We are running a week long series on the OTC commodity structure known as the Accumulator. The trade is simple, yet very complex. Understanding the trade, its risks and when to avoid it will be the focus of the five part series.
Part 5. The Bottom Line
Yesterday we covered the basics of what goes into Accumulator pricing. For producers, high prices and high volatility translates to higher accumulation levels and lower proportionate markups – an ideal set-up for the strategy.
Right now, in a lot of the ag commodities, the economics are horrible for producers. Low prices and low volatility mean tiny accumulation levels over the current market and potential double ups at low prices. If you take March corn for example, there might only be a 4.2% improvement in price and to achieve this, you will give up significant edge to the OTC dealer. Low volatility is providing opportunities to hedgers but the Accumulator product is not one of them.
The Accumulator product was introduced to the agricultural market in the late ‘90s. Early adopters typically didn’t understand its risks or how the product would impact their account statement. Through trial and error and some hard lessons, most end users have seen the light. While they understand the Product’s mechanics, it still ends up in customer OTC accounts at inopportune times. The reality of the Accumulator is that it should only be used in specific market environments. Unfortunately, in many cases it is still sold as a tool to improve margins, irrespective of underlying price and volatility.
Tune in for our next series...
Pack Creek Capital constructs and manages hedge portfolios for companies in the grains, softs and energy markets. Contact mbradbury@packcreekcapital.com for more information.
