UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2013. |
OR
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . |
Commission File Number: 001-34765
Teucrium Commodity Trust
(Exact name of registrant as specified in its charter)
| Delaware | 61-1604335 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
232 Hidden Lake Road, Building A
Brattleboro, Vermont 05301
(Address of principal executive offices) (Zip code)
(802) 257-1617
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer x | |
| Non-accelerated filer o | Smaller reporting company o | |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
|
Total Number of Outstanding Shares as of October 31, 2013
| |
| Teucrium Corn Fund | 1,500,004 |
| Teucrium WTI Crude Oil Fund | 50,002 |
| Teucrium Natural Gas Fund | 300,004 |
| Teucrium Sugar Fund | 175,004 |
| Teucrium Soybean Fund | 225,004 |
| Teucrium Wheat Fund | 450,004 |
| Teucrium Agricultural Fund | 50,002 |
TEUCRIUM COMMODITY TRUST
Table of Contents
| 1 |
Index to Financial Statements
| 2 |
| 3 |
TEUCRIUM COMMODITY TRUST
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | |||||||
| Assets | (Unaudited) | |||||||
| Equity in BNY Mellon trading accounts: | ||||||||
| Cash and cash equivalents | $ | 65,937,688 | $ | 52,575,291 | ||||
| Commodity futures contracts | 324,470 | 133,384 | ||||||
| Collateral, due from broker | 10,079,123 | 7,004,263 | ||||||
| Interest receivable | 3,584 | 2,596 | ||||||
| Other assets | 600,739 | 365,076 | ||||||
| Total assets | 76,945,604 | 60,080,610 | ||||||
| Liabilities | ||||||||
| Commodity futures contracts | 5,373,564 | 3,075,587 | ||||||
| Collateral, due to broker | 92,567 | - | ||||||
| Management fee payable to Sponsor | 54,425 | 50,632 | ||||||
| Other liabilities | 125,580 | 56,695 | ||||||
| Total liabilities | 5,646,136 | 3,182,914 | ||||||
| Net assets | $ | 71,299,468 | $ | 56,897,696 | ||||
The accompanying notes are an integral part of these financial statements.
| 4 |
SCHEDULE OF INVESTMENTS
September 30, 2013
(Unaudited)
| Description: Assets | Fair Value | Percentage of Net Assets |
||||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management Plus | $ | 65,937,688 | 92.48 | % | ||||||||
| Notional Amount | ||||||||||||
| Commodity futures contracts | (Long Exposure) | |||||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures (7 contracts, settlement date November 20, 2013) | $ | 88,732 | 0.12 | % | $ | 713,300 | ||||||
| WTI crude oil futures (6 contracts, settlement date May 20, 2014) | 55,800 | 0.08 | 578,640 | |||||||||
| WTI crude oil futures (8 contracts, settlement date November 20, 2014) | 27,840 | 0.04 | 740,320 | |||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT soybean futures (35 contracts, settlement date January 14, 2014) | 50,875 | 0.07 | 2,248,750 | |||||||||
| United States sugar futures contracts | ||||||||||||
| ICE sugar futures (46 contracts, settlement date April 30, 2014) | 16,386 | 0.02 | 930,966 | |||||||||
| ICE sugar futures (40 contracts, settlement date June 30, 2014) | 17,024 | 0.02 | 805,504 | |||||||||
| United States wheat futures contacts | ||||||||||||
| CBOT wheat futures contracts (66 contracts, settlement date May 14, 2014) | 67,813 | 0.10 | 2,276,175 | |||||||||
| Total commodity futures contracts | $ | 324,470 | 0.45 | % | $ | 8,293,655 | ||||||
| Description: Liabilities | Fair Value | Percentage of Net Assets |
Notional Amount (Long Exposure) |
|||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures (759 contracts, settlement date March 14, 2014) | $ | 2,014,900 | 2.83 | % | $ | 17,248,275 | ||||||
| CBOT corn futures (639 contracts, settlement date May 14, 2014) | 872,050 | 1.22 | 14,768,888 | |||||||||
| CBOT corn futures (719 contracts, settlement date December 12, 2014) | 1,755,375 | 2.46 | 17,291,950 | |||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures (21 contracts, settlement date February 26, 2014) | 33,460 | 0.05 | 800,100 | |||||||||
| NYMEX natural gas futures (22 contracts, settlement date March 27, 2014) | 37,440 | 0.05 | 827,420 | |||||||||
| NYMEX natural gas futures (21 contracts, settlement date September 26, 2014) | 15,320 | 0.02 | 813,330 | |||||||||
| NYMEX natural gas futures (21 contracts, settlement date October 29, 2014) | 7,810 | 0.01 | 828,240 | |||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT soybean futures (30 contracts, settlement date March 14, 2014) | 141,900 | 0.20 | 1,900,500 | |||||||||
| CBOT soybean futures (39 contracts, settlement date November 14, 2014) | 165,413 | 0.23 | 2,252,250 | |||||||||
| United States sugar futures contracts | ||||||||||||
| ICE sugar futures (44 contracts, settlement date February 27, 2015) | 34,933 | 0.05 | 925,478 | |||||||||
| United States wheat futures contracts | ||||||||||||
| CBOT wheat futures contracts (77 contracts, settlement date March 14, 2014) | 41,063 | 0.06 | 2,644,950 | |||||||||
| CBOT wheat futures contracts (76 contracts, settlement date December 12, 2014) | 253,900 | 0.36 | 2,621,050 | |||||||||
| Total commodity futures contracts | $ | 5,373,564 | 7.54 | % | $ | 62,922,431 | ||||||
| Exchange-traded funds | Shares | |||||||||||
| Teucrium Corn Fund | $ | 503,639 | 0.71 | % | 15,058 | |||||||
| Teucrium Soybean Fund | 489,072 | 0.69 | 21,031 | |||||||||
| Teucrium Wheat Fund | 518,037 | 0.73 | 30,937 | |||||||||
| Teucrium Sugar Fund | 518,391 | 0.73 | 34,074 | |||||||||
| Total exchange-traded funds (cost $2,599,403) owned by Teucrium Agricultural Fund | $ | 2,029,139 | 2.86 | % | ||||||||
The accompanying notes are an integral part of these financial statements.
| 5 |
TEUCRIUM COMMODITY TRUST
SCHEDULE OF INVESTMENTS
December 31, 2012
| Percentage of | Principal | |||||||||||
| Description: Assets | Fair Value | Net Assets | Amount | |||||||||
| Cash equivalents | ||||||||||||
| United States Treasury obligations | ||||||||||||
| U.S. Treasury bills, 0.090%, due January 17, 2013 | $ | 9,999,930 | 17.58 | % | $ | 10,000,000 | ||||||
| U.S. Treasury bills, 0.090%, due February 14, 2013 | 9,999,670 | 17.57 | 10,000,000 | |||||||||
| Total U.S. Treasury obligations | 19,999,600 | 35.15 | ||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management Plus | 32,575,691 | 57.25 | ||||||||||
| Total cash equivalents | $ | 52,575,291 | 92.40 | % | ||||||||
| Notional Amount | ||||||||||||
| (Long Exposure) | ||||||||||||
| Commodity futures contracts | ||||||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures (32 contracts, settlement date September 26, 2013) | $ | 9,550 | 0.02 | % | $ | 1,161,600 | ||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures (6 contracts, settlement date November 20, 2013) | 24,312 | 0.04 | 560,220 | |||||||||
| WTI crude oil futures (8 contracts, settlement date November 20, 2014) | 20,560 | 0.04 | 733,040 | |||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT soybean futures (28 contracts, settlement date May 14, 2013) | 40,775 | 0.07 | 1,958,950 | |||||||||
| CBOT soybean futures (36 contracts, settlement date November 14, 2013) | 22,425 | 0.04 | 2,344,950 | |||||||||
| United States wheat futures contracts | ||||||||||||
| CBOT wheat futures (32 contracts, settlement date December 13, 2013) | 15,762 | 0.03 | 1,313,200 | |||||||||
| Total commodity futures contracts | $ | 133,384 | 0.24 | % | $ | 8,071,960 | ||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures (377 contracts, settlement date May 14, 2013) | $ | 1,341,775 | 2.36 | % | $ | 13,199,712 | ||||||
| CBOT corn futures (325 contracts, settlement date July 12, 2013) | 413,700 | 0.73 | 11,330,313 | |||||||||
| CBOT corn futures (440 contracts, settlement date December 13, 2013) | 458,300 | 0.81 | 13,194,500 | |||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures (34 contracts, settlement date February 26, 2013) | 103,412 | 0.18 | 1,144,100 | |||||||||
| NYMEX natural gas futures (34 contracts, settlement date March 26, 2013) | 61,967 | 0.11 | 1,157,020 | |||||||||
| NYMEX natural gas futures (31 contracts, settlement date October 29, 2013) | 68,540 | 0.12 | 1,160,950 | |||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures (8 contracts, settlement date May 21, 2013) | 58,090 | 0.10 | 747,920 | |||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT soybean futures (33 contracts, settlement date March 14, 2013) | 284,575 | 0.50 | 2,325,675 | |||||||||
| United States sugar futures contracts | ||||||||||||
| ICE sugar futures (35 contracts, settlement date April 30, 2013) | 38,629 | 0.07 | 768,320 | |||||||||
| ICE sugar futures (30 contracts, settlement date June 28, 2013) | 11,189 | 0.02 | 663,264 | |||||||||
| ICE sugar futures (34 contracts, settlement date February 28, 2014) | 28,560 | 0.05 | 783,686 | |||||||||
| United States wheat futures contracts | ||||||||||||
| CBOT wheat futures (33 contracts, settlement date May 14, 2013) | 166,925 | 0.29 | 1,299,787 | |||||||||
| CBOT wheat futures (28 contracts, settlement date July 12, 2013) | 39,925 | 0.07 | 1,111,250 | |||||||||
| Total commodity futures contracts | $ | 3,075,587 | 5.41 | % | $ | 48,886,497 | ||||||
| Shares | ||||||||||||
| Exchange-traded funds | ||||||||||||
| Teucrium Corn Fund | $ | 596,685 | 1.05 | % | 13,458 | |||||||
| Teucrium Soybean Fund | 603,422 | 1.06 | 25,006 | |||||||||
| Teucrium Sugar Fund | 628,110 | 1.10 | 35,274 | |||||||||
| Teucrium Wheat Fund | 597,970 | 1.05 | 28,137 | |||||||||
| Total exchange-traded funds (cost $2,679,379) owned by Teucrium Agricultural Fund | $ | 2,426,187 | 4.26 | % | ||||||||
The accompanying notes are an integral part of these financial statements.
| 6 |
TEUCRIUM COMMODITY TRUST
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | ||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | ||||||||||||
| Income | |||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | |||||||||||||||
| Realized (loss) gain on commodity futures contracts | $ | (4,229,448 | ) | $ | 17,680,107 | $ | (9,312,668 | ) | $ | 11,781,196 | |||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (1,167,783 | ) | (3,737,364 | ) |
(2,106,891 |
) |
1,793,551 |
||||||||
| Realized gain on securities | 70 | - | 70 | - | |||||||||||
| Interest income | 6,881 | 25,096 | 23,703 | 53,101 | |||||||||||
| Total (loss) income | (5,390,280 | ) | 13,967,839 | (11,395,786 | ) | 13,627,848 | |||||||||
| Expenses | |||||||||||||||
| Management fees | 155,359 | 267,296 | 431,677 | 644,954 | |||||||||||
| Professional fees | 365,449 | (107,429 | ) | 694,596 | 506,490 | ||||||||||
| Distribution and marketing fees | 414,233 | 751,082 | 1,250,016 | 1,712,641 | |||||||||||
| Custodian fees and expenses | 36,256 | 42,082 | 107,800 | 367,816 | |||||||||||
| Business permits and licenses fees | 40,875 | 30,850 | 92,364 | 47,323 | |||||||||||
| General and administrative expenses | 74,807 | 127,799 | 153,278 | 270,888 | |||||||||||
| Brokerage commissions | 16,810 | 25,674 | 66,165 | 51,333 | |||||||||||
| Other expenses | 15,254 | 29,931 | 44,432 | 72,085 | |||||||||||
| Total expenses | 1,119,043 | 1,167,285 | 2,840,328 | 3,673,530 | |||||||||||
| Net (loss) income | $ | (6,509,323 | ) | $ | 12,800,554 | $ | (14,236,114 | ) | $ | 9,954,318 | |||||
The accompanying notes are an integral part of these financial statements.
| 7 |
TEUCRIUM COMMODITY TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Operations | ||||||||
| Net (loss) income | $ | (14,236,114 | ) | $ | 9,954,318 | |||
| Capital transactions | ||||||||
| Issuance of Shares | 61,512,730 | 93,826,552 | ||||||
| Change in cost of shares of the Underlying Funds acquired by Teucrium Agricultural Fund | 79,976 | (2,682,915 | ) | |||||
| Realized loss on shares of the Underlying Funds sold by Teucrium Agricultural Fund excluded from net (loss) income | (68,970 | ) | (615,762 | ) | ||||
| Redemption of Shares | (32,885,850 | ) | (104,847,665 | ) | ||||
| Total capital transactions | 28,637,886 | (14,319,790 | ) | |||||
| Net change in net assets | 14,401,772 | (4,365,472 | ) | |||||
| Net assets, beginning of period | 56,897,696 | 83,823,568 | ||||||
| Net assets, end of period | $ | 71,299,468 | $ | 79,458,096 | ||||
The accompanying notes are an integral part of these financial statements.
| 8 |
TEUCRIUM COMMODITY TRUST
(Unaudited)
| Nine months ended | Nine months ended | ||||||||||
| September 30, 2013 | September 30, 2012 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | (14,236,114 | ) | $ | 9,954,318 | ||||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 2,106,891 | (1,793,551 | ) | ||||||||
| Realized loss on shares of the Underlying Funds sold by Teucrium Agricultural | |||||||||||
| Fund excluded from net (loss) income | (68,970 | ) | (615,762 | ) | |||||||
| Changes in operating assets and liabilities: | |||||||||||
| Net purchases and sales of Underlying Funds acquired by Teucrium Agricultural Fund | 79,976 | (2,682,915 | ) | ||||||||
| Collateral, due from broker | (3,074,860 | ) | (1,073,116 | ) | |||||||
| Receivable for investments sold | - | (25,882 | ) | ||||||||
| Interest receivable | (988 | ) | (2,026 | ) | |||||||
| Other assets | (235,663 | ) | (221,825 | ) | |||||||
| Collateral, due to broker | 92,567 | - | |||||||||
| Management fee payable to Sponsor | 3,793 | 5,018 | |||||||||
| Payable for investments purchased | - | 16,178 | |||||||||
| Other liabilities | 68,885 | 56,074 | |||||||||
| Net cash (used in) provided by operating activities | (15,264,483 | ) | 3,616,511 | ||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from sale of Shares | 61,512,730 | 93,826,552 | |||||||||
| Redemption of Shares, net of change in payable for shares redeemed | (32,885,850 | ) | (99,872,805 | ) | |||||||
| Net cash provided by (used in) financing activities | 28,626,880 | (6,046,253 | ) | ||||||||
| Net change in cash and cash equivalents | 13,362,397 | (2,429,742 | ) | ||||||||
| Cash and cash equivalents, beginning of period | 52,575,291 | 80,567,901 | |||||||||
| Cash and cash equivalents, end of period | $ | 65,937,688 | $ | 78,138,159 | |||||||
The accompanying notes are an integral part of these financial statements.
| 9 |
September 30, 2013
(Unaudited)
Note 1 – Organization and Operation
Teucrium Commodity Trust (“Trust”), a Delaware statutory trust organized on September 11, 2009, is a series trust consisting of seven series: Teucrium Corn Fund (“CORN”), Teucrium WTI Crude Oil Fund (“CRUD”), Teucrium Natural Gas Fund (“NAGS”), Teucrium Sugar Fund (“CANE”), Teucrium Soybean Fund (“SOYB”), Teucrium Wheat Fund (“WEAT”), and Teucrium Agricultural Fund (“TAGS”). All these series of the Trust are collectively referred to as the “Funds” and singularly as the “Fund.” The Funds issue common units, called the “Shares,” representing fractional undivided beneficial interests in a Fund. The Trust and the Funds operate pursuant to the Trust’s Second Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”).
On June 5, 2010, the initial Form S-1 for CORN was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On June 8, 2010, four Creation Baskets for CORN were issued representing 200,000 shares and $5,000,000. CORN began trading on the New York Stock Exchange (“NYSE”) Arca on June 9, 2010.
On October 22, 2010, the initial Forms S-1 for NAGS and CRUD were declared effective by the SEC. On January 31, 2011, four Creation Baskets for NAGS were issued representing 200,000 shares and $5,000,000. NAGS began trading on the NYSE Arca on February 1, 2011. On February 22, 2011, four Creation Baskets for CRUD were issued representing 100,000 shares and $5,000,000. CRUD began trading on the NYSE Arca on February 23, 2011.
On June 17, 2011, the Forms S-1 for CANE, SOYB, and WEAT were declared effective by the SEC. On September 16, 2011, two Creation Baskets were issued for each Fund, representing 100,000 shares and $2,500,000, for CANE, SOYB, and WEAT. On September 19, 2011, CANE, SOYB, and WEAT started trading on the NYSE Arca.
