Trading Tip: Interpreting USDA Inspection Certificates

The words, “Fails to grade U.S. #1 account condition,” on a USDA inspection certificate sound awfully conclusive.  And, in fact, they do tell us with certainty (setting aside the possibility of an appeal inspection) that the product that was inspected, at that time and place, failed to meet U.S. #1 standards.

Most of the time, however, the pertinent question is not whether the product presently meets U.S. #1 standards, but whether there’s been a breach of the sales agreement.  And, for several reasons, failing to make grade does not necessarily mean the seller failed to comply with the sales agreement.

First, if the product was not sold or labeled U.S. #1, then the seller is under no obligation to meet this standard.  For example, product sold without a grade (or ‘no grade’) could fully comply with the sales agreement, while failing to grade U.S. #1.

Second, it’s important to consider whether all the product was inspected.  A certain percentage of condition defects is permissible, so any product that is not made available for inspection must be factored in as defect-free to arrive at the relevant percentage of defects.

And third, even if all the product is made available for inspection, and even if the product was sold with a grade of U.S. #1, if the shipment was purchased on an f.o.b. basis, then it only needs to make grade when the title transfers at shipping point, not days later when the inspection is performed at destination.  In other words, a failure to grade U.S. #1 at destination doesn’t necessarily prove the product failed at shipping point when title passed to the buyer.

In theory, it’s possible that elevated levels of condition defects at destination, combined with proof of normal transportation conditions, could be used to establish that the product must not have been in grade when title transferred at shipping point.  Practically speaking, however, when product is sold on an f.o.b. basis, and condition defects are elevated, the question is usually not whether the product made grade, but whether the product made “good arrival,” per PACA’s good arrival guidelines.

Does this mean that the acceptable level of condition defects at destination is the same for product sold with and without a grade?

No.  Although it’s true that the same percentages for average, serious, and very serious defects apply, when product is sold U.S. #1, both quality and condition defects score against the good arrival percentages.  Conversely, when product is sold without a grade, only condition defects score.   Therefore, when quality defects are present, fewer condition defects are permitted at destination when product is sold with a grade.

In summary, when interpreting inspection certificates it’s important to take your time and carefully consider whether it establishes a breach of the sales agreement.