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and the letter .... mm i dont rember or i dont undertood .
sorry for my bad english, is broken .
I think it's deep in either the second or third memory tree, you get an item that changes that letter into a visible number - where anything over 100 is generally going to be an S.
As far as the 'level' of a completed item, I'm not 100% sure what it means but I think that it's the alchemy level of the item. You don't NEED to be that level or higher or make it, but creating the item at an alchemy level less than the item level will dramatically reduce the quality of the finished item.
Quality determines the overall effectiveness of an item. The higher the quality, the higher the damage/healing/defence/etc. of any trait or stat on the item.
A few other things - the letter grade for the item (from E to S) is not what is replaced, the letter grade is always there. What is replaced is the item's quality description, you may notice things like "Fresh" or "High-grade" and such. Once you have created the Eye of Mercury, these descriptions are replaced by the actual quality value of the item.
As for alchemy level, it is pretty much as the previous poster stated, though the effect on quality for being underleveled is not too drastic really. Using high quality ingredients can offset the penalty for being under the item's alchemy level, so if you use high quality items you can still end up with something good. The items will of course be somewhat better if you are of an appropriate level to create them, but they are still usable even if you are too low. There are a few items that are impossible to reach the alchemy level for (max alchemy level is 50) and so they will always suffer a quality penalty, but even these items can be made up to the 999 quality maximum with the right materials.
You might find things like fresh milk or vegetables, and average ores or logs for example. No matter what type of item it is, the letter grades always refer to the same quality range, so your B-grade items or C-grade items are of roughly equal quality even though one might say "Fresh" and while another says "Average".
Until you get the Eye of Mercury, it's best to pay more attention to the letter grade instead of the quality description. Once you have it and you can see the exact quality number, then that is better to look at than the letter grade.
Quick note, though - beast type monsters (especially wolves and monsters like wolves) are much, much harder to fight than everything else on the maps they're found on for what seems like no reason in particular. Take care when fighting these that you only have 1-2 exploration bubbles on your minimap (they're the pale red bubbles along the lower right edge of the minimap) otherwise there's a good chance they'll 1-shot your party members. They're not that scary once you hit 20 and have some better equipment, but up until that point... eugh.
For example, a quick and easy Cole farming method is to go to Waterside Ruins, turn the difficulty up to DESPAIR and farm the Gold Puni spawns there. They're weak, even on Despair, and drop 900 Cole each with on bubble on the map, and significantly more with five. Though, you should remember to turn the difficulty back down afterward, because as mentioned before, the wolves will eat your faces off.
As far as material gathering - you do not have to fight everything you see. My party is level 20 with like 30 adventure points, and even I just walk around the enemies and gather most of the time. But if you get caught by beast type monsters, sometimes it's better to just run away. Puzzlingly it seems that even demon type monsters aren't as difficult as some of the beast type monsters are.
If you're struggling with areas that are the same level as you, I recommend two things;
The first is doing some party member events. Your party members gain very useful passives as you progress through their individual stories. These would be PAs if you have ever played Star Ocean, or Skits if you're ever played a Tales of game.
The second would be synthesizing some good cloth and metals with the most potent ATK stat and +All Stats traits you can on the metal, and at least Steel Defense and a +All Stat trait on the cloth. You shouldn't need to worry about min-maxing until postgame, so these should be sufficient to get you through the main story if you keep them up to date as new weapons and armour become available at the equipment shops.