On February 10, 2012, the Form S-1 for TAGS was declared effective by the SEC. On March 27, 2012, six Creation Baskets for TAGS were issued representing 300,000 shares and $15,000,000. TAGS began trading on the NYSE Arca on March 28, 2012.
The specific investment objective of each Fund and information regarding the organization and operation of each Fund are included in each Fund’s financial statements and accompanying notes, as well as in other sections of this Form 10-Q filing. In general, the investment objective of each Fund is to have the daily changes in percentage terms of its Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for certain Futures Contracts for the commodity specified for that Fund. The investment objective of the TAGS is to have the daily changes in percentage terms of NAV of its common units (“Shares”) reflect the daily changes in percentage terms of a weighted average (the “Underlying Fund Average”) of the NAVs per share of four other commodity pools that are series of the Trust and are sponsored by the Sponsor: CORN, WEAT, SOYB, and CANE (collectively, the “Underlying Funds”). The Underlying Fund Average will have a weighting of 25% to each Underlying Fund, and the Fund’s assets will be rebalanced to maintain the approximate 25% allocation to each Underlying Fund.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Trust’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification and include the accounts of the Trust, CORN, NAGS, CRUD, CANE, SOYB, WEAT and TAGS. For the periods represented by the financial statements herein the operations of the Trust contain the results of CORN, NAGS, CRUD, SOYB, CANE, WEAT, and TAGS (except as discussed in the Shares of the Underlying Funds Held by the Teucrium Agricultural Fund (TAGS) section) for the months during which each Fund was in operation.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial
| 10 |
statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Funds earn interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Funds earn interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
For tax purposes, the Funds will be treated as partnerships. Therefore, the Funds do not record a provision for income taxes because the partners report their share of a Fund’s income or loss on their income tax returns. The financial statements reflect the Funds’ transactions without adjustment, if any, required for income tax purposes.
The Funds are required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Funds file income tax returns in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Funds are subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Funds recording a tax liability that reduces net assets. Based on their analysis, the Funds have determined that they have not incurred any liability for unrecognized tax benefits as of September 30, 2013 and December 31, 2012. However, the Funds’ conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Funds recognize interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Funds may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Funds’ management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets from each Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from each Fund only in blocks of shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
Each Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the statements of assets and liabilities as payable for shares redeemed.
There are a minimum number of baskets and associated shares specified for each Fund in the respective most recent Form S-1 registration statements, amendments or supplements. Once the minimum number of baskets is reached, there can be no more redemptions until there has been a creation basket. These minimum levels are as follows:
CORN: 50,000 shares representing 2 baskets
NAGS: 100,000 shares representing 2 baskets
CRUD: 50,000 shares representing 2 baskets (at minimum as of September 30, 2013 and December 31, 2012)
SOYB: 50,000 shares representing 2 baskets
CANE: 50,000 shares representing 2 baskets
WEAT: 50,000 shares representing 2 baskets
TAGS: 50,000 shares representing 2 baskets (at minimum as of September 30, 2013 and December 31, 2012)
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Trust reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Trust has a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Trust had a balance of $65,937,688 and $32,575,691 in money market funds at September 30, 2013
| 11 |
and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities. The Trust also had investments in United States Treasury Bills with a maturity of three months or less with a fair value of $19,999,600 on December 31, 2012.
Collateral, Due from/to Broker
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Funds’ clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Funds’ trading, the Funds (and not their shareholders personally) are subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated, and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Due from/to Broker for Securities Transactions
Due from/to broker for investments in securities are securities transactions pending settlement. The Trust and the Funds are subject to credit risk to the extent any broker with whom it conducts business is unable to fulfill contractual obligations on its behalf. The management of the Trust and the Funds monitors the financial condition of such brokers and does not anticipate any losses from these counterparties. Since the inception of the Fund, the principal broker through which the Trust and TAGS clear securities transactions for TAGS is the Bank of New York Mellon Capital Markets.
Shares of the Underlying Funds Held by the Teucrium Agricultural Fund (TAGS)
Given the investment objective of TAGS as described in Note 1, TAGS will buy, sell and hold as part of its normal operations shares of the four Underlying Funds. The Trust excludes the shares of the other series of the Trust owned by the Teucrium Agricultural Fund from its statements of assets and liabilities. The Trust excludes the net change in unrealized appreciation or depreciation on securities owned by the Teucrium Agricultural Fund from its statements of operations. Upon the sale of the Underlying Funds by the Teucrium Agricultural Fund, the Trust includes any realized gain or loss in its statements of changes in net assets.
Sponsor Fee and Allocation of Expenses
The Sponsor is responsible for investing the assets of the Funds in accordance with the objectives and policies of each Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Trust and the Funds. For the performance of this service, the Funds, except for TAGS which has no such fee, are contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum.
The Funds pay for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares, after its initial registration, and all legal, accounting, printing and other expenses associated therewith. The Funds also pay the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds are allocated by the Sponsor to the respective funds based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses for the Funds are calculated on the prior day’s net assets.
| 12 |
The Sponsor can elect to waive certain fees or expenses that would generally be paid for by each Fund. As of December 31, 2012, there were approximately $560,000 of expenses recorded on the financial statements of the Sponsor which are subject to reimbursement by the Funds in 2013. Through the nine months ended September 30, 2013, the Sponsor sought approximately $390,000 in reimbursement from CORN, SOYB and WEAT for these expenses, with approximately $174,000 in the quarter ended September 30, 2013. These Funds have not recorded the remaining $170,000 of expenses subject to reimbursement to the Sponsor as payment is not probable at September 30, 2013.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Trust uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Trust. Unobservable inputs reflect the Trust’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Trust and the Funds in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Trust’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Trust uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. For instance, when Corn Futures Contracts on the Chicago Board of Trade (“CBOT”) are not actively trading due to a “limit-up” or ‘limit-down” condition, meaning that the change in the Corn Futures Contracts has exceeded the limits established, the Trust and the Fund will revert to alternative verifiable sources of valuation of its assets. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2013 and December 31, 2012, in the opinion of the Trust, the reported value at the close of the market for each commodity contract fairly reflected the value of the futures and no alternative valuations were required.
The Wheat Futures Contracts traded on the CBOT due to settle on December 12, 2014 (the "DEC14 Wheat Contracts") did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT for portions of the three months ended September 30, 2013. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of September 30, 2013. The DEC14 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on September 30, 2013. In addition, for the three months ended June 30, 2013, the Wheat Futures Contracts traded on the CBOT due to settle on December 12, 2014 did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT for portions of the three months ended June 30, 2013. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of June 30, 2013. The DEC14 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on June 30, 2013.
For the period ended June 30, 2013, the Sugar Futures Contracts traded on ICE due to settle on February 27, 2015 (the “MAR15 ICE Sugar Contracts”) did not, in the opinion of the Trust and CANE, trade in an actively traded futures market as defined in the policy of the Trust and CANE for the entire period during which they were held. Accordingly, the Trust and CANE have classified these as a Level 2 liability. The MAR15 ICE Sugar Contracts were, in the opinion of the Trust and CANE, fairly valued at settlement on June 30, 2013. These transferred back to a Level 1 liability for the quarter ended September 30, 2013.
On March 31, 2013, the Corn Futures Contracts traded on the CBOT due to settle on July 12, 2013 (the “JUL13 Corn Contracts”) were in a “limit down” condition and, in the opinion of the Trust and CORN, the reported value at the close of market on that day did not fairly value the JUL13 Corn Contracts held by CORN. Therefore, the Trust and CORN used alternative verifiable sources to value the JUL13 Corn Contracts on March 31, 2013 and the financial statements of the Trust and the Fund have been adjusted accordingly. This adjustment resulted in a ($410,475) decrease in the unrealized change in commodity futures contracted for the Trust and CORN in excess of reported CBOT values, for the quarter-ended March 31, 2013.
| 13 |
For the period ended March 31, 2013, Soybean Futures Contracts traded on the CBOT due to settle on November 14, 2014 (the “NOV14 Soybean Contracts”) did not, in the opinion of the Trust and SOYB, trade in an actively traded futures market as defined in the policy of the Trust and SOYB for the entire period during which they were held. Accordingly, the Trust and SOYB classified these as a Level 2 liability. The NOV14 Soybean Contracts were, in the opinion of the Trust and SOYB, fairly valued at settlement on March 31, 2013. These transferred back to a Level 1 liability for the quarter ended June 30, 2013.
The Funds and the Trust record their derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the New York Mercantile Exchange (“NYMEX”), or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts), which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Investments in the securities of the Underlying Funds are freely tradable and listed on the NYSE Arca. These investments are valued at the NAV of the Underlying Fund as of the valuation date as calculated by the administrator based on the exchange-quoted prices of the commodity futures contracts held by the Underlying Fund.
New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Trust or the Funds.
Note 3 – Fair Value Measurements
The Trust’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Trust’s significant accounting policies in Note 2. The following table presents information about the Trust’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
| 14 |
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Cash equivalents | $ | 65,937,688 | $ | - | $ | - | $ | 65,937,688 | ||||
| Commodity futures contracts | ||||||||||||
| WTI crude oil futures contracts | 172,372 | - | - | 172,372 | ||||||||
| Soybean futures contracts | 50,875 | - | - | 50,875 | ||||||||
| Sugar futures contracts | 33,410 | - | - | 33,410 | ||||||||
| Wheat futures contracts | 67,813 | - | - | 67,813 | ||||||||
| Total | $ | 66,262,158 | $ | - | $ | - | $ | 66,262,158 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Commodity futures contracts | ||||||||||||
| Corn futures contracts | $ | 4,642,325 | $ | - | $ | - | $ | 4,642,325 | ||||
| Natural gas futures contracts | 94,030 | - | - | 94,030 | ||||||||
| Soybean futures contracts | 307,313 | - | - | 307,313 | ||||||||
| Sugar futures contracts | 34,933 | - | - | 34,933 | ||||||||
| Wheat futures contracts | 41,063 | 253,900 | - | 294,963 | ||||||||
| Total | $ | 5,119,664 | $ | 253,900 | $ | - | $ | 5,373,564 | ||||
| December 31, 2012 | ||||||||||||
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Cash equivalents | $ | 52,575,291 | $ | - | $ | - | $ | 52,575,291 | ||||
| Commodity futures contracts | ||||||||||||
| Natural gas futures contracts | 9,550 | - | - | 9,550 | ||||||||
| WTI crude oil futures contracts | 44,872 | - | - | 44,872 | ||||||||
| Soybean futures contracts | 63,200 | - | - | 63,200 | ||||||||
| Wheat futures contracts | 15,762 | - | - | 15,762 | ||||||||
| Total | $ | 52,708,675 | $ | - | $ | - | $ | 52,708,675 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Commodity futures contracts | ||||||||||||
| Corn futures contracts | $ | 2,213,775 | $ | - | $ | - | $ | 2,213,775 | ||||
| Natural gas futures contracts | 233,919 | - | - | 233,919 | ||||||||
| WTI crude oil futures contracts | 58,090 | - | - | 58,090 | ||||||||
| Soybean futures contracts | 284,575 | - | - | 284,575 | ||||||||
| Sugar futures contracts | 78,378 | - | - | 78,378 | ||||||||
| Wheat futures contracts | 206,850 | - | - | 206,850 | ||||||||
| Total | $ | 3,075,587 | $ | - | $ | - | $ | 3,075,587 | ||||
Transfers into and out of each level of the fair value hierarchy for the JUL13 Corn Contracts, NOV14 Soybean Contracts, FEB15 Sugar Contracts, and the DEC14 Wheat Contracts, for the nine months ended September 30, 2013 were as follows:
| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Liabilities (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Corn future contracts | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | - | $ | - | ||||||||||||
| Soybean future contracts | 6,850 | 6,850 | 6,850 | 6,850 | - | - | ||||||||||||||||||
| Sugar future contracts | 62,082 | 62,082 | 62,082 | 62,082 | - | - | ||||||||||||||||||
| Wheat future contracts | 194,225 | 448,125 | 448,125 | 194,225 | - | - | ||||||||||||||||||
| Total | $ | 1,274,119 | $ | 1,528,019 | $ | 1,528,019 | $ | 1,274,119 | $ | $ | ||||||||||||||
There were no transfers into and out of each level of the fair value hierarchy for the Trust or the Funds for the nine months ended September 30, 2012.
Note 4 – Derivative Instruments and Hedging Activities
In the normal course of business, the Funds utilize derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Funds’ derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Funds are also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the nine months ended September 30, 2013, the Funds invested only in commodity futures contracts specifically related to each Fund. For the nine months ended September 30, 2012, the Funds invested only in commodity futures contracts and Cleared Swaps. Cleared Swaps have standardized terms similar to, and are priced by reference to, a corresponding Benchmark Component Futures Contract. Additionally, Other Commodity Interests that do not have standardized terms and are not exchange-traded, referred to as “over-the-counter” Interests, can generally be structured as the parties to the Commodity Interest contract desire. Therefore, each Fund might
| 15 |
enter into multiple Cleared Swaps and/or over-the-counter Interests intended to exactly replicate the performance of each of the Benchmark Component Futures Contracts for the Fund, or a single over-the-counter Interest designed to replicate the performance of the Benchmark as a whole. Assuming that there is no default by a counterparty to an over-the-counter Interest, the performance of the Interest will not necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract.
Futures Contracts
The Funds are subject to commodity price risk in the normal course of pursuing their investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by each Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by each Fund. Futures contracts may reduce the Funds’ exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to each Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2011-11 "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" and subsequently clarified in FASB ASU 2013-01 "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities."
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk as of September 30, 2013 and December 31, 2012.
Offsetting of Financial Assets and Derivative Assets as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| WTI crude oil futures contracts | $ | 172,372 | $ | - | $ | 172,372 | $ | - | $ | 92,567 | $ | 79,805 | ||||||||||||
| Soybean futures contracts | 50,875 | - | 50,875 | 50,875 | - | - | ||||||||||||||||||
| Sugar futures contracts | 33,410 | - | 33,410 | 33,410 | - | - | ||||||||||||||||||
| Wheat futures contracts | 67,813 | - | 67,813 | 67,813 | - | - | ||||||||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Corn futures contracts | $ | 4,642,325 | $ | - | $ | 4,642,325 | $ | - | $ | 4,642,325 | $ | - | ||||||||||||
| Natural gas futures contracts | 94,030 | - | 94,030 | - | 94,030 | - | ||||||||||||||||||
| Soybean futures contracts | 307,313 | - | 307,313 | 50,875 | 256,438 | - | ||||||||||||||||||
| Sugar futures contracts | 34,933 | - | 34,933 | 33,410 | 1,523 | - | ||||||||||||||||||
| Wheat futures contracts | 294,963 | - | 294,963 | 67,813 | 227,150 | - | ||||||||||||||||||
| 16 |
Offsetting of Financial Assets and Derivative Assets as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Natural gas futures contracts | $ | 9,550 | $ | - | $ | 9,550 | $ | 9,550 | $ | - | $ | - | ||||||||||||
| WTI crude oil futures contracts | 44,872 | - | 44,872 | 44,872 | - | - | ||||||||||||||||||
| Soybean futures contracts | 63,200 | - | 63,200 | 63,200 | - | - | ||||||||||||||||||
| Wheat futures contracts | 15,762 | - | 15,762 | 15,762 | - | - | ||||||||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Corn futures contracts | $ | 2,213,775 | $ | - | $ | 2,213,775 | $ | - | $ | 2,213,775 | $ | - | ||||||||||||
| Natural gas futures contracts | 233,919 | - | 233,919 | 9,550 | 224,369 | - | ||||||||||||||||||
| WTI crude oil futures contracts | 58,090 | - | 58,090 | 44,872 | 13,218 | - | ||||||||||||||||||
| Soybean futures contracts | 284,575 | - | 284,575 | 63,200 | 221,375 | - | ||||||||||||||||||
| Sugar futures contracts | 78,378 | - | 78,378 | - | 78,378 | - | ||||||||||||||||||
| Wheat futures contracts | 206,850 | - | 206,850 | 15,762 | 191,088 | - | ||||||||||||||||||
The following is a summary of realized and unrealized gains (losses) of the derivative instruments utilized by the Trust:
Three months ended September 30, 2013
| Realized (Loss) Gain on | Net Change in Unrealized (Loss) | |||||||
| Primary Underlying Risk | Derivative Instruments | Gain on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Corn futures contracts | $ | (3,670,163 | ) | $ | (1,818,600 | ) | ||
| Natural gas futures contracts | (125,490 | ) | 65,830 | |||||
| WTI crude oil futures contracts | 9,380 | 117,800 | ||||||
| Soybean futures contracts | 183,763 | (188,626 | ) | |||||
| Sugar futures contracts | (113,288 | ) | 174,888 | |||||
| Wheat futures contracts | (513,650 | ) | 480,925 | |||||
| Total commodity futures contracts | $ | (4,229,448 | ) | $ | (1,167,783 | ) | ||
Three months ended September 30, 2012
| Realized Gain (Loss) on | Net Change in Unrealized (Loss) | |||||||
| Primary Underlying Risk | Derivative Instruments | Gain on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Corn futures contracts | $ | 16,718,359 | $ | (3,740,286 | ) | |||
| Natural gas futures contracts | (263,121 | ) | 502,151 | |||||
| WTI crude oil futures contracts | - | 119,260 | ||||||
| Soybean futures contracts | 719,250 | (405,038 | ) | |||||
| Sugar futures contracts | (80,068 | ) | 661 | |||||
| Wheat futures contracts | 585,687 | (214,112 | ) | |||||
| Total commodity futures contracts | $ | 17,680,107 | $ | (3,737,364 | ) | |||
| 17 |
Nine months ended September 30, 2013
| Realized (Loss) Gain on | Net Change in Unrealized (Loss) | |||||||
| Primary Underlying Risk | Derivative Instruments | Gain on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Corn futures contracts | $ | (7,350,776 | ) | $ | (2,428,550 | ) | ||
| Natural gas futures contracts | (224,549 | ) | 130,339 | |||||
| WTI crude oil futures contracts | (77,750 | ) | 185,590 | |||||
| Soybean futures contracts | 8,838 | (35,063 | ) | |||||
| Sugar futures contracts | (398,406 | ) | 76,855 | |||||
| Wheat futures contracts | (1,270,025 | ) | (36,062 | ) | ||||
| Total commodity futures contracts | $ | (9,312,668 | ) | $ | (2,106,891 | ) | ||
Nine months ended September 30, 2012
| Realized Gain (Loss) on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | (Loss) on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Corn futures contracts | $ | 12,326,540 | $ | 978,790 | ||||
| Natural gas futures contracts | (831,009 | ) | 832,228 | |||||
| WTI crude oil futures contracts | 43,347 | (167,247 | ) | |||||
| Soybean futures contracts | 797,231 | (102,331 | ) | |||||
| Sugar futures contracts | (676,378 | ) | 77,875 | |||||
| Wheat futures contracts | 121,465 | 174,236 | ||||||
| Total commodity futures contracts | $ | 11,781,196 | $ | 1,793,551 | ||||
Volume of Derivative Activities
The notional amounts and number of contracts categorized by primary underlying risk are included in the schedule of investments as of September 30, 2013 and December 31, 2012.
