"Great deeds are usually wrought at great risks."
When Herodotus quilled that quote in about 450 B.C., the Greek historian and philosopher likely didn’t have grain marketing on his “risk and reward” train of thought.
But in 2010 A.D., creative risk management can reward growers in their quest for profitability.
However, some risk-management programs, such as accumulator contracts, are “Greek” to many potential grain marketers who don’t have the time or expertise to fully use them.
“I’ve learned to manage some of my corn and bean risk using accumulators and this year I’m looking at about a 40-50¢/bu. premium over the market by having them in place,” says Jayme Ungs, a grower in Boone, IA. “But accumulators are unique and not for everyone. There is risk involved and you really need to understand them before using them.”
He has the accumulators through his local Heartland Co-op elevator. They’re also offered through other elevators using FC Stone as a broker. The accumulator contract allows you to price an equal quantity of commodity bushels weekly above the day’s current futures market.
But if the designated futures price window is breached either below or above the low and high price barriers, the accumulation period ends, unless further action is taken to roll them forward.
Ungs grows 100% corn on corn, with average yields in the 180-bu. range, and some bumping past 200. “We can produce good corn yields here,” he says, “but it takes good marketing to make the most of it.”
For 2010 and 2011, he figured his cost of production at about $300/acre, then finalized marketing plans to protect cash flow, then generate profit. And his marketing tools include accumulators, along with futures and hedge-to-arrive (HTA) contracts with the elevator.
“In an accumulator contract, growers determine how many bushels to price,” says Steve Johnson, Iowa State University Extension farm management specialist. “There is an accumulation period in weeks designated for that specific contract with a start and end date.
“A typical accumulator contract for new-crop corn would be offered in early winter with an accumulation period for the first week of April until September, or a 25-week period. If 5,000 bu. are offered as an example, then each week represents 200 bu. to be priced (5,000/25).
“Each week during this accumulation period, the closing futures price on that specific day of the week will be used to determine how many of the maximum total bushels offered are actually priced.”
Ungs markets about 40% of his corn through accumulators. In a typical accumulator, he set up a contract based off December 2010 corn futures for 10,000 bu., set up for pricing from April through Nov. 26. The price range was $3.50-4.50/bu., with the lower price being the knockout level.
“At the time (spring) December futures were in the $3.70-3.75 range,” Ungs says. “With the accumulator contract, I was able to make weekly sales of $4.50 HTAs. I can make those sales up to the November closing date. But if the market goes below $3.50 before then, the accumulator ends. Any remaining bushels I have unsold must be marketed differently.”
This is where limiting how much you commit to an accumulator contract may be advisable, says Johnson.
“That’s because during the accumulation period, for any week with the designated day of the week the actual Chicago Board of Trade (CBOT) close/settlement is above the accumulator selling price, the number of bushels offered will be doubled at the accumulator selling price,” he says.
“Should actual CBOT futures prices rally, producers could be committing as many as twice the number of bushels that they thought they offered.”
In Ungs’ case, if December futures go above $4.50, then he must double the bushels. “I would owe 20,000 bu. at the $4.50 price,” he says, noting that he feels comfortable if a double-up occurs, since less than 40% of his crop is in accumulators and $4.50 is a profitable price.
Also, to protect against the double-up threat and the loss of higher markets from the increased futures price, he bought $4.20 December call options in early summer. With the higher price, he can capture added futures prices from the calls. The remainder of his 2010 crop is marketed through cash sales and additional HTAs in the $4-4.20 range. “My other marketing is straight cash sales and HTAs sales to spread out marketing risk,” he says.
In the event of a double-up situation, growers can look at rolling the contracts to the next year. ”In theory, if you get doubled-up and didn’t produce all of your crop, you can roll to the next crop year,” Ungs says, adding there will likely be a small per-bushel fee (about 2¢/bu.) to fund the rollover.
“With accumulator contracts, I know I am making a profit. When we entered into the accumulators in early spring, the 40-50¢ over the market at that time was good to me.”
He also had additional 2010 accumulators in place to enable him to market HTAs at $4.70, with the knockout still at $3.50. And when the summer rally saw December 2011 futures hit $4.30+, he set up another accumulator with a floor of $4.08 and ceiling at near $5.10.
“I set up some additional HTAs at over $5,” he says. “In early August, with December 2011 trading at $4.37, you could get an accumulator at $4.98 – a 60¢ premium over futures.”
Ungs is also an ag lender. Some of his corn and soybean customers with sufficient storage have set up accumulator contracts based off the July 2011 futures price at $4.40-4.60. “Some have made accumulator sales near $5.20 December 2011 futures,” he says.
He has 85% crop-revenue protection (CRC) and adequate hail insurance.
To Ungs, that’s a pretty good philosophy; even one Herodotus might appreciate.
“MAKE YOUR MORTGAGE” AND MORE
Accumulator contracts are another way of taking advantage of profitable spikes in the markets, says Steve Johnson, Iowa State University Extension farm management specialist.
He speaks of one grower who jumped at 2011 crop-marketing opportunities. In early spring 2010, the grower priced much of his 2011 corn via an accumulator contract at $4.45 December futures with a knock out of $3.40. “But if he was knocked out, the remainder was priced at $4.05 through put options,” says Johnson.
“The grower said, ‘This pays the mortgage payments, and that was all I wanted. I think we have a potential for a big crop coming and prices could go lower.’”
Accumulators can also benefit country elevators and other grain handlers to justify the cost of offering them, says Johnson. “There are improved efficiencies of grain origination and timeliness of grain delivery through volume purchases and also reduced grain handling and transportation costs .
“It’s a tool to target specific farms that deliver direct to processors, terminals or feedlots and have on-farm storage and truck transportation.”
Investigate whether the double-up aspects of accumulator contracts are right for you.
Late November 2010