What does "middle-grade" mean?

Solution 1:

Middle-Grade refers to the age of the target audience, which are young adults going to middle school, not to the quality of the literary work. For example Wikipedia says (emphasis mine):

The distinctions among children's literature, young adult literature, and adult literature have historically been flexible and loosely defined. This line is often policed by adults who feel strongly about the border. At the lower end of the age spectrum, fiction targeted to readers age 9 to 12 is referred to as middle-grade fiction.

A couple paragraphs later the same article says:

Middle grade novels are typically for the ages of 8–12.

This shows that the boundaries are pretty loosely defined. Something that may be important for this genre is:

Middle grade novels usually feature protagonists under the age of 13, whereas young adult novels usually feature protagonists within the age range of 12–18.

Solution 2:

The term middle-grade fiction. user asks: "Is it a new term?" and the OP asks "when did it come about?"

Interesting question. Here is an Ngram about that source

Note: searching British English finds no instances of this. So it seems this is primarily an American English usage.