Note 5 - Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the shares, including applicable SEC registration fees, were borne directly by the Sponsor for the Funds and will be borne directly by the Sponsor for any series of the Trust which is not yet operating or will be issued in the future. The Trust will not be obligated to reimburse the Sponsor.
Note 6 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013, the following subsequent events transpired for each of the series of the Trust:
CORN: Nothing to Report
NAGS: Nothing to Report
CRUD: Nothing to Report
SOYB: Nothing to Report
CANE: Nothing to Report
WEAT: Nothing to Report
TAGS: Nothing to Report
| 18 |
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | ||||||||
| Assets | (Unaudited) | ||||||||
| Equity in BNY Mellon trading accounts: | |||||||||
| Cash and cash equivalents | $ | 45,377,263 | $ | 34,631,982 | |||||
| Collateral, due from broker | 8,392,513 | 5,106,775 | |||||||
| Interest receivable | 2,247 | 1,376 | |||||||
| Other assets | 353,022 | 242,407 | |||||||
| Total assets | 54,125,045 | 39,982,540 | |||||||
| Liabilities | |||||||||
| Commodity futures contracts | 4,642,325 | 2,213,775 | |||||||
| Management fee payable to Sponsor | 40,156 | 36,444 | |||||||
| Other liabilities | 108,560 | 45,809 | |||||||
| Total liabilities | 4,791,041 | 2,296,028 | |||||||
| Net assets | $ | 49,334,004 | $ | 37,686,512 | |||||
| Shares outstanding | 1,475,004 | 850,004 | |||||||
| Net asset value per share | $ | 33.45 | $ | 44.34 | |||||
| Market value per share | $ | 33.57 | $ | 44.32 | |||||
The accompanying notes are an integral part of these financial statements.
| 19 |
TEUCRIUM CORN FUND
September 30, 2013
(Unaudited)
| Description: Assets | Fair Value | Percentage of Net Assets |
||||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management Plus | $ | 45,377,263 | 91.98 | % | ||||||||
| Description: Liabilities | Fair Value | Percentage of Net Assets |
Notional Amount (Long Exposure) |
|||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures (759 contracts, settlement date March 14, 2014) | $ | 2,014,900 | 4.08 | % | $ | 17,248,275 | ||||||
| CBOT corn futures (639 contracts, settlement date May 14, 2014) | 872,050 | 1.77 | 14,768,888 | |||||||||
| CBOT corn futures (719 contracts, settlement date December 12, 2014) | 1,755,375 | 3.56 | 17,291,950 | |||||||||
| Total commodity futures contracts | $ | 4,642,325 | 9.41 | % | $ | 49,309,113 | ||||||
The accompanying notes are an integral part of these financial statements.
| 20 |
TEUCRIUM CORN FUND
SCHEDULE OF INVESTMENTS
December 31, 2012
| Fair | Percentage of | Principal | |||||||||
| Description: Assets | Value | Net Assets | Amount | ||||||||
| Cash equivalents | |||||||||||
| United States Treasury obligations | |||||||||||
| U.S. Treasury bills, 0.090%, due January 17, 2013 | $ | 9,999,930 | 26.53 | % | $ | 10,000,000 | |||||
| U.S. Treasury bills, 0.090%, due February 14, 2013 | 9,999,670 | 26.53 | 10,000,000 | ||||||||
| Total U.S. Treasury obligations | 19,999,600 | 53.06 | |||||||||
| Money market funds | |||||||||||
| Dreyfus Cash Management Plus | 14,632,382 | 38.83 | |||||||||
| Total cash equivalents | $ | 34,631,982 | 91.89 | % | |||||||
| Fair | Percentage of | Notional Amount | ||||||||||
| Description: Liabilities | Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures (377 contracts, settlement date May 14, 2013) | $ | 1,341,775 | 3.56 | % | $ | 13,199,712 | ||||||
| CBOT corn futures (325 contracts, settlement date July 12, 2013) | 413,700 | 1.10 | 11,330,313 | |||||||||
| CBOT corn futures (440 contracts, settlement date December 13, 2013) | 458,300 | 1.21 | 13,194,500 | |||||||||
| Total commodity futures contracts | $ | 2,213,775 | 5.87 | % | $ | 37,724,525 | ||||||
The accompanying notes are an integral part of these financial statements.
| 21 |
TEUCRIUM CORN FUND
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized (loss) gain on commodity futures contracts | $ | (3,670,163 | ) | $ | 16,718,359 | $ | (7,350,776 | ) | $ | 12,326,540 | ||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (1,818,600 | ) | (3,740,286 | ) |
(2,428,550 |
) |
978,790 |
|||||||||
| Realized gain on securities | 70 | - | 70 | - | ||||||||||||
| Interest income | 4,612 | 20,303 | 16,350 | 42,393 | ||||||||||||
| Total (loss) income | (5,484,081 | ) | 12,998,376 | (9,762,906 | ) | 13,347,723 | ||||||||||
| Expenses | ||||||||||||||||
| Management fees | 112,618 | 221,902 | 307,010 | 534,153 | ||||||||||||
| Professional fees | 259,440 | (87,700 | ) | 498,360 | 343,462 | |||||||||||
| Distribution and marketing fees | 342,144 | 615,400 | 1,028,346 | 1,343,730 | ||||||||||||
| Custodian fees and expenses | 32,564 | 32,564 | 96,631 | 96,985 | ||||||||||||
| Business permits and licenses fees | 21,160 | 13,120 | 62,790 | 24,416 | ||||||||||||
| General and administrative expenses | 46,740 | 92,120 | 109,185 | 202,440 | ||||||||||||
| Brokerage commissions | 12,420 | 21,329 | 53,295 | 40,123 | ||||||||||||
| Other expenses | 10,396 | 20,561 | 30,849 | 55,806 | ||||||||||||
| Total expenses | 837,482 | 929,296 | 2,186,466 | 2,641,115 | ||||||||||||
| Net (loss) income | $ | (6,321,563 | ) | $ | 12,069,080 | $ | (11,949,372 | ) | $ | 10,706,608 | ||||||
| Net (loss) income per share | $ | (5.25 | ) | $ | 6.38 | $ | (10.89 | ) | $ | 6.48 | ||||||
| Net (loss) income per weighted average share | $ | (5.06 | ) | $ | 6.79 | $ | (11.49 | ) | $ | 6.45 | ||||||
| Weighted average shares outstanding | 1,249,461 | 1,776,906 | 1,039,656 | 1,659,311 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
| 22 |
TEUCRIUM CORN FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Operations | ||||||||
| Net (loss) income | $ | (11,949,372 | ) | $ | 10,706,608 | |||
| Capital transactions | ||||||||
| Issuance of Shares | 52,132,966 | 48,186,703 | ||||||
| Redemption of Shares | (28,536,102 | ) | (72,077,181 | ) | ||||
| Total capital transactions | 23,596,864 | (23,890,478 | ) | |||||
| Net change in net assets | 11,647,492 | (13,183,870 | ) | |||||
| Net assets, beginning of period | 37,686,512 | 71,268,521 | ||||||
| Net assets, end of period | $ | 49,334,004 | $ | 58,084,651 | ||||
| Net asset value per share at beginning of period | $ | 44.34 | $ | 41.92 | ||||
| At end of period | $ | 33.45 | $ | 48.40 | ||||
The accompanying notes are an integral part of these financial statements.
| 23 |
TEUCRIUM CORN FUND
(Unaudited)
| Nine months ended September 30, 2013 |
Nine months ended September 30, 2012 |
||||||||||
| Cash flows from operating activities: | |||||||||||
| Net (loss) income | $ | (11,949,372 | ) | $ | 10,706,608 | ||||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 2,428,550 | (978,790 | ) | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Collateral, due from broker | (3,285,738 | ) | (1,051,188 | ) | |||||||
| Interest receivable | (871 | ) | (1,163 | ) | |||||||
| Other assets | (110,615 | ) | (103,138 | ) | |||||||
| Management fee payable to Sponsor | 3,712 | (2,177 | ) | ||||||||
| Other liabilities | 62,751 | 44,909 | |||||||||
| Net cash (used in) provided by operating activities | (12,851,583 | ) | 8,615,061 | ||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from sale of Shares | 52,132,966 | 48,186,703 | |||||||||
| Redemption of Shares | (28,536,102 | ) | (67,753,539 | ) | |||||||
| Net cash provided by (used in) financing activities | 23,596,864 | (19,566,836 | ) | ||||||||
| Net change in cash and cash equivalents | 10,745,281 | (10,951,775 | ) | ||||||||
| Cash and cash equivalents, beginning of period | 34,631,982 | 69,022,336 | |||||||||
| Cash and cash equivalents, end of period | $ | 45,377,263 | $ | 58,070,561 | |||||||
The accompanying notes are an integral part of these financial statements.
| 24 |
September 30, 2013
(Unaudited)
Note 1 – Organization and Operation
Teucrium Corn Fund (referred to herein as “CORN,” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 25,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “CORN,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for corn interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of the Fund is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for corn (“Corn Futures Contracts”) that are traded on the Chicago Board of Trade (“CBOT”), specifically (1) the second-to-expire CBOT Corn Futures Contract, weighted 35%, (2) the third-to-expire CBOT Corn Futures Contract, weighted 30%, and (3) the CBOT Corn Futures Contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%. (This weighted average of the three referenced Corn Futures Contracts is referred to herein as the “Benchmark,” and the three Corn Futures Contracts that at any given time make up the Benchmark are referred to herein as the “Benchmark Component Futures Contracts.”
The Fund commenced investment operations on June 9, 2010 and has a fiscal year ending on December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On June 5, 2010, the Fund’s initial registration of 30,000,000 shares the Form S-1 was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On June 9, 2010, the Fund listed its shares on the NYSE Arca under the ticker symbol “CORN.” On the day prior to that, the Fund issued 200,000 shares in exchange for $5,000,000 at the Fund’s initial NAV of $25 per share. The Fund also commenced investment operations on June 9, 2010 by purchasing commodity futures contracts traded on the Chicago Board of Trade (“CBOT”).
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
| 25 |
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Fund is subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2013 and December 31, 2012. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from CORN. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The size of a Creation Basket and a Redemption basket was changed effective February 1, 2012 from 100,000 to 50,000 shares. On March 5, 2012 the size of a Creation Basket and a Redemption Basket was changed again from 50,000 to 25,000 shares.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $45,377,263 and $14,632,382 in money market funds at September 30, 2013 and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities. The Fund held $19,999,600 in United States Treasury Bills with a maturity date of three months or less at December 31, 2012; this balance is included in cash and cash equivalents on the statements of assets and liabilities.
Collateral, Due from/to Broker
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in
| 26 |
relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| • | Taking the current market value of its total assets and |
| • | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of Corn Futures Contracts, the administrator uses the CBOT closing price. The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter corn interests is determined based on the value of the commodity or futures contract underlying such corn interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such corn interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open corn interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Market value per share represents the closing price on the last trading day of the quarter as reported by the NYSE Arca. If such a closing price is not available, the bid/ask midpoint at 4 p.m. as reported by the NYSE Arca was used.
Sponsor Fee and Allocation of Expenses
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum. For the three months ended September 30, 2013, the Fund recorded $112,618 in management fees to the Sponsor. For the three months ended September 30, 2012, the Fund recorded $221,902 in management fees to the Sponsor. For the nine months ended September 30, 2013, the Fund recorded $307,010 in management fees to the Sponsor. For the nine months ended September 30, 2012, the Fund recorded $534,153 in management fees to the Sponsor.
The Fund pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays the fees and expenses associated with the Fund’s tax accounting and reporting requirements. The Sponsor can elect to waive certain fees or expenses that would generally be paid for by the Fund. As of December 31, 2012, there were approximately $560,000 of expenses recorded on the financial statements of the Sponsor which are subject to reimbursement by the Funds in 2013. Through the nine months ended September 30, 2013, the Sponsor sought approximately $390,000 in reimbursement from CORN,
| 27 |
SOYB and WEAT for these expenses, with approximately $174,000 in the quarter ended September 30, 2013. These Funds have not recorded the remaining $170,000 of expenses subject to reimbursement to the Sponsor as payment is not probable at September 30, 2013.
Certain aggregate expenses common to all Funds managed by the Sponsor are allocated to each Fund based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses are calculated on the prior day’s net assets.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. For instance, when Corn Futures Contracts on the CBOT are not actively trading due to a “limit-up” or limit-down” condition, meaning that the change in the Corn Futures Contracts has exceeded the limits established, the Trust and the Fund will revert to alternative verifiable sources of valuation of its assets. When such a situation exists on a quarter close, the Sponsor will calculate the Net Asset Value (“NAV”) on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2013 and December 31, 2012, in the opinion of the Trust and the Fund, the reported value of the Corn Futures Contracts traded on the CBOT fairly reflected the value of the Corn Futures Contracts held by the Fund, and no adjustments were necessary.
On March 31, 2013, the Corn Futures Contracts traded on the CBOT due to settle on July 12, 2013 (the “JUL13 Corn Contracts”) were in a “limit down” condition and, in the opinion of the Trust and CORN, the reported value at the close of market on that day did not fairly value the JUL13 Corn Contracts held by CORN. Therefore, the Trust and CORN used alternative verifiable sources to value the JUL13 Corn Contracts on March 31, 2013 and the financial statements of the Trust and the Fund have been adjusted accordingly. This adjustment resulted in a ($410,475) decrease in the unrealized change in commodity futures contracted for the Trust and CORN in excess of reported CBOT values, for the quarter-ended March 31, 2013.
| 28 |
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the Chicago Board of Trade (“CBOT”) or the New York Mercantile Exchange (“NYMEX”), or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Fund.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Fund.
Note 3 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 2. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Cash equivalents | $ | 45,377,263 | $ | - | $ | - | $ | 45,377,263 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Commodity futures contracts | $ | 4,642,325 | $ | - | $ | - | $ | 4,642,325 | ||||
December 31, 2012
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Cash equivalents | $ | 34,631,982 | $ | - | $ | - | $ | 34,631,982 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Commodity futures contracts | $ | 2,213,775 | $ | - | $ | - | $ | 2,213,775 | ||||
| 29 |
Transfers into and out of each level of the fair value hierarchy for the JUL13 Corn Contracts, for the nine months ended September 30, 2013 were as follows:
| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Liabilities (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Corn future contracts | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | - | $ | - | ||||||||||||
During the nine months ended September 30, 2012, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
Note 4 -Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the nine months ended September 30, 2013 the Fund invested only in commodity futures contracts. For the nine months ended September 30, 2012 the Fund invested only in commodity futures contracts and Cleared Corn Swaps. Cleared Corn Swaps have standardized terms similar to, and are priced by reference to, the corresponding Benchmark Component Futures Contract. Additionally, Other Corn Interests that do not have standardized terms and are not exchange-traded, referred to as “over-the-counter” Corn Interests, can generally be structured as the parties to the Corn Interest contract desire. Therefore, the Fund might enter into multiple Cleared Swaps and/or over-the-counter Interests intended to exactly replicate the performance of the Benchmark Component Futures Contracts for the Fund, or a single over-the-counter Interest designed to replicate the performance of the Benchmark as a whole. Assuming that there is no default by a counterparty to an over-the-counter Interest, the performance of the Interest will not necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2011-11 "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" and subsequently clarified in FASB ASU 2013-01 "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities."
