Rule 704 in the CBOT Rulebook states the following:
Any grain facilities in Chicago, regular for the delivery of grain under the Rules of the Exchange, shall require inbound and outbound inspections as mandated by the U.S. Grain Standards Act and/or the U.S. Warehouse Act.
When grain is delivered in satisfaction of shipping certificates, the holder of the shipping certificates shall be entitled to an official sample lot inspection as defined in the U.S. Grain Standards Act unless otherwise agreed, and the result of such inspection or an appeal therefrom, shall be the settlement grade.
CME Group defines this Rule to mean that regular delivery warehouses may meet their load-out obligations based on “first official grades” or the grade certificate the warehouse receives on the day of loading. In a futures load-out, the regular warehouse is responsible for meeting the quality attributes designated on cancelled shipping certificates and for meeting its minimum daily load-out rate. Typically when loading rail cars, a warehouseman receives initial grades upon loading, and if the grade meets his contractual requirement, he moves to the next car. If the initial grade fails to meet his contractual requirement, the warehousemen will decide whether to request re-inspection and appeal inspection or to simply un-load and re-load the car. Ultimately the warehouseman is responsible for applying rail cars that meet his daily loading requirement and grade certificates meeting contract quality, whether that grade certificate was obtained during the initial inspection or through subsequent re-inspection or appeal inspection, as ordered by the shipper.
Using first official grades to determine good delivery is consistent with trade custom and facilitates the orderly operation of the grain futures markets. Other interpretations of Rule 704 could substantially delay the entire futures delivery process, resulting in additional costs to buyers in the delivery line-up with equipment constructively placed. Using first official grades under Rule 704 precludes any market participant from using the delivery and inspection process to affect either delivery discounts and/or slow the operation of the delivery warehouse.
Regular warehouses meeting their load-out requirements with first official grades does not preclude a buyer’s right to request official inspection services. In the past, we have had buyers request federal appeal grades on their loading orders. This option is typically requested when loading from warehouses that provide state grading certificates when the buyer needs or better trusts federal certificates. Additionally, while first official grades govern for the delivery process, the buyer may still call for re-inspection or appeal, and any benefit (due to improved certificates) or risk (due to degraded certificates) shall be fully realized by the buyer.