Authored by James Schroeder

I dislike accumulators and believe they are not an appropriate risk management tool for most grain and soybean producers for two main reasons. One reason is transactional, and the other is functional. Before I explain those reasons, let me explain the essence of accumulators.

In the grain and soybean markets, accumulators are complex over-the-counter (OTC) derivative contracts generally made between producers and buyers. The buyer usually offers the producer a premium to the current marketplace that prices ("accumulates") bushels at regular (usually daily) intervals for the contract's life. Almost always, these contracts include a "double-up" clause, where the producer is obligated to deliver twice as many bushels if the market goes above a certain level. Often, accumulators also include a "knock-out" feature to the downside that ends the contract's life if prices fall a certain amount, thus absolving the grain buyer of its obligation to pay the higher price on any remaining unpriced bushels. There are numerous variations possible, but this is the general concept.

In essence, accumulators are an options transaction between the producer and the grain buyer. In the typical scenario, accumulators include a double-up and a knock-out. The producer sells the grain buyer a more-or-less vanilla call option (the double-up) and an American binary put (the knock-out). If I just lost you, you should (on those grounds alone) probably question whether accumulators are a good fit for your operation. In consideration for selling these options, the producer receives a premium price (to the current market) for the grain he sells to the buyer rather than an upfront payment.

Transactionally, I dislike accumulators for the same reason I dislike most complex OTC derivative contracts (including many unsubsidized crop insurance products). Most complex OTC derivatives include a volatility component. Volatility on a given asset class is effectively a commodity itself, and, like other commodities, at any given moment, it has a fair market value. In the complex OTC derivative world, that volatility passes through many hands before it gets to the end user (in this case, the producer). A derivative specialist needs to design the contract. The same specialist, or maybe a different one, must manage the risk. Lawyers must write the contract and be kept on retainer for potential litigation. A team of salespeople must "sell" the contract. Along the way, these people require management, support staff, office space, etc. With so many hands in the cookie jar, it is doubtful that the producer receives anything remotely close to fair market value for the volatility he is selling.

Functionally, I dislike accumulators because they compound rather than mitigate what I see as one of the most challenging aspects of managing price risk in grain and soybean production - price and yield tend to move in opposite directions. This tendency means as prices rise, producers typically have less to sell, and as prices fall, producers usually have more to sell. Another way to think about this tendency is that producers are naturally short gamma. The double-up component of the accumulator leaves the producer obligated to sell more bushels when he likely has fewer bushels to sell, and the knock-out component leaves him with less sold when he likely has more to sell. From a risk management standpoint, this makes accumulators a functionally lousy hedge.

Risk management should be a process of efficiently managing the risks associated with grain and soybean production. In my opinion, accumulators are a poor choice due to their inefficient supply chain and the fact that they compound one of the more challenging aspects of grain production. Ultimately, it is up to each individual producer to choose for himself what types of risk management and marketing tools are the best fit for his operation, but I would all but guarantee you will never see me recommend accumulators to any of my clients.