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk as of September 30, 2013 and December 31, 2012.
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Corn futures contracts | $ | 4,642,325 | $ | - | $ | 4,642,325 | $ | - | $ | 4,642,325 | $ | - | ||||||||||||
| 30 |
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Corn futures contracts | $ | 2,213,775 | $ | - | $ | 2,213,775 | $ | - | $ | 2,213,775 | $ | - | ||||||||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (3,670,163 | ) | $ | (1,818,600) | |||
Three months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 16,718,359 | $ | (3,740,286) | ||||
Nine months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (7,350,776 | ) | $ | (2,428,550 | ) | ||
Nine months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 12,326,540 | $ | 978,790 | ||||
Volume of Derivative Activities
The notional amounts and number of contracts categorized by primary underlying risk, commodity price risk, are included in the schedule of investments as of September 30, 2013 and December 31, 2012.
Note 5 - Financial Highlights
The following tables present per unit performance data and other supplemental financial data for the nine months ended September 30, 2013 and 2012. This information has been derived from information presented in the financial statements.
| Per Share Operation Performance for the nine months ended September 30, 2013 | ||||
| Net asset value at beginning of period | $ | 44.34 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (8.80 | ) | ||
| Total expenses | (2.10 | ) | ||
| Net decrease in net asset value | (10.89 | ) | ||
| Net asset value end of period | $ | 33.45 | ||
| Total Return | (24.56 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 7.11 | % | ||
| Net investment loss | (7.06 | )% |
| 31 |
| Per Share Operation Performance for the nine months ended September 30, 2012 | ||||
| Net asset value at beginning of period | $ | 41.92 | ||
| Income from investment operations: | ||||
| Investment income | 0.02 | |||
| Net realized and unrealized gain on commodity futures contracts | 8.05 | |||
| Total expenses | (1.59 | ) | ||
| Net increase in net asset value | 6.48 | |||
| Net asset value at end of period | $ | 48.40 | ||
| Total Return | 15.46 | % | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 4.95 | % | ||
| Net investment loss | (4.87 | )% |
The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. This election is subject to change by the Sponsor, at its discretion. As of December 31, 2012, there were approximately $560,000 of expenses recorded on the financial statements of the Sponsor which are subject to reimbursement by the Funds in 2013. Through the nine months ended September 30, 2013, the Sponsor sought approximately $390,000 in reimbursement from CORN, SOYB and WEAT for these expenses, with approximately $174,000 in the quarter ended September 30, 2013. These Funds have not recorded the remaining $170,000 of expenses subject to reimbursement to the Sponsor as payment is not probable at September 30, 2013.
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 6 - Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 7 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013 there was nothing to report.
| 32 |
TEUCRIUM NATURAL GAS FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | |||||||
| Assets | (Unaudited) | |||||||
| Equity in BNY Mellon trading accounts: | ||||||||
| Cash and cash equivalents | $ | 3,170,295 | $ | 4,476,336 | ||||
| Commodity futures contracts | - | 9,550 | ||||||
| Collateral, due from broker | 192,223 | 367,374 | ||||||
| Interest receivable | 210 | 305 | ||||||
| Other assets | 15,192 | 10,989 | ||||||
| Total assets | 3,377,920 | 4,864,554 | ||||||
| Liabilities | ||||||||
| Commodity futures contracts | 94,030 | 233,919 | ||||||
| Management fee payable to Sponsor | 2,773 | 4,046 | ||||||
| Other liabilities | 1,492 | 968 | ||||||
| Total liabilities | 98,295 | 238,933 | ||||||
| Net assets | $ | 3,279,625 | $ | 4,625,621 | ||||
| Shares outstanding | 300,004 | 400,004 | ||||||
| Net asset value per share | $ | 10.93 | $ | 11.56 | ||||
| Market value per share | $ | 10.92 | $ | 11.58 | ||||
The accompanying notes are an integral part of these financial statements.
| 33 |
TEUCRIUM NATURAL GAS FUND
September 30, 2013
(Unaudited)
| Description: Assets | Fair Value | Percentage of Net Assets |
|||||||||||
| Cash equivalents | |||||||||||||
| Money market funds | |||||||||||||
| Dreyfus Cash Management Plus | $ | 3,170,295 | 96.67 | % | |||||||||
| Fair | Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Value | Net Assets | (Long Exposure) | ||||||||||
| Commodity futures contracts | |||||||||||||
| United States natural gas futures contracts | |||||||||||||
| NYMEX natural gas futures (21 contracts, settlement date February 26, 2014) | $ | 33,460 | 1.02 | % | $ | 800,100 | |||||||
| NYMEX natural gas futures (22 contracts, settlement date March 27, 2014) | 37,440 | 1.14 | 827,420 | ||||||||||
| NYMEX natural gas futures (21 contracts, settlement date September 26, 2014) | 15,320 | 0.47 | 813,330 | ||||||||||
| NYMEX natural gas futures (21 contracts, settlement date October 29, 2014) | 7,810 | 0.24 | 828,240 | ||||||||||
| Total commodity futures contracts | $ | 94,030 | 2.87 | % | $ | 3,269,090 | |||||||
The accompanying notes are an integral part of these financial statements.
| 34 |
TEUCRIUM NATURAL GAS FUND
SCHEDULE OF INVESTMENTS
December 31, 2012
|
|
Fair | Percentage of | Notional Amount | ||||||||||
| Description: Assets | Value | Net Assets | (Long Exposure) | ||||||||||
| Cash equivalents | |||||||||||||
| Money market funds | |||||||||||||
| Dreyfus Cash Management Plus | $ 4,476,336 | 96.77 | % | ||||||||||
| Commodity futures contracts | |||||||||||||
| United States natural gas futures contracts | |||||||||||||
| NYMEX natural gas futures (32 contracts, settlement date September 26, 2013) | $ | 9,550 | 0.21 | % | $ | 1,161,600 | |||||||
| Fair | Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Value | Net Assets | (Long Exposure) | ||||||||||
| Commodity futures contracts | |||||||||||||
| United States natural gas futures contracts | |||||||||||||
| NYMEX natural gas futures (34 contracts, settlement date February 26, 2013) | $ | 103,412 | 2.24 | % | $ | 1,144,100 | |||||||
| NYMEX natural gas futures (34 contracts, settlement date March 26, 2013) | 61,967 | 1.34 | 1,157,020 | ||||||||||
| NYMEX natural gas futures (31 contracts, settlement date October 29, 2013) | 68,540 | 1.48 | 1,160,950 | ||||||||||
| Total commodity futures contracts | $ | 233,919 | 5.06 | % | $ | 3,462,070 | |||||||
The accompanying notes are an integral part of these financial statements.
| 35 |
TEUCRIUM NATURAL GAS FUND
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||||
| Income | ||||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | ||||||||||||||||||
| Realized (loss) gain on commodity futures contracts | $ | (125,490 | ) | $ | (263,121 | ) | $ | (224,549 | ) | $ | (831,009 | ) | ||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 65,830 | 502,151 |
130,339 |
832,228 |
||||||||||||||
| Interest income | 314 | 863 | 1,094 | 1,544 | ||||||||||||||
| Total (loss) income | (59,346 | ) | 239,893 | (93,116 | ) | 2,763 | ||||||||||||
| Expenses | ||||||||||||||||||
| Management fees | 8,459 | 5,833 | 27,999 | 5,833 | ||||||||||||||
| Professional fees | 2,879 | 655 | 8,004 | 2,728 | ||||||||||||||
| Distribution and marketing fees | 89 | 3,458 | 1,802 | 10,046 | ||||||||||||||
| Custodian fees and expenses | 632 | 1,179 | 2,091 | 3,533 | ||||||||||||||
| Business permits and licenses fees | - | 224 | - | 142 | ||||||||||||||
| General and administrative expenses | 88 | 1,229 | 432 | 4,448 | ||||||||||||||
| Brokerage commissions | 213 | 213 | 755 | 705 | ||||||||||||||
| Other expenses | 84 | 294 | 30 | 388 | ||||||||||||||
| Total expenses | 12,444 | 13,085 | 41,113 | 27,823 | ||||||||||||||
| Net (loss) income | $ | (71,790 | ) | $ | 226,808 | $ | (134,229 | ) | $ | (25,060 | ) | |||||||
| Net (loss) income per share | $ | (0.24 | ) | $ | 0.76 | $ | (0.63 | ) | $ | (1.22 | ) | |||||||
| Net (loss) income per weighted average share | $ | (0.24 | ) | $ | 0.76 | $ | (0.42 | ) | $ | (0.12 | ) | |||||||
| Weighted average shares outstanding | 300,004 | 300,004 | 317,403 | 213,143 | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
| 36 |
TEUCRIUM NATURAL GAS FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine
months ended September 30, 2013 |
Nine
months ended September 30, 2012 |
|||||||
| Operations | ||||||||
| Net loss | $ | (134,229 | ) | $ | (25,060 | ) | ||
| Capital transactions | ||||||||
| Issuance of Shares | - | 2,420,546 | ||||||
| Redemption of Shares | (1,211,767 | ) | - | |||||
| Total capital transactions | (1,211,767 | ) | 2,420,546 | |||||
| Net change in net assets | (1,345,996 | ) | 2,395,486 | |||||
| Net assets, beginning of period | 4,625,621 | 1,381,367 | ||||||
| Net assets, end of period | $ | 3,279,625 | $ | 3,776,853 | ||||
| Net asset value per share at beginning of period | $ | 11.56 | $ | 13.81 | ||||
| At end of period | $ | 10.93 | $ | 12.59 | ||||
The accompanying notes are an integral part of these financial statements.
| 37 |
TEUCRIUM NATURAL GAS FUND
(Unaudited)
| Nine months ended September 30, 2013 |
Nine months ended September 30, 2012 |
|||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (134,229 | ) | $ | (25,060 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (130,339 | ) | (832,228 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Collateral, due from broker | 175,151 | 676,181 | ||||||
| Interest receivable | 95 | (152 | ) | |||||
| Other assets | (4,203 | ) | (2,570 | ) | ||||
| Management fee payable to Sponsor | (1,273 | ) | 2,867 | |||||
| Other liabilities | 524 | (5,892 | ) | |||||
| Net cash used in operating activities | (94,274 | ) | (186,854 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of Shares | - | 2,420,546 | ||||||
| Redemption of Shares | (1,211,767 | ) | - | |||||
| Net cash (used in) provided by financing activities | (1,211,767 | ) | 2,420,546 | |||||
| Net change in cash and cash equivalents | (1,306,041 | ) | 2,233,692 | |||||
| Cash and cash equivalents, beginning of period | 4,476,336 | 1,277,159 | ||||||
| Cash and cash equivalents, end of period | $ | 3,170,295 | $ | 3,510,851 | ||||
The accompanying notes are an integral part of these financial statements.
| 38 |
September 30, 2013
(Unaudited)
Note 1 – Organization and Operation
Teucrium Natural Gas Fund (referred to herein as “NAGS,” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 50,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “NAGS,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for natural gas interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of the Fund is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the following: the nearest to spot month March, April, October and November Henry Hub Natural Gas Futures Contracts traded on the New York Mercantile Exchange (“NYMEX”), weighted 25% equally in each contract month. (This weighted average of the four referenced Natural Gas Futures Contracts is referred to herein as the “NAGS Benchmark,” and the four Natural Gas Futures Contracts that at any given time make up the Benchmark are referred to herein as the “NAGS Benchmark Component Futures Contracts.”)
The Fund commenced investment operations on February 1, 2011 and has a fiscal year ending December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On October 22, 2010, the Fund’s initial registration of 40,000,000 shares on Form S-1 was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On February 1, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “NAGS”. On the day prior to that, the Fund issued 200,000 shares in exchange for $5,000,000 at NAGS’ initial NAV of $25 per share. The Fund also commenced investment operations on February 1, 2011 by purchasing commodity futures contracts traded on the NYMEX. On December 31, 2010, the Fund had two shares outstanding which were owned by the Sponsor.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
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Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Fund is subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2013 and December 31, 2012. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 50,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 50,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 100,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $3,170,295 and $4,476,336 in money market funds on September 30, 2013 and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Collateral, Due from/to Broker
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect
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themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| • | Taking the current market value of its total assets and |
| • | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of Natural Gas Futures Contracts, the administrator uses the NYMEX closing price (currently 2:30 p.m. New York time). The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter natural gas interests is determined based on the value of the commodity or futures contract underlying such natural gas interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such natural gas interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open natural gas interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Sponsor Fee and Allocation of Expenses
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum. The Sponsor had waived the management fee for this Fund for the period August 1, 2011 through July 31, 2012. For the three months ended September 30, 2013, the Fund recorded a management fee expense of $8,459. For the nine months ended September 30, 2013, the Fund recorded a management fee expense of $27,999. For the three and nine months ended September 30, 2012, the Fund recorded a management fee expense of $5,833. The waiving of the management fee for some period in 2012 by the Sponsor resulted in an approximate $3,200 reduction in expenses to the Fund for the three months ended September 30, 2012 and $12,800 for the nine months ended from January 1, 2012 through September 30, 2012.
The Fund generally pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds managed by the Sponsor are allocated to each Fund based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses are calculated on the prior day’s net assets. On July 29, 2011, the Sponsor filed a Form 8-K with the SEC which stated that effective August 1, 2011, the Sponsor has agreed to voluntarily cap the management fee and expenses of NAGS at 1.5% per annum of the daily net assets of the Fund. The cap may be terminated by the Sponsor at any time with 90 days’ notice. This action resulted in an approximate $17,500 reduction in expenses for the Fund for the three month and $53,800 for the nine month period ending September 30, 2013. In addition, the Sponsor can waive the management fee; this action resulted in an approximate $12,800 reduction in expenses for the Fund for the nine months ending September 30, 2012. Additional expenses of the Fund may be paid by the Sponsor in future periods.
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Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2013 and December 31, 2012, in the opinion of the Trust and the Fund, the reported value of the Natural Gas Futures Contracts traded on the NYMEX fairly reflected the value of the Natural Gas Futures Contracts held by the Fund, and no adjustments were necessary.
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the NYMEX, or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
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New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Fund.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Fund.
Note 3 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 2. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Cash equivalents | $ | 3,170,295 | $ | - | $ | - | $ | 3,170,295 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Commodity futures contracts | $ | 94,030 | $ | - | $ | - | $ | 94,030 | ||||
December 31, 2012
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Cash equivalents | $ | 4,476,336 | $ | - | $ | - | $ | 4,476,336 | ||||
| Commodity futures contracts | 9,550 | - | - | 9,550 | ||||||||
| Total | $ | 4,485,886 | $ | - | $ | - | $ | 4,485,886 | ||||
| Balance as of | |||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | December 31, 2012 | |||||||
| Commodity futures contracts | $ 233,919 | $ | - | $ | - | $ | 233,919 | ||||
During the three and nine months ended September 30, 2013 and 2012, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
Note 4 – Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the three and nine months ended September 30, 2013 and 2012, the Fund invested only in commodity futures contracts.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
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The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2011-11 "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" and subsequently clarified in FASB ASU 2013-01 "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities."
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk as of September 30, 2013 and December 31, 2012.
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Natural gas futures contracts | $ | 94,030 | $ | - | $ | 94,030 | $ | - | $ | 94,030 | $ | - | ||||||||||||
Offsetting of Financial Assets and Derivative Assets as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Natural gas futures contracts | $ | 9,550 | $ | - | $ | 9,550 | $ | 9,550 | $ | - | $ | - | ||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Natural gas futures contracts | $ | 233,919 | $ | - | $ | 233,919 | $ | 9,550 | $ | 224,369 | $ | - | ||||||||||||
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The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2013
| Primary Underlying Risk | Realized Loss on Derivative Instruments |
Net Change in Unrealized Gain on Derivative Instruments |
||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (125,490) | $ | 65,380 | ||||
Three months ended September 30, 2012
| Realized Loss on | Net Change in Unrealized Gain | ||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | |||||
| Commodity price | |||||||
| Commodity futures contracts | $ | (263,121) | $ | 502,151 | |||
Nine months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (224,549) | $ | 130,339 | ||||
Nine months ended September 30, 2012
| Realized Loss on | Net Change in Unrealized Gain | ||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | |||||
| Commodity price | |||||||
| Commodity futures contracts | $ | (831,009) | $ | 832,228 | |||
Volume of Derivative Activities
The notional amounts and number of contracts categorized by primary underlying risk, commodity price risk, are included in the schedule of investments as of September 30, 2013 and December 31, 2012.
