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Senior Contributor

Young farmer pondering accumulator contracts

"We entered into a couple accumulator contracts in 2010 for the 2011 crop. They have their upsides but I don't like how they limit your ability to hedge a percentage of your crop.  With the accumulators there is a double up clause which is the number of bushels we have locked in could double if the price is above the contracted price." 

 

That's what one farmer and member of our farmersforthefuture.com social network has to say about the accumulator contracts he's got for last year's and this year's crops. Here's his full post. 

 

What do you think? Is he on to something? Any pointers for him?

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6 Replies
Senior Contributor

Re: Young farmer pondering accumulator contracts

I was just thinking about those accumulator contracts, and what a train wreck they are probably going to be for the 2011 crops. I was thinking of changing the game around if corn is really short come July....tell the end users that I have x amount of bushels they can have in July for $7 but they have to give me the option to sell them x amounts of bushels in October for a similar price.

 

Turnabout is always fair play, right?

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Frequent Contributor

Re: Young farmer pondering accumulator contracts

I have never found any upside to the accumulator contracts, even without the bend over double up clauses. The math is always 100% in favor of the buyer. Anyone can average a lot cheaper on their own just by selling every day.

 

A far better approach is to split the 130 bu/ac into the number of trading days before you want it priced and just sell each day the previous weeks low is broken. (For example, you are willing to start selling 100,000 bushels beginning 12/10/2010 for the 2011 crop but want it priced before April 20th. SO, 20 weeks or 100 trading days, 100,000/100= 1,000 per day)   If the previous weeks low is not broken, just like in a skins game, those bushels just add to the next days sale. And before you say this won't work, look at its performance over the years. This approach simply destroys the averaging method, which I would point out that most marketing services seldom beat anyway. Its returns are dramatically better than an accumulator.

 

It is quite common for the buyer to work with you on issues like this. IF you are worried about the double-up quantity, they could easily modify the contract to the increased bushels right now. This way you would then know your net position and you could react accordingly, which might include buying corn to get less sold. Eleminate the unknown makes everyone think clearer.

 

As to buying puts....you aren't serious are you. If you are, you should wait until the first week of June and then buy in-the-money Sept corn puts. The collapse this year will very likely happen from 6/10 thru 8/15. Options seldom work at market peaks unless you are selling them. Right now with Dec2011 Corn @ 5.80, a 5.50 put is 60 cents. Locking in a 5.50-60= 4.90 floor minus basis isn't really a plan that is working for anyone except the guy in chicago driving his new expedition while writing you the put on his blackberry.  

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Senior Contributor

re: put expense

I was wondering about the cost of puts....so to lock in a price that is already thirty cents under the money, you would have to pay sixty cents right now? That is obscene...who on earth would possibly do that?

 

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iowafarmer31
Visitor

Re: re: put expense

Red,

Thanks for the advice.  I have never messed around with puts / options so I just threw it out there to see what feedback I'd get.  The trading at the previous weeks low makes sense...needless to say this will probably be the last of the accumulator contracts for us.  I will continue to work with our coop to see what we can do as u suggested. 

 

Michael

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Frequent Contributor

Re: re: put expense

Good Luck with the co-op. Be sure you are talking to a decison-maker. The local buyer may have been told "no" to everything, but the actual position trader for them might be more flexible, especially to keep help a young guy learn and build a relationship with a young guy. Not many young farmes in Iowa if you read the press. We have plenty in Indiana from what I've seen, but IA may be different.

 

Great day in the markets today. Just love markets that make the hosts look bad.....ie the post about CORN TECHNICALS BULLISH or some such rubbish,,,, :-)

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Contributor

Re: Young farmer pondering accumulator contracts

I think those Accumulators are great.  You get a premium for your grain, for an offer to sell additional bushels if the premium price is exceeded.  I got $8.00 yesterday for March of 2012. 

     They are like any other contract, if the market goes up they don't look as good later.

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