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Diluting Damaged Grain: A Blend of Legal Issues?

With careful attention to regulations, blending continues to be a viable outlet for damaged grain.

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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 As A Solution

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 to 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.

State law may also limit a person’s ability to blend grain, so it pays to be familiar with the laws of the jurisdiction in which you operate. Your state department of agriculture should have further information about specific provisions where you operate. Engage legal counsel to ensure that your practices comply with state and federal law.

Challenges with Molds and Mycotoxins

It has been the Food and Drug Administration’s (FDA) long-standing policy that grains contaminated with aflatoxin and other mycotoxins may not be blended with uncontaminated grain in order to bring the aflatoxin levels to within the FDA action levels for the species to be fed. This policy arguably does not apply to the blending of grain by end-users; or those not offering the grain or co-products for further sale. At times, the FDA has by regulation relaxed this policy in order to address specific aflatoxin outbreaks on a state-by-state basis, and only for certain problematic crop years. Further, when the FDA has relaxed the blending restriction in the past, it invoked additional limitations and requirements before the blended products could be used. So far, the FDA has not relaxed the blending restriction for the 2009 corn crop.

Blenders should be aware of the FDA’s position that the addition of contaminated grain to uncontaminated grain may cause the finished product to be adulterated, in FDA terms. Regardless of the final concentration of the blended grain, FDA may deem the practice a violation. Whether the combination of sources of grain results in adulteration in violation of FDA’s no-blending policy will depend on the purpose for which the grain is being blended. If, for example, two sources of corn containing 200 ppb of aflatoxin are blended for purposes of adjusting the test weight of the first source, and the end user plans to feed the corn to feedlot cattle, no adulteration has occurred, since the action level for that species is 300 ppb. Alternatively, if one source of corn containing 200 ppb of aflatoxin is mixed with corn without aflatoxin for purposes of obtaining a blend lower than 20 ppb action level for use in dairy feed, the resulting feed is adulterated.

The blending of mycotoxin-contaminated grains can be further complicated by the difficulty with which contamination levels are determined. Often, mycotoxins are not evenly distributed throughout a lot or batch of grain or co-products, so accurately determining the starting concentration requires extensive sampling. Insufficient sampling could result in overestimating or underestimating the concentration of the source to be blended. Even with accurate sampling, it is wise to allow for a margin of error.

Questions for the Grain Processing and Biofuels Industries

Though mycotoxins have been the subject of regulation for some time, there are still a lot of unanswered questions, particularly those confronting the ethanol industry. After the removal of starch, mycotoxin concentrations in distillers’ grains may be three times as high as the corn entering an ethanol plant. The FDA has provided little guidance as to how the manufacturing process may impact a party’s ability to blend contaminated grain before it enters a manufacturing facility. Do FDA action levels limit the contamination levels for grain entering into industrial uses, when the co-products will be used in animal feed, or do the action levels apply only once the distiller’s grains have been produced? The answer to that question is not clear at this time.

Customer Expectations

Parties employing the use of blending practices need to be cognizant of their customer’s expectations and the terms of the parties’ agreements. The ultimate use for the grain may dictate the degree to which blending is acceptable, and may require the seller to submit the grain to additional testing and quality control so that customer needs are met without violation of FDA regulations. Sophisticated buyers and sellers of grain understand the economic realities of the marketplace; and may focus on price first and quality later. Therefore, it is important that buyers and sellers alike are aware of the meaning behind the grades specified in their contracts, and are familiar with the applicable limits and tolerances specified.

In the end, there is no doubt that a blending will continue to be a vital part of the grain industry, particularly in challenging crop years like 2009. It is important to employ the practice carefully and responsibly, so that it will continue to be an option down the road.

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