Note 5 – Financial Highlights
The following table presents per unit performance data and other supplemental financial data for the nine months ended September 30, 2013 and 2012. This information has been derived from information presented in the financial statements.
| Per Share Operation Performance for the nine months ended September 30, 2013 | ||||
| Net asset value at beginning of period | $ | 11.56 | ||
| Income from investment operations: | ||||
| Investment income | - | |||
| Net realized and unrealized loss on commodity futures contracts | (0.49 | ) | ||
| Total expenses | (0.14 | ) | ||
| Net decrease in net asset value | (0.63 | ) | ||
| Net asset value at end of period | $ | 10.93 | ||
| Total Return | (5.45 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 1.47 | % | ||
| Net investment loss | (1.43 | )% |
| Per Share Operation Performance for the nine months ended September 30, 2012 | ||||
| Net asset value at beginning of period | $ | 13.81 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (1.10 | ) | ||
| Total expenses | (0.13 | ) | ||
| Net decrease in net asset value | (1.22 | ) | ||
| Net asset value at end of period | $ | 12.59 | ||
| Total Return | (8.83 | )% | ||
| Ratios to Average Net Assets | ||||
| Total expense | 1.50 | % | ||
| Net investment loss | (1.41 | )% |
On July 29, 2011, the Sponsor filed a Form 8-K with the SEC which stated that effective August 1, 2011, the Sponsor has agreed to voluntarily cap the management fee and expenses of NAGS at 1.5% per annum of the daily net assets of the Fund. The cap may be terminated by the Sponsor at any time with 90 days’ notice. This action by the Sponsor resulted in an approximate $53,800 reduction in expenses to the Fund for the nine months ended
| 45 |
September 30, 2013 and approximately, $9,800 reduction in expenses to the Fund for the nine months ended September 30, 2012. In addition, the Sponsor can waive the management fee; this action resulted in an approximate $12,800 reduction in expenses for the Fund for the nine months ending September 30, 2012. Additional expenses of the Fund may be paid by the Sponsor in future periods.
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 6 – Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 7 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013 there was nothing to report.
| 46 |
TEUCRIUM WTI CRUDE OIL FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | ||||||||
| Assets | (Unaudited) | ||||||||
| Equity in BNY Mellon trading accounts: | |||||||||
| Cash and cash equivalents | $ | 1,964,651 | $ | 1,845,910 | |||||
| Commodity futures contracts | 172,372 | 44,872 | |||||||
| Collateral, due from broker | - | 137,328 | |||||||
| Interest receivable | 131 | 123 | |||||||
| Other assets | 36,183 | 26,866 | |||||||
| Total assets | 2,173,337 | 2,055,099 | |||||||
| Liabilities | |||||||||
| Commodity futures contracts | - | 58,090 | |||||||
| Collateral, due to broker | 92,567 | - | |||||||
| Management fee payable to Sponsor | - | 1,626 | |||||||
| Other liabilities | 1,127 | 1,636 | |||||||
| Total liabilities | 93,694 | 61,352 | |||||||
| Net assets | $ | 2,079,643 | $ | 1,993,747 | |||||
| Shares outstanding | 50,002 | 50,002 | |||||||
| Net asset value per share | $ | 41.59 | $ | 39.87 | |||||
| Market value per share | $ | 41.05 | $ | 38.53 | |||||
The accompanying notes are an integral part of these financial statements.
| 47 |
TEUCRIUM WTI CRUDE OIL FUND
September 30, 2013
| Percentage of | Notional Amount | ||||||||
| Description: Assets | Fair Value | Net Assets | (Long Exposure) | ||||||
| Cash equivalents | |||||||||
| Money market funds | |||||||||
| Dreyfus Cash Management Plus | $ 1,964,651 | 94.47 | % | ||||||
| Commodity futures contracts | |||||||||
| United States WTI crude oil futures contracts | |||||||||
| WTI crude oil futures (7 contracts, settlement date November 20, 2013) | $ 88,732 | 4.27 | % | $ 713,300 | |||||
| WTI crude oil futures (6 contracts, settlement date May 20, 2014) | 55,800 | 2.68 | 578,640 | ||||||
| WTI crude oil futures (8 contracts, settlement date November 20, 2014) | 27,840 | 1.34 | 740,320 | ||||||
| Total commodity futures contracts | $ 172,372 | 8.29 | % | $ 2,032,260 |
The accompanying notes are an integral part of these financial statements.
| 48 |
TEUCRIUM WTI CRUDE OIL FUND
SCHEDULE OF INVESTMENTS
December 31, 2012
| Fair | Percentage of | Notional Amount | |||||||||
| Description: Assets | Value | Net Assets | (Long Exposure) | ||||||||
| Cash equivalents | |||||||||||
| Money market funds | |||||||||||
| Dreyfus Cash Management Plus | $ | 1,845,910 | 92.58 | % | |||||||
| Commodity futures contracts | |||||||||||
| United States WTI crude oil futures contracts | |||||||||||
| WTI crude oil futures (6 contracts, settlement date November 20, 2013) | $ | 24,312 | 1.22 | % | $ | 560,220 | |||||
| WTI crude oil futures (8 contracts, settlement date November 20, 2014) | 20,560 | 1.03 | 733,040 | ||||||||
| Total commodity futures contracts | $ | 44,872 | 2.25 | % | $ | 1,293,260 | |||||
| Fair | Percentage of | Notional Amount | ||||||||||
| Description: Liabilities | Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures (8 contracts, settlement date May 21, 2013) | $ | 58,090 | 2.91 | % | $ | 747,920 | ||||||
The accompanying notes are an integral part of these financial statements.
| 49 |
TEUCRIUM WTI CRUDE OIL FUND
(Unaudited)
| Three months ended September 30, 2013 |
Three months ended September 30, 2012 |
Nine months ended September 30, 2013 |
Nine months ended September 30, 2012 |
||||||||||||||
| Income | |||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | |||||||||||||||||
| Realized gain (loss) on commodity futures contracts | $ | 9,380 | $ | - | $ | (77,750 | ) | $ 43,347 | |||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 117,800 | 119,260 |
185,590 |
(167,247 |
) |
||||||||||||
| Interest income | 229 | 494 | 731 | 1,839 | |||||||||||||
| Total income (loss) | 127,409 | 119,754 | 108,571 | (122,061 | ) | ||||||||||||
| Expenses | |||||||||||||||||
| Management fees | - | 5,097 | - | 21,769 | |||||||||||||
| Professional fees | 7,643 | (5,168 | ) | 20,016 | 10,325 | ||||||||||||
| Distribution and marketing fees | 266 | 30,423 | 2,659 | 59,611 | |||||||||||||
| Custodian fees and expenses | - | (3,947 | ) | - | 60,474 | ||||||||||||
| Business permits and licenses fees | - | 790 | - | 790 | |||||||||||||
| General and administrative expenses | - | 4,068 | - | 4,068 | |||||||||||||
| Brokerage commissions | - | 207 | - | 506 | |||||||||||||
| Other expenses | - | 102 | - | 352 | |||||||||||||
| Total expenses | 7,909 | 31,572 | 22,675 | 157,895 | |||||||||||||
| Net income (loss) | $ | 119,500 | $ | 88,182 | $ | 85,896 | $ | (279,956 | ) | ||||||||
| Net income (loss) per share | $ | 2.39 | $ | 1.76 | $ | 1.72 | $ | (4.12 | ) | ||||||||
| Net income (loss) per weighted average share | $ | 2.39 | $ | 1.76 | $ | 1.72 | $ | (4.21 | ) | ||||||||
| Weighted average shares outstanding | 50,002 | 50,002 | 50,002 | 66,425 | |||||||||||||
The accompanying notes are an integral part of these financial statements.
| 50 |
TEUCRIUM WTI CRUDE OIL FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended September 30, 2013 |
Nine months ended September 30, 2012 |
|||||||
| Operations | ||||||||
| Net income (loss) | $ | 85,896 | $ | (279,956 | ) | |||
| Capital transactions | ||||||||
| Redemption of Shares | - | (2,148,469 | ) | |||||
| Total capital transactions | - | (2,148,469 | ) | |||||
| Net change in net assets | 85,896 | (2,428,425 | ) | |||||
| Net assets, beginning of period | 1,993,747 | 4,445,013 | ||||||
| Net assets, end of period | $ | 2,079,643 | $ | 2,016,588 | ||||
| Net asset value per share at beginning of period | $ | 39.87 | $ | 44.45 | ||||
| At end of period | $ | 41.59 | $ | 40.33 | ||||
The accompanying notes are an integral part of these financial statements.
| 51 |
TEUCRIUM WTI CRUDE OIL FUND
(Unaudited)
| Nine months ended September 30, 2013 |
Nine months ended September 30, 2012 |
|||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 85,896 | $ | (279,956 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (185,590 | ) | 167,247 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Collateral, due from broker | 137,328 | (13,662 | ) | |||||
| Interest receivable | (8 | ) | 88 | |||||
| Other assets | (9,317 | ) | 20,166 | |||||
| Collateral, due to broker | 92,567 | - | ||||||
| Management fee payable to Sponsor | (1,626 | ) | (2,964 | ) | ||||
| Other liabilities | (509 | ) | (2,410 | ) | ||||
| Net cash provided by (used in) operating activities | 118,741 | (111,491 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Redemption of Shares | - | (2,148,469 | ) | |||||
| Net cash provided by (used in) financing activities | - | (2,148,469 | ) | |||||
| Net change in cash and cash equivalents | 118,741 | (2,259,960 | ) | |||||
| Cash and cash equivalents, beginning of period | 1,845,910 | 4,139,910 | ||||||
| Cash and cash equivalents, end of period | $ | 1,964,651 | $ | 1,879,950 | ||||
The accompanying notes are an integral part of these financial statements.
| 52 |
September 30, 2013
(Unaudited)
Note 1 – Organization and Operation
Teucrium WTI Crude Oil Fund (referred to herein as “CRUD” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 25,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “CRUD,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for crude oil interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of the Fund is to have the daily changes in percentage terms of the Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for futures contracts for WTI crude oil, also known as Texas Light Sweet Crude Oil (“Oil Futures Contracts”) traded on the NYMEX, specifically (1) the nearest to spot September or December Oil Futures Contract, weighted 35%; (2) the September or December Oil Futures Contract following the aforementioned (1), weighted 30%; and (3) the next December Oil Future Contract that immediately follows the aforementioned (2), weighted 35%. (This weighted average of the three referenced WTI Crude Oil Futures Contracts is referred to herein as the “CRUD Benchmark,” and the three WTI Crude Oil Futures Contracts that at any given time make up the Benchmark are referred to herein as the “CRUD Benchmark Component Futures Contracts.”)
The Fund commenced investment operations on February 23, 2011 and has a fiscal year ending December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On October 22, 2010, the Fund’s initial registration of 15,000,000 shares on Form S-1 was declared effective by the SEC. On February 23, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “CRUD.” On the day prior to that, the Fund issued 100,000 shares in exchange for $5,000,000 at the Fund’s initial NAV of $50 per share. The Fund also commenced investment operations on February 23, 2011 by purchasing commodity futures contracts traded on the NYMEX. On December 31, 2010, the Fund had two shares outstanding, which were owned by the Sponsor.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
| 53 |
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Fund is subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2013 and December 31, 2012. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Fund may be subject to potential examination by U.S. federal, U.S. state or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares. Effective May 18, 2012, the Fund had a minimum number of shares and this situation continued through September 30, 2013. No redemptions can be made until additional shares are created.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $1,964,651 and $1,845,910 in money market funds at September 30, 2013 and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Collateral, Due from/to Broker
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price
| 54 |
changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| • | Taking the current market value of its total assets and |
| • | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of WTI Crude Oil Futures Contracts, the administrator uses the NYMEX closing price (typically 2:30 p.m. New York time). The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter crude oil interests is determined based on the value of the commodity or futures contract underlying such crude oil interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such crude oil interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open crude oil interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Market value per share represents the closing price on the last trading day of the quarter as reported by the NYSE Arca. If such a closing price is not available, the bid/ask midpoint at 4 p.m. as reported by the NYSE Arca was used.
Sponsor Fee and Allocation of Expenses
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum. The Sponsor elected to waive the management fee for the three and nine months ended September 30, 2013; this action by the Sponsor resulted in an approximate $5,200 and $15,000 reduction in fees for these periods, respectively.
The Fund pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds managed by the Sponsor are allocated to each Fund based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses are calculated on the prior day’s net assets. The Sponsor may, at its discretion, pay certain expenses on behalf of the Fund. For the three and nine months ended September 30, 2013, approximately $11,300 and $39,800 of expenses which were paid by the Sponsor that normally would have been paid by the Fund. For these same periods in 2012, the amounts were $13,500 and $28,000, respectively. Additional expenses of the Fund may be paid by the Sponsor in future periods.
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Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2013 and December 31, 2012, in the opinion of the Trust and the Fund, the reported value of the WTI Crude Oil Futures Contracts traded on the NYMEX fairly reflected the value of the WTI Crude Oil Futures Contracts held by the Fund, and no adjustments were necessary.
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the NYMEX, or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
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New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Fund.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Fund.
Note 3 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 2. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Cash equivalents | $ | 1,964,651 | $ | - | $ | - | $ | 1,964,651 | ||||
| Commodity futures contracts | 172,372 | - | - | 172,372 | ||||||||
| Total | $ | 2,137,023 | $ | - | $ | - | $ | 2,137,023 | ||||
December 31, 2012
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Cash equivalents | $ | 1,845,910 | $ | - | $ | - | $ | 1,845,910 | ||||
| Commodity futures contracts | 44,872 | - | - | 44,872 | ||||||||
| Total | $ | 1,890,782 | $ | - | $ | - | $ | 1,890,782 | ||||
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Commodity futures contracts | $ | 58,090 | $ | - | $ | - | $ | 58,090 | ||||
During the three and nine months ended September 30, 2013 and 2012, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
Note 4 – Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the three and nine months ended September 30, 2013 and 2012, the Fund invested only in commodity futures contracts.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded
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as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2011-11 "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" and subsequently clarified in FASB ASU 2013-01 "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities."
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk as of September 30, 2013 and December 31, 2012.
Offsetting of Financial Assets and Derivative Assets as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| WTI crude oil futures contracts | $ | 172,372 | $ | - | $ | 172,372 | $ | - | $ | 92,567 | $ | 79,805 | ||||||||||||
Offsetting of Financial Assets and Derivative Assets as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| WTI crude oil futures contracts | $ | 44,872 | $ | - | $ | 44,872 | $ | 44,872 | $ | - | $ | - | ||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| WTI crude oil futures contracts | $ | 58,090 | $ | - | $ | 58,090 | $ | 44,872 | $ | 13,218 | $ | - | ||||||||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2013
| Realized Gain on | Net Change in Unrealized Gain | |||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||
| Commodity price | ||||||
| Commodity futures contracts | $ | 9,380 | $ | 117,800 | ||
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Three months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Gain | |||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||
| Commodity price | ||||||
| Commodity futures contracts | $ | - | $ | 119,260 | ||
Nine months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Gain | |||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||
| Commodity price | ||||||
| Commodity futures contracts | $ | (77,750 | ) | $ | 185,590 | |
Nine months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Loss | |||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||
| Commodity price | ||||||
| Commodity futures contracts | $ | 43,347 | $ | (167,247) | ||
Volume of Derivative Activities
The notional amounts and number of contracts categorized by primary underlying risk, commodity price risk, are included in the schedule of investments as of September 30, 2013 and December 31, 2012.
Note 5 – Financial Highlights
The following table presents per unit performance data and other, supplemental financial data for the nine months ended September 30, 2013 and 2012. This information has been derived from information presented in the financial statements.
| Per Share Operation Performance for the nine months ended September 30, 2013 | ||||
| Net asset value at beginning of period | $ | 39.87 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized gain on commodity futures contracts | 2.16 | |||
| Total expenses | (0.45 | ) | ||
| Net increase in net asset value | 1.72 | |||
| Net asset value at end of period | $ | 41.59 | ||
| Total Return | 4.31 | % | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 1.50 | % | ||
| Net investment loss | (1.45 | )% |
| Per Share Operation Performance for the nine months ended September 30, 2012 | ||||
| Net asset value at beginning of period | $ | 44.45 | ||
| Income from investment operations: | ||||
| Investment income | 0.03 | |||
| Net realized and unrealized loss on commodity futures contracts | (1.77 | ) | ||
| Total expenses | (2.38 | ) | ||
| Net decrease in net asset value | (4.12 | ) | ||
| Net asset value at end of period | $ | 40.33 | ||
| Total Return | (9.27 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 7.26 | % | ||
| Net investment loss | (7.17 | )% |
The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. This election is subject to change by the Sponsor, at its discretion. For the nine months ended September 30, 2013, this resulted in the waiving of Fund expenses of approximately $39,800. For the nine months ended September 30, 2012, this resulted in the waiving of Fund expenses of $28,000. In addition, for the nine months ended September 30, 2013, the Sponsor waived approximately $15,000 in management fees. Additional expenses of the Fund may be paid by the Sponsor in future periods.
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Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios, excluding non-recurring expenses, have been annualized.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 6 – Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees, were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 7 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013 there was nothing to report.
