Grading error reduces grower incentives to increase prune quality

Fig. 1. Dried Fruit Association prune grading system. Grading is important to ensure the production ofhlgh-quallty foods, but It Is usually done with error, distorting market signals and diminishing Incentives to produce hlgh-quallty products. Size is the main quality criterion for dried prunes and the crucial characteristic In determining prune value. We studied the economic effects oferrors In commodity grading, focusing In particular on the Implications ofone-way (asymmetric) grading errors, namely when small, lowquality product Is erroneously classified as high quality, but not vice versa. In an application to the California prune Industry, we estimated the extent to which large prunes are undervalued and small prunes are overvalued. We conclude that grading error means thatprunes graded as hlgh-quallty may not really be hlgh-quallty prunes. The presence of these Incorrectly graded prunes depresses the prices that growers are paid for hlgh-quallty prunes and Increases the net returns for small prunes. As a result, growers face reduced Incentives to produce larger prunes. Food demand in the United States is relatively stable. As people's incomes rise, they do not consume more food, but they eat better, higher-quality foods. The quality dimension of the U.S. food industry has become increasingly important, especially in fruit and vegetable markets where California is the dominant producing state. The most successful growers and marketers consistently provide high-quality products to consumers. .Grading of farm commodities is one way to encourage production of highquality products. To improve the incentives to growers of large prunes, the prune industry adopted payments based upon five grades in 1996. Before then, growers received one price for their entire crop, based on the average prune size in the sample. If products of various quality are commingled and receive a common price based on average quality, it discourages growers from adopting the costly production practices necessary to produce the larger fruit that is highly valued in the marketplace. However, if the commodity is graded, price premiums and discounts associated with grades provide incentives for market participants to alter quality in ways that consumers desire. Unfortunately, grading is rarely done perfectly. Grading errors can emerge both because of sampling errors and from imperfect testing. We investigated the one-way grading error caused by imperfect testing, wherein low-quality product can receive a high-quality rating, but the converse cannot occur. This type of asymmetric error is the norm for sizebased grading methods. For example, in systems used to grade or sort fruit, vegetables, nuts or grain by size, the product is conveyed across screens or cylinders with holes of increasing size or via diverging belts or rollers. Small product can fail to fall into the correct category, moving instead to a category intended for larger product, but large product cannot fall through screen holes intended to capture the smaller product. We apply the analysis to the California prune industry, where prunes are graded by size into one of five categories. Figure 1 is a schematic of the grader used for California prunes. As the figure suggests, small prunes may not fall into their designated category and may instead travel into categories reserved for larger prunes, but large prunes cannot fall into categories designated for smaller product. Therefore, a portion of lower-quality prunes receives a higher-quality ranking and a higher price, but the reverse cannot occur. We examined the effect of this grading error on prices that growers receive and on the incentives to adopt cultural practices leading to increased prune size.