Quality of Agricultural Products: Rationale, Impact, and Policy Issues of Crop Grading

Grade is one of the key aspects of crop quality. In this article, I summarize basic issues and review some findings from empirical and theoretical research on grading. To begin with, I discuss how to measure quality by comparing three indices: individual attributes, grade, and price. Then I explain why grade is necessary. The underlying rationale is found in market failure caused by information asymmetry. Next, taking the impact of global warming on rice as an example, I demonstrate the importance of grade in farm economy. Empirical evidence indicates that higher temperature decreases farm revenue by deteriorating quality rather than quantity. Finally, I turn to the policy question of how to improve grade. Specifically, I focus on quality payment, which sets different subsidy rates by grades. Theoretical analysis shows that, under plausible assumptions, quality payment improves both grade and yield in a more cost effective manner than other types of payments such as quantity payments, area payments or decoupled payments.