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TEUCRIUM SOYBEAN FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | |||||||
| Assets | (Unaudited) | |||||||
| Equity in BNY Mellon trading accounts: | ||||||||
| Cash and cash equivalents | $ | 5,989,091 | $ | 6,169,205 | ||||
| Commodity futures contracts | 50,875 | 63,200 | ||||||
| Collateral, due from broker | 599,175 | 670,563 | ||||||
| Interest receivable | 402 | 425 | ||||||
| Other assets | 75,783 | 26,315 | ||||||
| Total assets | 6,715,326 | 6,929,708 | ||||||
| Liabilities | ||||||||
| Commodity futures contracts | 307,313 | 284,575 | ||||||
| Management fee payable to Sponsor | 5,493 | 5,741 | ||||||
| Other liabilities | 7,330 | 3,217 | ||||||
| Total liabilities | 320,136 | 293,533 | ||||||
| Net assets | $ | 6,395,190 | $ | 6,636,175 | ||||
| Shares outstanding | 275,004 | 275,004 | ||||||
| Net asset value per share | $ | 23.25 | $ | 24.13 | ||||
| Market value per share | $ | 23.57 | $ | 24.07 | ||||
The accompanying notes are an integral part of these financial statements.
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TEUCRIUM SOYBEAN FUND
September 30, 2013
(Unaudited)
| Percentage of | Notional Amount | ||||||||||
| Description: Assets | Fair Value | Net Assets | (Long Exposure) | ||||||||
| Cash equivalents | |||||||||||
| Money market funds | |||||||||||
| Dreyfus Cash Management Plus | $ | 5,989,091 | 93.65 | % | |||||||
| Commodity futures contracts | |||||||||||
| United States soybean futures contracts | |||||||||||
| CBOT Soybean futures (35 contracts, settlement date January 14, 2014) | $ | 50,875 | 0.80 | % | $ | 2,248,750 | |||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT Soybean futures (30 contracts, settlement date March 14, 2014) | $ | 141,900 | 2.22 | % | $ | 1,900,500 | ||||||
| CBOT Soybean futures (39 contracts, settlement date November 14, 2014) | 165,413 | 2.59 | 2,252,250 | |||||||||
| Total commodity futures contracts | $ | 307,313 | 4.81 | % | $ | 4,152,750 | ||||||
The accompanying notes are an integral part of these financial statements.
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TEUCRIUM SOYBEAN FUND
SCHEDULE OF INVESTMENTS
December 31, 2012
| Percentage of | |||||||||||
| Description: Assets | Fair Value | Net Assets | |||||||||
| Cash equivalents | |||||||||||
| Money market funds | |||||||||||
| Dreyfus Cash Management Plus | $ | 6,169,205 | 92.96 | % | |||||||
| Notional Amount | |||||||||||
| (Long Exposure) | |||||||||||
| Commodity futures contracts | |||||||||||
| United States soybean futures contracts | |||||||||||
| CBOT Soybean futures (28 contracts, settlement date May 14, 2013) | $ | 40,775 | $ | 0.61 | % | $ | 1,958,950 | ||||
| CBOT soybean futures (36 contracts, settlement date November 14, 2013) | 22,425 | 0.34 | 2,344,950 | ||||||||
| Total commodity futures contracts | $ | 63,200 | $ | 0.95 | % | $ | 4,303,900 | ||||
| Fair | Percentage of | Notional Amount | ||||||||||
| Description: Liabilities | Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT soybean futures (33 contracts, settlement date March 14, 2013) | $ | 284,575 | $ | 4.29 | % | $ | 2,325,675 | |||||
The accompanying notes are an integral part of these financial statements.
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TEUCRIUM SOYBEAN FUND
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized gain on commodity futures contracts | $ | 183,763 | $ | 719,250 | $ | 8,838 | $ | 797,231 | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (188,626 | ) | (405,038 | ) | (35,063 | ) | (102,331 | ) | ||||||||
| Interest income | 698 | 2,248 | 2,359 | 3,680 | ||||||||||||
| Total (loss) income | (4,165 | ) | 316,460 | (23,866 | ) | 698,580 | ||||||||||
| Expenses | ||||||||||||||||
| Management fees | 16,459 | 26,362 | 49,254 | 44,140 | ||||||||||||
| Professional fees | 42,430 | (3,351 | ) | 75,010 | 51,800 | |||||||||||
| Distribution and marketing fees | 35,262 | 53,450 | 113,103 | 115,335 | ||||||||||||
| Custodian fees and expenses | 1,518 | 10,620 | 4,505 | 75,041 | ||||||||||||
| Business permits and licenses fees | 9,600 | 8,560 | 15,211 | 10,384 | ||||||||||||
| General and administrative expenses | 14,276 | 14,760 | 22,783 | 24,042 | ||||||||||||
| Brokerage commissions | 1,932 | 1,504 | 5,733 | 2,500 | ||||||||||||
| Other expenses | 1,885 | 4,830 | 6,191 | 6,981 | ||||||||||||
| Total expenses | 123,362 | 116,735 | 291,790 | 330,223 | ||||||||||||
| Net (loss) income | $ | (127,527 | ) | $ | 199,725 | $ | (315,656 | ) | 368,357 | |||||||
| Net (loss) income per share | $ | (0.47 | ) | $ | 2.18 | $ | (0.88 | ) | $ | 4.72 | ||||||
| Net (loss) income per weighted average share | $ | (0.46 | ) | $ | 0.51 | $ | (1.15 | ) | $ | 1.59 | ||||||
| Weighted average shares outstanding | 275,004 | 389,950 | 275,279 | 232,303 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
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TEUCRIUM SOYBEAN FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended September 30, 2013 |
Nine months ended September 30, 2012 |
|||||||
| Operations | ||||||||
| Net (loss) income | $ | (315,656 | ) | $ | 368,357 | |||
| Capital transactions | ||||||||
| Issuance of Shares | 1,859,169 | 16,116,224 | ||||||
| Redemption of Shares | (1,784,498 | ) | (8,037,728 | ) | ||||
| Total capital transactions | 74,671 | 8,078,496 | ||||||
| Net change in net assets | (240,985 | ) | 8,446,853 | |||||
| Net assets, beginning of period | 6,636,175 | 2,186,430 | ||||||
| Net assets, end of period | $ | 6,395,190 | $ | 10,633,283 | ||||
| Net asset value per share at beginning of period | $ | 24.13 | $ | 21.86 | ||||
| At end of period | $ | 23.25 | $ | 26.58 | ||||
The accompanying notes are an integral part of these financial statements.
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TEUCRIUM SOYBEAN FUND
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (315,656 | ) | $ | 368,357 | |||
| Adjustments to reconcile net (loss) income to net cash used in by operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 35,063 | 102,331 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Collateral, due from broker | 71,388 | (908,906 | ) | |||||
| Interest receivable | 23 | (681 | ) | |||||
| Other assets | (49,468 | ) | (55,487 | ) | ||||
| Management fee payable to Sponsor | (248 | ) | 8,560 | |||||
| Other liabilities | 4,113 | 13,493 | ||||||
| Net cash used in operating activities | (254,785 | ) | (472,333 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of Shares | 1,859,169 | 16,116,224 | ||||||
| Redemption of Shares | (1,784,498 | ) | (7,386,510 | ) | ||||
| Net cash provided by financing activities | 74,671 | 8,729,714 | ||||||
| Net change in cash and cash equivalents | (180,114 | ) | 8,257,381 | |||||
| Cash and cash equivalents, beginning of period | 6,169,205 | 2,055,369 | ||||||
| Cash and cash equivalents, end of period | $ | 5,989,091 | $ | 10,312,750 | ||||
The accompanying notes are an integral part of these financial statements.
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September 30, 2013
(Unaudited)
Note 1 – Organization and Operation
Teucrium Soybean Fund (referred to herein as “SOYB” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 25,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “SOYB,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for soybean interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of the Fund is to have the daily changes in percentage terms of the Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for soybeans (“Soybean Futures Contracts”) that are traded on the Chicago Board of Trade (“CBOT”). Except as described in the following paragraph, the three Soybean Futures Contracts will be: (1) second-to-expire CBOT Soybean Futures Contract, weighted 35%, (2) the third-to-expire CBOT Soybean Futures Contract, weighted 30%, and (3) the CBOT Soybean Futures Contract expiring in the November following the expiration month of the third-to-expire contract, weighted 35%.
The Fund commenced investment operations on September 19, 2011 and has a fiscal year ending December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On June 17, 2011, the Fund’s registration of 10,000,000 shares on Form S-1 was declared effective by the SEC. On September 19, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “SOYB.” On the business day prior to that, the Fund issued 100,000 shares in exchange for $2,500,000 at the Fund’s initial NAV of $25 per share. The Fund also commenced investment operations on September 19, 2011 by purchasing soybean commodity futures contracts traded on the CBOT. On December 31, 2010, the Fund had four shares outstanding, which were owned by the Sponsor.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
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Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Fund is subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2013 and December 31, 2012. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The size of a Creation Basket and a Redemption basket was changed effective March 5, 2012 from 50,000 to 25,000 shares.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $5,989,091 and $6,169,205 in money market funds at September 30, 2013 and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Collateral, Due from/to Broker
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in
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relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| • | Taking the current market value of its total assets and |
| • | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of Soybean Futures Contracts, the administrator uses the CBOT closing price. The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter soybean interests is determined based on the value of the commodity or futures contract underlying such soybean interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such soybean interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open soybean interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Market value per share represents the closing price on the last trading day of the quarter as reported by the NYSE Arca. If such a closing price is not available, the bid/ask midpoint at 4 p.m. as reported by the NYSE Arca was used.
Sponsor Fee and Allocation of Expenses
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum. For the three months ended September 30, 2013, the Fund recorded $16,459 in management fees to the Sponsor. For the nine months ended September 30, 2013, the Fund recorded $49,254 in management fees to the Sponsor. For the three months ended September 30, 2012, the Fund recorded $26,362 in management fees to the Sponsor. For the nine months ended September 30, 2012, the Fund recorded $44,140 in management fees to the Sponsor.
The Fund pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays the fees and expenses associated with the Fund’s tax accounting and reporting requirements. The Sponsor can elect to waive certain fees or expenses that would generally be paid for by the Fund. For the nine months ended September 30, 2013, approximately $5,700 of expenses were paid by the Sponsor. For the three and nine months ended September 30, 2012, approximately $7,500 and $11,700 of expenses, respectively, were paid by the Sponsor. As of December 31, 2012, there were approximately
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$560,000 of expenses recorded on the financial statements of the Sponsor which are subject to reimbursement by the Funds in 2013. Through the nine months ended September 30, 2013, the Sponsor sought approximately $390,000 in reimbursement from CORN, SOYB and WEAT for these expenses, with approximately $174,000 in the quarter ended September 30, 2013. These Funds have not recorded the remaining $170,000 of expenses subject to reimbursement to the Sponsor as payment is not probable at September 30, 2013.
Certain aggregate expenses common to all Funds managed by the Sponsor are allocated to each Fund based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses are calculated on the prior day’s net assets.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2013 and December 31, 2012, in the opinion of the Trust and the Fund, the reported value of the Soybean Futures Contracts traded on the CBOT fairly reflected the value of the Soybean Futures Contracts held by the Fund, and no adjustments were necessary.
For the period ended March 31, 2013, Soybean Futures Contracts traded on the CBOT due to settle on November 14, 2014 (the “NOV14 Soybean Contracts”) did not, in the opinion of the Trust and SOYB, trade in an actively traded futures market as defined in the policy of the Trust and SOYB for the entire period during which they were held. Accordingly, the Trust and SOYB classified these as a Level 2 liability. The NOV14 Soybean Contracts were, in the opinion of the Trust and SOYB, fairly valued at settlement on March 31, 2013. These transferred back to a Level 1 liability for the quarter ended June 30, 2013.
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange,
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such as the Chicago Board of Trade (“CBOT”) or the New York Mercantile Exchange (“NYMEX”), or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Fund.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Fund.
Note 3 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 2. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Cash equivalents | $ | 5,989,091 | $ | - | $ | - | $ | 5,989,091 | ||||
| Commodity futures contracts | 50,875 | - | - | 50,875 | ||||||||
| Total | $ | 6,039,966 | $ | - | $ | - | $ | 6,039,966 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Commodity futures contracts | $ | 307,313 | $ | - | $ | - | $ | 307,313 | ||||
December 31, 2012
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Cash equivalents | $ | 6,169,205 | $ | - | $ | - | $ | 6,169,205 | ||||
| Commodity futures contracts | 63,200 | - | - | 63,200 | ||||||||
| Total | $ | 6,232,405 | $ | - | $ | - | $ | 6,232,405 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Commodity futures contracts | $ | 284,575 | $ | - | $ | - | $ | 284,575 | ||||
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Transfers into and out of each level of the fair value hierarchy for the NOV14 Soybean Contracts, for the nine months ended September 30, 2013 were as follows:
| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Liabilities (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Soybean future contracts | $ | 6,850 | $ | 6,850 | $ | 6,850 | $ | 6,850 | $ | - | $ | - | ||||||||||||
During the nine months ended September 30, 2012, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
Note 4 -Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the three and nine months ended September 30, 2013 and 2012, the Fund invested only in commodity futures contracts.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2011-11 "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" and subsequently clarified in FASB ASU 2013-01 "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities."
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk as of September 30, 2013 and December 31, 2012.
Offsetting of Financial Assets and Derivative Assets as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Soybean futures contracts | $ | 50,875 | $ | - | $ | 50,875 | $ | 50,875 | $ | - | $ | - | ||||||||||||
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Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Soybean futures contracts | $ | 307,313 | $ | - | $ | 307,313 | $ | 50,875 | $ | 256,438 | $ | - | ||||||||||||
Offsetting of Financial Assets and Derivative Assets as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Soybean futures contracts | $ | 63,200 | $ | - | $ | 63,200 | $ | 63,200 | $ | - | $ | - | ||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Soybean futures contracts | $ | 284,575 | $ | - | $ | 284,575 | $ | 63,200 | $ | 221,375 | $ | - | ||||||||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2013
| Realized Gain on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 183,763 | $ | (188,626) | ||||
Three months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 719,250 | $ | (405,038 | ) | |||
Nine months ended September 30, 2013
| Realized Gain on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 8,838 | $ | (35,063) | ||||
Nine months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 797,231 | $ | (102,331 | ) | |||
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Volume of Derivative Activities
The notional amounts and number of contracts categorized by primary underlying risk, commodity price risk, are included in the schedule of investments as of September 30, 2013 and December 31, 2012.
Note 5 – Financial Highlights
The following table presents per unit performance data and other supplemental financial data for the nine months ended September 30, 2013 and 2012. This information has been derived from information presented in the financial statements.
| Per Share Operation Performance for nine months ended September 30, 2013 | ||||
| Net asset value at beginning of period | $ | 24.13 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized gain on commodity futures contracts | 0.17 | |||
| Total expenses | (1.06 | ) | ||
| Net decrease in net asset value | (0.88 | ) | ||
| Net asset value at end of period | $ | 23.25 | ||
| Total Return | (3.65 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 5.93 | % | ||
| Net investment loss | (5.88 | )% |
| Per Share Operation Performance for nine months ended September 30, 2012 | ||||
| Net asset value at beginning of period | $ | 21.86 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized gain on commodity futures contracts | 6.13 | |||
| Total expenses | (1.42 | ) | ||
| Net increase in net asset value | 4.72 | |||
| Net asset value at end of period | $ | 26.58 | ||
| Total Return | 21.59 | % | ||
| Ratios to Average Net Assets | ||||
| Total expense | 7.47 | % | ||
| Net investment loss | (7.38 | )% |
The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. This election is subject to change by the Sponsor, at its discretion. For the nine month period ended September 30, 2013, approximately $5,700 of expenses was paid by the Sponsor. For the nine months ended September 30, 2012, approximately $11,700 of expenses were paid by the Sponsor. As of December 31, 2012, there were approximately $560,000 of expenses recorded on the financial statements of the Sponsor which are subject to reimbursement by the Funds in 2013. Through the nine months ended September 30, 2013, the Sponsor sought approximately $390,000 in reimbursement from CORN, SOYB and WEAT for these expenses, with approximately $174,000 in the quarter ended September 30, 2013. These Funds have not recorded the remaining $170,000 of expenses subject to reimbursement to the Sponsor as payment is not probable at September 30, 2013.
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios, excluding non-recurring expenses, have been annualized.
The Financial Highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the Financial Highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 6 – Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees, were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 7 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013 there was nothing to report.
