suggestions, and improvements. The preliminary definition is in wiki form that anyone can edit and uses the same software that powers Wikipedia.