It’s your effort that determines your grade. If you put in a lot of work, you’ll get a better grade. The teacher is pointing out that the grade is really determined by you, not him or her. In other words, the teacher is being totally objective.
I think the implication is grades are based on work more than on ability. That is, if you are already knowledgeable in the subject, or if you pick up things quickly, and write good papers without trying, you wouldn’t do as well as if you looked like you were working really hard, even if your hard work did not create an above-average result.
If the teacher considers intelligence and good papers to be earning a good grade, then what I said above doesn’t hold true. It’s hard to imagine a teacher who values work over product, but I suppose they could exist. I know there have been times in my life when I worked very hard and got a bad grade for a bad product. Other times I’ve just coasted on through, doing next to nothing, and still gotten a high grade.
I think it’s kind of like lurve. Sometimes you write a lot of good answers and no one seems to like them. Other times you can do no wrong.