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TEUCRIUM SUGAR FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | |||||||
| Assets | (Unaudited) | |||||||
| Equity in BNY Mellon trading accounts: | ||||||||
| Cash and cash equivalents | $ | 2,493,924 | $ | 2,088,533 | ||||
| Commodity futures contracts | 33,410 | - | ||||||
| Collateral, due from broker | 136,487 | 189,259 | ||||||
| Interest receivable | 159 | 164 | ||||||
| Other assets | 33,489 | 27,067 | ||||||
| Total assets | 2,697,469 | 2,305,023 | ||||||
| Liabilities | ||||||||
| Commodity futures contracts | 34,933 | 78,378 | ||||||
| Other liabilities | 64 | 747 | ||||||
| Total liabilities | 34,997 | 79,125 | ||||||
| Net assets | $ | 2,662,472 | $ | 2,225,898 | ||||
| Shares outstanding | 175,004 | 125,004 | ||||||
| Net asset value per share | $ | 15.21 | $ | 17.81 | ||||
| Market value per share | $ | 15.19 | $ | 17.84 | ||||
The accompanying notes are an integral part of these financial statements.
| 75 |
TEUCRIUM SUGAR FUND
September 30, 2013
(Unaudited)
| Percentage of | Notional Amount | ||||||||||
| Description: Assets | Fair Value | Net Assets | (Long Exposure) | ||||||||
| Cash equivalents | |||||||||||
| Money market funds | |||||||||||
| Dreyfus Cash Management Plus | $ | 2,493,924 | 93.67 | % | |||||||
| Commodity futures contracts | |||||||||||
| United States sugar futures contracts | |||||||||||
| ICE sugar futures (46 contracts, settlement date April 30, 2014) | 16,386 | 0.61 | 930,966 | ||||||||
| ICE sugar futures (40 contracts, settlement date June 30, 2014) | 17,024 | 0.64 | 805,504 | ||||||||
| Total commodity futures contracts | $ | 33,410 | 1.25 | % | $ | 1,736,470 | |||||
| Description: Liabilities | Fair Value |
Percentage of Net Assets |
Notional Amount (Long Exposure) |
||||||||||||
| Commodity futures contracts | |||||||||||||||
| United States sugar futures contracts | |||||||||||||||
| ICE sugar futures (44 contracts, settlement date February 27, 2015) | $ | 34,933 | 1.31 | % | $ | 925,478 | |||||||||
The accompanying notes are an integral part of these financial statements.
| 76 |
TEUCRIUM SUGAR FUND
SCHEDULE OF INVESTMENTS
December 31, 2012
| Description: Assets | Fair Value | Percentage of Net Assets |
||||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management Plus | $ | 2,088,533 | 93.83 | % | ||||||||
| Fair | Percentage of | Notional Amount | ||||||||||
| Description: Liabilities | Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States sugar futures contracts | ||||||||||||
| ICE sugar futures (35 contracts, settlement date April 30, 2013) | $ | 38,629 | 1.74 | % | $ | 768,320 | ||||||
| ICE sugar futures (30 contracts, settlement date June 28, 2013) | 11,189 | 0.50 | 663,264 | |||||||||
| ICE sugar futures (34 contracts, settlement date February 28, 2014) | 28,560 | 1.28 | 783,686 | |||||||||
| Total commodity futures contracts | $ | 78,378 | 3.52 | % | $ | 2,215,270 | ||||||
The accompanying notes are an integral part of these financial statements.
| 77 |
TEUCRIUM SUGAR FUND
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
| Income | ||||||||||||||||
| Realized and unrealized (loss) gain on trading of commodity futures contracts: | ||||||||||||||||
| Realized loss on commodity futures contracts | $ | (113,288 | ) | $ | (80,068 | ) | $ | (398,406 | ) | $ | (676,378 | ) | ||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 174,888 | 661 | 76,855 | 77,875 | ||||||||||||
| Interest income | 272 | 392 | 876 | 1,541 | ||||||||||||
| Total income (loss) | 61,872 | (79,015 | ) | (320,675 | ) | (596,962 | ) | |||||||||
| Expenses | ||||||||||||||||
| Management fees | - | - | - | 14,055 | ||||||||||||
| Professional fees | 9,876 | (7,864 | ) | 22,119 | 47,286 | |||||||||||
| Distribution and marketing fees | (654 | ) | 3,369 | 4,160 | 5,193 | |||||||||||
| Custodian fees and expenses | - | 12,135 | - | 74,019 | ||||||||||||
| Business permits and licenses fees | - | (4,000 | ) | (124 | ) | 60,421 | ||||||||||
| General and administrative expenses | - | 5,107 | 245 | 14,389 | ||||||||||||
| Brokerage commissions | 384 | 1,053 | 839 | 3,072 | ||||||||||||
| Other expenses | - | 1,455 | 453 | 3,605 | ||||||||||||
| Total expenses | 9,606 | 11,255 | 27,692 | 222,040 | ||||||||||||
| Net income (loss) | $ | 52,266 | $ | (90,270 | ) | $ | (348,367 | ) | $ | (819,002 | ) | |||||
| Net income (loss) per share | $ | 0.29 | $ | (0.74 | ) | $ | (2.60 | ) | $ | (4.50 | ) | |||||
| Net income (loss) per weighted average share | $ | 0.30 | $ | (1.12 | ) | $ | (2.23 | ) | $ | (7.37 | ) | |||||
| Weighted average shares outstanding | 175,004 | 80,711 | 156,323 | 111,135 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
| 78 |
TEUCRIUM SUGAR FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | ||||||||
| September 30, 2013 | September 30, 2012 | ||||||||
| Operations | |||||||||
| Net loss | $ | (348,367 | ) | $ | (819,002 | ) | |||
| Capital transactions | |||||||||
| Issuance of Shares | 784,941 | 4,438,390 | |||||||
| Redemption of Shares | - | (4,069,474 | ) | ||||||
| Total capital transactions | 784,941 | 368,916 | |||||||
| Net change in net assets | 436,574 | (450,086 | ) | ||||||
| Net assets, beginning of period | 2,225,898 | 2,306,249 | |||||||
| Net assets, end of period | $ | 2,662,472 | $ | 1,856,163 | |||||
| Net asset value per share at beginning of period | $ | 17.81 | $ | 23.06 | |||||
| At end of period | $ | 15.21 | $ | 18.56 | |||||
The accompanying notes are an integral part of these financial statements.
| 79 |
TEUCRIUM SUGAR FUND
(Unaudited)
| Nine months ended | Nine months ended | ||||||||
| September 30, 2013 | September 30, 2012 | ||||||||
| Cash flows from operating activities: | |||||||||
| Net loss | $ | (348,367 | ) | $ | (819,002 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (76,855 | ) | (77,875 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||
| Collateral, due from broker | 52,772 | 211,348 | |||||||
| Interest receivable | 5 | (19 | ) | ||||||
| Other assets | (6,422 | ) | (35,957 | ) | |||||
| Management fee payable to Sponsor | - | (1,973 | ) | ||||||
| Other liabilities | (683 | ) | (2,156 | ) | |||||
| Net cash used in operating activities | (379,550 | ) | (725,634 | ) | |||||
| Cash flows from financing activities: | |||||||||
| Proceeds from sale of Shares | 784,941 | 4,438,390 | |||||||
| Redemption of Shares | - | (4,069,474 | ) | ||||||
| Net cash provided by financing activities | 784,941 | 368,916 | |||||||
| Net change in cash and cash equivalents | 405,391 | (356,718 | ) | ||||||
| Cash and cash equivalents, beginning of period | 2,088,533 | 2,051,003 | |||||||
| Cash and cash equivalents, end of period | $ | 2,493,924 | $ | 1,694,285 | |||||
The accompanying notes are an integral part of these financial statements.
| 80 |
September 30, 2013
(Unaudited)
Note 1 – Organization and Operation
Teucrium Sugar Fund (referred to herein as “CANE” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 25,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “CANE,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for sugar interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of the Fund is to have the daily changes in percentage terms of the Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for sugar (“Sugar Futures Contracts”) that are traded on ICE Futures US (“ICE Futures”), specifically: (1) the second-to-expire Sugar No. 11 Futures Contract (a “Sugar No. 11 Futures Contract”), weighted 35%, (2) the third-to-expire Sugar No. 11 Futures Contract, weighted 30%, and (3) the Sugar No. 11 Futures Contract expiring in the March following the expiration month of the third-to-expire contract, weighted 35%.
The Fund commenced investment operations on September 19, 2011 and has a fiscal year ending December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On June 17, 2011, the Fund’s registration of 10,000,000 shares on Form S-1 was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On September 19, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “CANE.” On the business day prior to that, the Fund issued 100,000 shares in exchange for $2,500,000 at the Fund’s initial NAV of $25 per share. The Fund also commenced investment operations on September 19, 2011 by purchasing commodity futures contracts traded on ICE. On December 31, 2010, the fund had four shares outstanding, which were owned by the Sponsor.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
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Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Fund is subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2013 and December 31, 2012. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The size of a Creation Basket and a Redemption basket was changed effective March 5, 2012 from 50,000 to 25,000 shares.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $2,493,924 and $2,088,533 in money market funds at September 30, 2013 and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Collateral, Due from/to Broker
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in
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relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| • | Taking the current market value of its total assets and |
| • | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of Sugar Futures Contracts, the administrator uses the ICE closing price (currently 1:30 p.m. New York time). The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter sugar interests is determined based on the value of the commodity or futures contract underlying such sugar interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such sugar interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open sugar interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Market value per share represents the closing price on the last trading day of the quarter as reported by the NYSE Arca. If such a closing price is not available, the bid/ask midpoint at 4 p.m. as reported by the NYSE Arca was used.
Sponsor Fee and Allocation of Expenses
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum. The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. This election is subject to change by the Sponsor, at its discretion. For the three and nine months ended September 30, 2013, this election by the Sponsor resulted in approximately $5,800 and $17,500 reduction in management fees, respectively. For 2012, this election was $4,000 for both the three and nine months.
The Fund pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds managed by the Sponsor are allocated to each Fund based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses are calculated on the prior day’s net assets. The Sponsor may, at its discretion, pay certain expenses on behalf of the Fund. For the three and nine months ended September 30, 2013,
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approximately $12,200 and $50,000 of expenses were paid by the Sponsor that normally would have been paid by the Fund. For the same periods in 2012, approximately $17,600 and $33,300 of expenses were paid by the Sponsor. Additional expenses of the Fund may be paid by the Sponsor in future periods.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2013 and December 31, 2012, in the opinion of the Trust and the Fund, the reported value of the Sugar Futures Contracts traded on ICE fairly reflected the value of the Sugar Futures Contracts held by the Fund, and no adjustments were necessary.
For the period ended June 30, 2013, the Sugar Futures Contracts traded on ICE due to settle on February 27, 2015 (the “MAR15 ICE Sugar Contracts”) did not, in the opinion of the Trust and CANE, trade in an actively traded futures market as defined in the policy of the Trust and CANE for the entire period during which they were held. Accordingly, the Trust and CANE have classified these as a Level 2 liability. The MAR15 ICE Sugar Contracts were, in the opinion of the Trust and CANE, fairly valued at settlement on June 30, 2013. These transferred back to a Level 1 liability for the quarter ended September 30, 2013.
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the NYMEX, or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
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Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Fund.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Fund.
Note 3 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 2. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Cash equivalents | $ | 2,493,924 | $ | - | $ | - | $ | 2,493,924 | ||||
| Commodity futures contracts | 33,410 | - | - | 33,410 | ||||||||
| Total | $ | 2,527,334 | $ | - | $ | - | $ | 2,527,334 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Commodity futures contracts | $ | 34,933 | $ | - | $ | - | $ | 34,933 | ||||
December 31, 2012
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Cash equivalents | $ | 2,088,533 | $ | - | $ | - | $ | 2,088,533 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Commodity futures contracts | $ | 78,378 | $ | - | $ | - | $ | 78,378 | ||||
Transfers into and out of each level of the fair value hierarchy for the FEB15 ICE Sugar Contracts, for the nine months ended September 30, 2013 were as follows:
| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Liabilities (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Sugar future contracts | $ | 62,082 | $ | 62,082 | $ | 62,082 | $ | 62,082 | $ | - | $ | - | ||||||||||||
During the nine months ended September 30, 2012, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
| 85 |
Note 4 – Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the three and nine months ended September 30, 2013 and 2012, the Fund invested only in commodity futures contracts.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2011-11 "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" and subsequently clarified in FASB ASU 2013-01 "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities."
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk as of September 30, 2013 and December 31, 2012.
Offsetting of Financial Assets and Derivative Assets as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Sugar futures contracts | $ | 33,410 | $ | - | $ | 33,410 | $ | 33,410 | $ | - | $ | - | ||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Sugar futures contracts | $ | 34,933 | $ | - | $ | 34,933 | $ | 33,410 | $ | 1,523 | $ | - | ||||||||||||
| 86 |
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Sugar futures contracts | $ | 78,378 | $ | - | $ | 78,378 | $ | - | $ | 78,378 | $ | - | ||||||||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (113,288 | ) | $ | 174,888 | |||
Three months ended September 30, 2012
| Realized Loss on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (80,068 | ) | $ | 661 | |||
Nine months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (398,406 | ) | $ | 76,855 | |||
Nine months ended September 30, 2012
| Realized Loss on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (676,378 | ) | $ | 77,875 | |||
Volume of Derivative Activities
The notional amounts and number of contracts categorized by primary underlying risk, commodity price risk, are included in the schedule of investments as of September 30, 2013 and December 31, 2012.
Note 5 – Financial Highlights
The following table presents per unit performance data and other supplemental financial data for the nine months ended September 30, 2013 and 2012. This information has been derived from information presented in the financial statements.
| Per Share Operation Performance for the nine months ended September 30, 2013 | ||||
| Net asset value at beginning of period | $ | 17.81 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (2.43 | ) | ||
| Total expenses | (0.18 | ) | ||
| Net decrease in net asset value | (2.60 | ) | ||
| Net asset value at end of period | $ | 15.21 | ||
| Total Return | (14.60 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 1.53 | % | ||
| Net investment loss | (1.48 | )% |
| 87 |
| Per Share Operation Performance for the nine months ended September 30, 2012 | ||||
| Net asset value at beginning of period | $ | 23.06 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (2.51 | ) | ||
| Total expenses | (2.00 | ) | ||
| Net decrease in net asset value | (4.50 | ) | ||
| Net asset value at end of period | $ | 18.56 | ||
| Total Return | (19.51 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 12.46 | % | ||
| Net investment loss | (12.37 | )% |
The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. This election is subject to change by the Sponsor, at its discretion. For the nine months ended September 30, 2013, this resulted in the waiving of Fund expenses of approximately $50,000 and $17,500 reduction in management fees. For the nine months ended September 30, 2012, this resulted in the waiving of Fund expenses of approximately $33,300 and $4,000 reduction in management fees.
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios, excluding non-recurring expenses, have been annualized.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 6 – Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees, were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 7 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013 there was nothing to report.
| 88 |
TEUCRIUM WHEAT FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Equity in BNY Mellon trading accounts: | ||||||||
| Cash and cash equivalents | $ | 6,940,275 | $ | 3,356,906 | ||||
| Commodity futures contracts | 67,813 | 15,762 | ||||||
| Collateral, due from broker | 758,725 | 532,964 | ||||||
| Interest receivable | 435 | 203 | ||||||
| Other assets | 75,624 | 26,443 | ||||||
| Total assets | 7,842,872 | 3,932,278 | ||||||
| Liabilities | ||||||||
| Commodity futures contracts | 294,963 | 206,850 | ||||||
| Management fee payable to Sponsor | 6,003 | 2,775 | ||||||
| Other liabilities | 6,622 | 3,444 | ||||||
| Total liabilities | 307,588 | 213,069 | ||||||
| Net assets | $ | 7,535,284 | $ | 3,719,209 | ||||
| Shares outstanding | 450,004 | 175,004 | ||||||
| Net asset value per share | $ | 16.74 | $ | 21.25 | ||||
| Market value per share | $ | 16.64 | $ | 21.32 | ||||
The accompanying notes are an integral part of these financial statements.
| 89 |
TEUCRIUM WHEAT FUND
September 30, 2013
(Unaudited)
| Fair | Percentage of | Notional Amount | |||||
| Description: Assets | Value | Net Assets | (Long Exposure) | ||||
| Cash equivalents | |||||||
| Money market funds | $ 6,940,275 | 92.10 | % | ||||
| Dreyfus Cash Management Plus | |||||||
| Commodity futures contracts | |||||||
| United States wheat futures contracts | |||||||
| CBOT wheat futures (66 contracts, settlement date May 14, 2014) | $ 67,813 | 0.90 | % | $ 2,276,175 |
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States wheat futures contracts | ||||||||||||
| CBOT wheat futures (77 contracts, settlement date March 14, 2014) | $ | 41,063 | 0.54 | % | $ | 2,644,950 | ||||||
| CBOT wheat futures (76 contracts, settlement date December 12, 2014) | 253,900 | 3.37 | 2,621,050 | |||||||||
| Total commodity futures contracts | $ | 294,963 | 3.91 | % | $ | 5,266,000 | ||||||
The accompanying notes are an integral part of these financial statements.
| 90 |
TEUCRIUM WHEAT FUND
SCHEDULE OF INVESTMENTS
December 31, 2012
| Fair | Percentage of | Notional Amount | |||||||
| Description: Assets | Value | Net Assets | (Long Exposure) | ||||||
| Cash equivalents | |||||||||
| Money market funds | |||||||||
| Dreyfus Cash Management Plus | $ 3,356,906 | 90.26 | % | ||||||
| Commodity futures contracts | |||||||||
| United States wheat futures contracts | |||||||||
| CBOT wheat futures (32 contracts, settlement date December 13, 2013) | $ 15,762 | 0.42 | $ 1,313,200 |
| Fair | Percentage of | Notional Amount | ||||||||||
| Description: Liabilities | Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States wheat futures contracts | ||||||||||||
| CBOT wheat futures (33 contracts, settlement date May 14, 2013) | $ 166,925 | 4.49 | % | $ 1,299,787 | ||||||||
| CBOT wheat futures (28 contracts, settlement date July 12, 2013) | 39,925 | 1.07 | 1,111,250 | |||||||||
| Total commodity futures contracts | $ | 206,850 | 5.56 | % | $ | 2,411,037 | ||||||
The accompanying notes are an integral part of these financial statements.
