Corn+Soybean Digest

Risky accumulator contracts might work for 2014 grain trades

Think Different “I have had good experiences with guaranteed accumulators,” says farm Kurt Lehman, Slater, Iowa. “The best thing about accumulators is that it forces you to make sales when the price is going up… One of my rules has been not to make sales when the price is below crop insurance levels ($5.65 for 2013). But if the price goes down, a lot can be left on the table. “One problem with crop insurance is, we don’t know the crop insurance price until March. Before, we would make a lot of sales six to eight months in advance of planting. It has taken away some of my aggressiveness.”

With corn prices in the doldrums, farmers might revisit accumulator grain contracts or other so-called new generation contracts for 2014. But with their high risk-and-reward nature, beware of getting too many bushels tied up.

“With prices where they are compared to last year, we’ll probably see more accumulators used for 2014,” says Ron Groskreutz, grain originator, Heartland Co-op, headquartered in Des Moines, Iowa (with elevators in more than 60 locations).

“But you don’t want to be oversold. A good rule of thumb still applies; sell one-third before planting, one-third while it’s growing and one-third after harvest.”

Accumulator contracts took off about 10 years ago as part of new generation marketing aimed as helping farmers manage their price risk. But with $7+ corn futures and volumes of volatility, accumulators have been scarce, as farmers didn’t feel the need for any additional premium type contracts.

Kurt Lehman, Slater, Iowa, has used accumulators. He wonders whether they’ll fit into his 2014 corn-marketing program. “With futures at near $4.90 per bushel, if there was an accumulator price offered at $5.40-$5.60, I would sure think about it,” he says. “It depends on what the double-up is and what the knock-out is.”

Double-up and knockout?

Those terms distinguish accumulators from other contracts. They’re designed to enable elevators and other grain handlers to secure large, uniform grain supplies throughout a certain period. And they enable farmers to make orderly sales of small percentages of their crops on a daily or weekly basis.

The accumulator price is usually 50¢ per bushel or more above a set futures price. The knockout price is normally 80¢ or more below the futures price. If the futures price increases to the accumulation price, then the amount of bushels scheduled for marketing that particular day or week is doubled. But if futures drop to the knockout price, the contract stops pricing, and no additional bushels will be priced.

Accumulators allow growers to receive a premium above today’s market value, Groskreutz says. There can be many different types of accumulators. Here’s an example of a typical accumulator with a set pricing period, based on a $4.80 futures price:

  • A farmer agrees to sell 10,000 bushels of corn at a rate of 100 bushels per day for 100 days. Using December 2014 futures at $4.80, the farmer receives an accumulation level of $5.30 with a knockout level set at $3.90.
  • Each pricing day the referenced futures month (December) trades above the knockout price and below the accumulation level, 100 bushels will be priced at the accumulation level ($5.30).
  • If the referenced futures month closes at or above the accumulation level, the number of bushels for that pricing period will be doubled (from 100 to 200 bushels).
  • But, if at any point the futures reference month drops to the knockout price ($3.90), the contract stops pricing, and is turned into a hedge-to-arrive (HTA) contract.  The remaining unpriced bushels will not be priced.

“I have had good experiences with ladder (guaranteed) accumulators,” Lehman says, which provide lower accumulator prices, but no knockout. “The best thing about accumulators is that it forces you to make sales when the price is going up. But I didn’t have any in 2013 because the market was bullish, and option volatility did not provide very good premiums for accumulator contracts.”

He has some early 2014 corn booked through a $5.50 HTA. “I can live with HTAs and I sell most of my corn in HTAs,” he says. “But the co-op might come out with an accumulator that trips my trigger.”

Caution, don’t overbook

Lehman knows not to get too much corn locked into an accumulator. “That’s their curse. You may not know where you are,” he says. “You may have a $5 accumulator and then corn goes to $7. But you don’t know if you can sell more because it may double-up.

“I don’t want to get where I can’t take advantage of a major price swing. With an accumulator, don’t put all your eggs one basket.”

He prefers to limit accumulators to about 20% of his expected production. Groskreutz agrees, noting that because of the potential for the double-up, consider limiting accumulator contracts to 20-30% of potential production.

Ed Usset, University of Minnesota grain marketing specialist, agrees that 20-30% of production is likely the maximum amount that should placed in an accumulator. “If you sign a contract for 20,000 bushels, you have to assume that could become 40,000 bushels if the double-up happens,” he says. “Accumulators require a lot of management. But they enable farmers to have some orderly marketing.”

Jayme Ungs, a Boone, Iowa, ag lender with U.S. Bank, works with growers on marketing and farms himself. He has used accumulators in the past (see http://bit.ly/GM9QQf). “I have some customers looking at accumulators,” he says. “Some are more like minimum-price contracts or floored-averaging contracts. One accumulator has a $5.70 accumulator price and a knockout at $4.65. We’re hoping to price a lot at $5.70.”

He admits accumulators hurt some in 2010 and 2011. “They bit us,” he says, noting that some growers had too much corn in accumulators. “We learned not to be too aggressive.”

Ungs says that with lower corn prices, farmers must reconsider their risk management. “Guys have to get back into the risk-management mode,” he says. “It will be harder to cash-flow in the future if you don’t manage around your breakeven level.”

Lehman bases many sales off Revenue Protection insurance. And sometimes it hurts. “One of my rules has been not to make sales when the price is below crop insurance levels ($5.65 for 2013),” he says. “But if the price goes down, a lot can be left on the table.

“One problem with crop insurance is we don’t know the crop insurance price until March. Before, we would make a lot of sales six to eight months in advance of planting. It has taken away some of my aggressiveness.”

Groskreutz says there are a number of accumulator contracts from which to select. And he encourages farmers to examine what their local or regional elevators have to offer as contracts.

“I am more worried about next year’s crop,” he says. “If we have a good crop, and with South America’s production, next year’s price will probably have a $3 in front of it. Farmers will be looking for a way to get more for their grain. Accumulators may help, if used properly.”

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