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There are trade futures contracts on goods that are inherently heterogeneous, like live cattle, soybeans, or oil.

When one trades a good like gold, all gold is pretty much the same, so all one needs to describe is the purity and the financial impact of variation is minimal. However, cattle for instance may be big or small, they may be different kinds, and based on these as well as other factors the price of an individual animal may differ hugely.

Presumably one can specify in the contract whatever requirements are considered important. But then the futures market would be full of many non-interchangeable contracts, and I am guessing they instead standardize the contracts somehow.

How does this standardization work? Is the contract priced based on the average value of the good, or the worst possible case?

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All futures contracts include a specification of the grade and quality of the commodity/instrument being contracted. For example, for CME futures these specifications are laid out the the CME Rulebook.

In the case of WTI Crude Oil futures, the contract specifies the acceptable sulphur content, gravity, viscosity, "Reid vapour pressure", acceptable levels of impurities, and "pour point". All of these values are determined by the relevant ASTM standards.

Here is a link to the CME rulebook which includes the details for all CME, CBOT, NYMEX, and COMEX contracts. Other exchange owners will provide similar information.

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  • So what happens if someone delivers sub-par goods? Does their inspector check it and refuse to accept, or do they sue/fine later when they realize it?
    – Superbest
    Aug 14, 2016 at 2:21
  • "Live cattle futures" and similar names are slightly misleading, since the delivery criteria are actually based on the weight and quality of the meat after slaughtering. Nobody cares whether you deliver 100 large cows or 150 small ones, so long as they finish up as the right number of pounds of the right quality of beef. The quality standards are set by the US Department of Agriculture for all food products, so they are not specific to futures contracts.
    – alephzero
    Aug 14, 2016 at 2:28
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    @Superbest The warehouse is responsible for assuring that goods in stock are appropriate for delivery. If you took personal delivery, from the warehouse to your own storage facilities, then I assume you would have some legal recourse. Agricultural commodities are often delivered to the big food manufacturers. There may be occasional disputes about quality. I'll see if I can find anything.
    – not-nick
    Aug 14, 2016 at 2:45
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    @alephzero I'm not familiar with the cattle market, but I have done software consultancy for the sugar, cocoa, and coffee brokers. Here, the big food manufacturers often take delivery of contracted futures, just as the big producers often make delivery of their crops. The rule book for cattle futures states : USDA Livestock Acceptance Certificate including pen number, number of head, net weight of cattle, quality grade, estimated average hot yield, and estimated yield grade.
    – not-nick
    Aug 14, 2016 at 2:49
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    @Superbest Further to my comment above, here is a NY Times article which mentions disputes (the article is dated 1983!!! no less) : nytimes.com/1983/03/07/business/…
    – not-nick
    Aug 14, 2016 at 2:53

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