Diluting Damaged Grain: A Blend of Legal Issues?

The 2009 growing season may go down as one of the most challenging from a grain handling perspective. Problems abounded with respect to quality, moisture, test weight, storage losses, and transportation of a tremendous volume of corn. The untimely frosts and wet weather experienced in many areas of the Corn Belt tested the patience of even the most seasoned farmers, elevator managers, livestock producers, and for some, hard lessons were learned with respect to inventory management and spoilage.

For most producers and elevators, the problems are far from over. As the 2009 crop continues to work its way through the marketplace, merchandisers, managers and end users have had to face the delicate task of adjusting their expectations, while working through inventories of lesser-quality or damaged grain. For some grain handlers, ample supplies of high-quality grain are available to soften the impact of the volumes of inferior grain. These processors have been able to sufficiently blend damaged or low test weight grain in order to meet delivery obligations and maintain margins. For some, harvest basis levels and the quantity of wet or damaged grain provided some margin-building opportunities, though these opportunities bring with them increased risks associated with logistical challenges, drying costs and storage losses. Others have been required to source outside grain, at premium prices, in order to meet their customers’ quality requirements.

Grain handlers with sophisticated blending and handling protocols may be the best positioned to work through the difficulties of the 2009 harvest. Blending can offer the merchandiser a means of improving margins, moving substandard inventory, and may help to recoup the premiums needed to procure higher-quality grain from nontraditional sources.

Blending generally

As a practice, blending has gone on as long as elevators have been around. Its prevalence, however, may be of particular interest to merchandisers and end users this year, as the marketplace seeks to divest itself of larger-than-normal quantities of light or substandard grain. The practice of blending can be somewhat controversial, since in essence it is the mixing of high-quality and poor-quality grain, but industry experts argue that without the practice, there would be little outlet for damaged grain, at a great cost to our food system. Blending provides this essential function, but it can bring a unique set of legal challenges, and handlers need to be wary of pitfalls to which they may be exposing themselves.

In concept, grain blending simply involves the dilution of high-quality grain with a small volume of lower-quality grain while maintaining the minimum standards for the higher quality grain. Purchasers of grain ordinarily do not pay a premium to sellers if a shipment of grain greatly exceeds the contract specifications. Some see this as a lost opportunity. Many elevator managers recognize the opportunity to blend amounts of heat-damaged grain, for example, into a larger quantity of higher-quality grain and still maintain a high grade on the end product. Thus, the inclusion of damaged grain, likely obtained at a steep discount, can add bulk to the finished grain without causing the finished grain to be downgraded to a lower standard. This allows the handler to obtain a higher return on the damaged grain, and allows the damaged or inferior grain to move through the system instead of going to waste or being relegated to low value uses.

Blending regulations

In general, federal law allows the blending of quantities of grain from multiple sources, but with a few key caveats. The U.S. Grain Standards Act and accompanying regulations allow grain of the same kind to be blended in order to adjust quality, and allows broken grain or kernels to be added, so long as no dockage or foreign material, including dust, is added to the broken grain. Adding dust, dockage or foreign material is impermissible, as is the blending of different kinds of grain. Not surprisingly, adding water to grain is also not permitted. Violations of the grain handling provisions for the U.S. Grain Standards Act can carry a hefty fine of up to $20,000 and even result in imprisonment of up to five years.