| 91 |
TEUCRIUM WHEAT FUND
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||
| Income | ||||||||||||||
| Realized and unrealized (loss) gain on trading of commodity futures contracts: | ||||||||||||||
| Realized (loss) gain on commodity futures contracts | $ | (513,650 | ) | $ | 585,687 | $ (1,270,025 | ) | $ | 121,465 | |||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 480,925 | (214,112 | ) |
(36,062 |
) |
174,236 |
||||||||
| Interest income | 759 | 792 | 2,299 | 2,083 | ||||||||||
| Total (loss) gain | (31,966 | ) | 372,367 | (1,303,788 | ) | 297,784 | ||||||||
| Expenses | ||||||||||||||
| Management fees | 17,823 | 8,102 | 47,414 | 25,004 | ||||||||||
| Professional fees | 42,430 | (5,200 | ) | 68,485 | 49,951 | |||||||||
| Distribution and marketing fees | 35,386 | 35,100 | 94,779 | 96,985 | ||||||||||
| Custodian fees and expenses | 1,518 | 5,310 | 4,505 | 69,731 | ||||||||||
| Business permits and licenses fees | 10,077 | 4,340 | 14,518 | 6,164 | ||||||||||
| General and administrative expenses | 13,672 | 10,040 | 20,287 | 19,322 | ||||||||||
| Brokerage commissions | 1,840 | 1,368 | 5,460 | 3,178 | ||||||||||
| Other expenses | 2,889 | 2,721 | 6,860 | 4,621 | ||||||||||
| Total expenses | 125,635 | 61,781 | 262,308 | 274,956 | ||||||||||
| Net (loss) income | $ | (157,601 | ) | $ | 310,586 | $ | (1,566,096 | ) | $ | 22,828 | ||||
| Net (loss) income per share | $ | (0.42 | ) | $ | 2.47 | $ | (4.51 | ) | $ | 2.19 | ||||
| Net (loss) income per weighted average share | $ | (0.37 | ) | $ | 2.34 | $ | (4.45 | ) | $ | 0.15 | ||||
| Weighted average shares outstanding | 424,189 | 132,884 | 351,561 | 154,384 | ||||||||||
The accompanying notes are an integral part of these financial statements.
| 92 |
TEUCRIUM WHEAT FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Operations | ||||||||
| Net (loss) income | $ | (1,566,096 | ) | $ | 22,828 | |||
| Capital transactions | ||||||||
| Issuance of Shares | 6,735,654 | 4,958,111 | ||||||
| Redemption of Shares | (1,353,483 | ) | (4,147,720 | ) | ||||
| Total capital transactions | 5,382,171 | 810,391 | ||||||
| Net change in net assets | 3,816,075 | 833,219 | ||||||
| Net assets, beginning of period | 3,719,209 | 2,235,888 | ||||||
| Net assets, end of period | $ | 7,535,284 | $ | 3,069,107 | ||||
| Net asset value per share at beginning of period | $ | 21.25 | $ | 22.36 | ||||
| At end of period | $ | 16.74 | $ | 24.55 | ||||
The accompanying notes are an integral part of these financial statements.
| 93 |
TEUCRIUM WHEAT FUND
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (1,566,096 | ) | $ | 22,828 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 36,062 | (174,236 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Collateral, due from broker | (225,761 | ) | 13,111 | |||||
| Interest receivable | (232 | ) | (99 | ) | ||||
| Other assets | (49,181 | ) | (37,463 | ) | ||||
| Management fee payable to Sponsor | 3,228 | 705 | ||||||
| Other liabilities | 3,178 | 8,092 | ||||||
| Net cash used in operating activities | (1,798,802 | ) | (167,062 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of Shares | 6,735,654 | 4,958,111 | ||||||
| Redemption of Shares | (1,353,483 | ) | (4,147,720 | ) | ||||
| Net cash provided by financing activities | 5,382,171 | 810,391 | ||||||
| Net change in cash and cash equivalents | 3,583,369 | 643,329 | ||||||
| Cash and cash equivalents, beginning of period | 3,356,906 | 2,022,024 | ||||||
| Cash and cash equivalents, end of period | $ | 6,940,275 | $ | 2,665,353 | ||||
The accompanying notes are an integral part of these financial statements.
| 94 |
September 30, 2013
(Unaudited)
Note 1 – Organization and Operation
Teucrium Wheat Fund (referred to herein as “WEAT” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 25,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “WEAT,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for wheat interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of the Fund is to have the daily changes in percentage terms of the Shares’ Net Asset Value reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for wheat (“Wheat Futures Contracts”) that are traded on the Chicago Board of Trade (“CBOT”), specifically: (1) the second-to-expire CBOT Wheat Futures Contract, weighted 35%, (2) the third-to-expire CBOT Wheat Futures Contract, weighted 30%, and (3) the CBOT Wheat Futures Contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%.
The Fund commenced investment operations on September 19, 2011 and has a fiscal year ending December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On June 17, 2011, the Fund’s registration of 10,000,000 shares on Form S-1 was declared effective by the SEC. On September 19, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “WEAT.” On the business day prior to that, the Fund issued 100,000 shares in exchange for $2,500,000 at the Fund’s initial NAV of $25 per share. The Fund also commenced investment operations on September 19, 2011 by purchasing commodity futures contracts traded on the CBOT. On December 31, 2010, the Fund had four shares outstanding, which were owned by the Sponsor.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
| 95 |
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Fund is subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2013 and December 31, 2012. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The size of a Creation Basket and a Redemption basket was changed effective March 5, 2012 from 50,000 to 25,000 shares.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $6,940,275 and $3,356,906 in money market funds at September 30, 2013 and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Collateral, Due from/to Broker
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be
| 96 |
modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| • | Taking the current market value of its total assets and |
| • | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of Wheat Futures Contracts, the administrator uses the CBOT closing price. The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter wheat interests is determined based on the value of the commodity or futures contract underlying such wheat interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such wheat interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open wheat interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Market value per share represents the closing price on the last trading day of the quarter as reported by the NYSE Arca. If such a closing price is not available, the bid/ask midpoint at 4 p.m. as reported by the NYSE Arca was used.
Sponsor Fee and Allocation of Expenses
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum. For the three months ended September 30, 2013, the Fund recorded $17,823 in management fees to the Sponsor. For the three months ended September 30, 2012, the Fund recorded $8,102 in management fees to the Sponsor. For the nine months ended September 30, 2013, the Fund recorded $47,414 in management fees to the Sponsor. For the nine months ended September 30, 2012, the Fund recorded $25,004 in management fees to the Sponsor.
The Fund generally pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements. The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. For the nine months ended September 30, 2013, approximately $5,600 of expenses were paid by the Sponsor. For the three and nine month periods ended September 30, 2012 approximately $31,800 and $36,500 respectively were paid by the Sponsor; there were no such expenses for the three month period. As of December 31, 2012, there were approximately $560,000 of expenses recorded on the financial statements of the Sponsor which are subject to reimbursement by the Funds in 2013. Through the nine months ended September 30, 2013, the Sponsor sought approximately $390,000 in reimbursement from CORN, SOYB and WEAT for these expenses, with approximately $174,000 in
| 97 |
the quarter ended September 30, 2013. These Funds have not recorded the remaining $170,000 of expenses subject to reimbursement to the Sponsor as payment is not probable at September 30, 2013.
Certain aggregate expenses common to all Funds managed by the Sponsor are allocated to each Fund based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses are calculated on the prior day’s net assets.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
The Wheat Futures Contracts traded on the CBOT due to settle on December 12, 2014 (the "DEC14 Wheat Contracts") did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT for portions of the three months ended September 30, 2013. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of September 30, 2013. The DEC14 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on September 30, 2013. In addition, for the three months ended June 30, 2013, the Wheat Futures Contracts traded on the CBOT due to settle on December 12, 2014 did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT for portions of the three months ended June 30, 2013. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of June 30, 2013. The DEC14 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on June 30, 2013.
On December 31, 2012, in the opinion of the Trust, the reported value at the close of the market for each commodity contract fairly reflected the value of the futures and no alternative valuations were required.
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The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the NYMEX, or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Fund.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Fund.
Note 3 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 2. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Cash equivalents | $ | 6,940,275 | $ | - | $ | - | $ | 6,940,275 | ||||
| Commodity futures contracts | 67,813 | - | - | 67,813 | ||||||||
| Total | $ | 7,008,088 | $ | - | $ | - | $ | 7,008,088 | ||||
| Balance as of | |||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | September 30, 2013 | |||||||
| Commodity futures contracts | $ | 41,063 | $ | 253,900 | $ | $ | 294,963 | ||||
December 31, 2012
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2013 | ||||||||
| Cash equivalents | $ | 3,356,906 | $ | - | $ | - | $ | 3,356,906 | ||||
| Commodity futures contracts | 15,762 | - | - | 15,762 | ||||||||
| Total | $ | 3,372,668 | $ | - | $ | - | $ | 3,372,668 | ||||
| Balance as of | ||||||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | December 31, 2013 | ||||||||
| Commodity futures contracts | $ | 206,850 | $ | - | $ | - | $ | 206,850 | ||||
| 99 |
Transfers into and out of each level of the fair value hierarchy for the DEC14 Wheat Contracts, for the nine months ended September 30, 2013 were as follows:
| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Liabilities (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Wheat future contracts | $ | 194,225 | $ | 448,125 | $ | 448,125 | $ | 194,225 | $ | - | $ | - | ||||||||||||
During the nine months ended September 30, 2012, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
Note 4 – Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the nine months ended September 30, 2013 and 2012, the Fund invested only in commodity futures contracts. Cleared Wheat Swaps have standardized terms similar to, and are priced by reference to, the corresponding Benchmark Component Futures Contract. Additionally, Other Wheat Interests that do not have standardized terms and are not exchange-traded, referred to as “over-the-counter” Wheat Interests, can generally be structured as the parties to the Wheat Interest contract desire. Therefore, the Fund might enter into multiple Cleared Swaps and/or over-the-counter Interests intended to exactly replicate the performance of the Benchmark Component Futures Contracts for the Fund, or a single over-the-counter Interest designed to replicate the performance of the Benchmark as a whole. Assuming that there is no default by a counterparty to an over-the-counter Interest, the performance of the Interest will not necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") No. 2011-11 "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" and subsequently clarified in FASB ASU 2013-01 "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities."
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk as of September 30, 2013 and December 31, 2012.
Offsetting of Financial Assets and Derivative Assets as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Wheat futures contracts | $ | 67,813 | $ | - | $ | 67,813 | $ | 67,813 | $ | - | $ | - | ||||||||||||
| 100 |
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Wheat futures contracts | $ | 294,963 | $ | - | $ | 294,963 | $ | 67,813 | $ | 227,150 | $ | - | ||||||||||||
Offsetting of Financial Assets and Derivative Assets as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Assets | Liabilities | Liabilities | Instruments | Received | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Wheat futures contracts | $ | 15,762 | $ | - | $ | 15,762 | $ | 15,762 | $ | - | $ | - | ||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2012
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Statement of Assets and Liabilities | ||||||||||||||||||||||||
| Gross Amount | Net Amount | |||||||||||||||||||||||
| Offset in the | Presented in the | |||||||||||||||||||||||
| Gross Amount | Statement of | Statement of | ||||||||||||||||||||||
| of Recognized | Assets and | Assets and | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged | Net Amount | ||||||||||||||||||
| Commodity price | ||||||||||||||||||||||||
| Wheat futures contracts | $ | 206,850 | $ | - | $ | 206,850 | $ | 15,762 | $ | 191,088 | $ | - | ||||||||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (513,650 | ) | $ | 480,925 | |||
Three months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 585,687 | $ | (214,112) | ||||
Nine months ended September 30, 2013
| Realized Loss on | Net Change in Unrealized Loss | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | (1,270,025 | ) | $ | (36,062 | ) | ||
| 101 |
Nine months ended September 30, 2012
| Realized Gain on | Net Change in Unrealized Gain | |||||||
| Primary Underlying Risk | Derivative Instruments | on Derivative Instruments | ||||||
| Commodity price | ||||||||
| Commodity futures contracts | $ | 121,465 | $ | 174,236 | ||||
Volume of Derivative Activities
The notional amounts and number of contracts categorized by primary underlying risk, commodity price risk, are included in the schedule of investments as of September 30, 2013 and December 31, 2012.
Note 5 – Financial Highlights
The following table presents per unit performance data and other supplemental financial data for the nine months ended September 30, 2013 and 2012. This information has been derived from information presented in the financial statements.
| Per Share Operation Performance for the nine months ended September 30, 2013 | ||||
| Net asset value at beginning of period | $ | 21.25 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (3.77 | ) | ||
| Total expenses | (0.75 | ) | ||
| Net decrease in net asset value | (4.51 | ) | ||
| Net asset value at end of period | $ | 16.74 | ||
| Total Return | (21.22 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 5.52 | % | ||
| Net investment loss | (5.47 | )% |
| Per Share Operation Performance for the nine months ended September 30, 2012 | ||||
| Net asset value at beginning of period | $ | 22.36 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized gain on commodity futures contracts | 3.96 | |||
| Total expenses | (1.78 | ) | ||
| Net increase in net asset value | 2.19 | |||
| Net asset value at end of period | $ | 24.55 | ||
| Total Return | 9.79 | % | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 11.04 | % | ||
| Net investment loss | (10.95 | )% |
The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. This election is subject to change by the Sponsor, at its discretion. For the nine months ended September 30, 2013, approximately $5,600 of expenses were paid by the Sponsor. For the nine months ended September 30, 2012 approximately $31,800 were paid by the Sponsor. As of December 31, 2012, there were approximately $560,000 of expenses recorded on the financial statements of the Sponsor which are subject to reimbursement by the Funds in 2013. Through the nine months ended September 30, 2013, the Sponsor sought approximately $390,000 in reimbursement from CORN, SOYB and WEAT for these expenses, with approximately $174,000 in the quarter ended September 30, 2013. These Funds have not recorded the remaining $170,000 of expenses subject to reimbursement to the Sponsor as payment is not probable at September 30, 2013.
Total return is calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios, excluding non-recurring expenses, have been annualized.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 6 – Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees, were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 7 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013 there was nothing to report.
| 102 |
TEUCRIUM AGRICULTURAL FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2013 | December 31, 2012 | |||||||
| Assets | (Unaudited) | |||||||
| Equity in BNY Mellon trading accounts: | ||||||||
| Investments in securities, at fair value (cost $2,599,403 and $2,679,379 as of September 30, 2013 and December 31, 2012, respectively) | $ | 2,029,139 | $ | 2,426,187 | ||||
| Cash and cash equivalents | 2,189 | 6,419 | ||||||
| Other assets | 11,446 | 4,989 | ||||||
| Total assets | 2,042,774 | 2,437,595 | ||||||
| Liabilities | ||||||||
| Other liabilities | 385 | 874 | ||||||
| Net assets | $ | 2,042,389 | $ | 2,436,721 | ||||
| Shares outstanding | 50,002 | 50,002 | ||||||
| Net asset value per share | $ | 40.85 | $ | 48.73 | ||||
| Market value per share | $ | 38.04 | $ | 48.74 | ||||
The accompanying notes are an integral part of these financial statements.
| 103 |
TEUCRIUM AGRICULTURAL FUND
September 30, 2013
(Unaudited)
| Fair | Percentage of | |||||||||||
| Description: Assets | Value | Net Assets | Shares | |||||||||
| Exchange-traded funds | ||||||||||||
| Teucrium Corn Fund | $ | 503,639 | 24.66 | % | 15,058 | |||||||
| Teucrium Soybean Fund | 489,072 | 23.95 | 21,031 | |||||||||
| Teucrium Wheat Fund | 518,037 | 25.36 | 30,937 | |||||||||
| Teucrium Sugar Fund | 518,391 | 25.38 | 34,074 | |||||||||
| Total exchange-traded funds (cost $2,599,403) | $ | 2,029,139 | 99.35 | % | ||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management Plus | $ | 2,189 | 0.11 | % | ||||||||
The accompanying notes are an integral part of these financial statements.
| 104 |
TEUCRIUM AGRICULTURAL FUND
SCHEDULE OF INVESTMENTS
December 31, 2012
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Shares | |||||||||
| Exchange-traded funds | ||||||||||||
| Teucrium Corn Fund | $ | 596,685 | 24.49 | % | 13,458 | |||||||
| Teucrium Soybean Fund | 603,422 | 24.76 | 25,006 | |||||||||
| Teucrium Sugar Fund | 628,110 | 25.78 | 35,274 | |||||||||
| Teucrium Wheat Fund | 597,970 | 24.54 | 28,137 | |||||||||
| Total exchange-traded funds (cost $2,679,379) | $ | 2,426,187 | 99.57 | % | ||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management Plus | $ | 6,419 | 0.26 | % | ||||||||
The accompanying notes are an integral part of these financial statements.
| 105 |
TEUCRIUM AGRICULTURAL FUND
(Unaudited)
| From the commencement of | |||||||||||||||
| Three months ended | Three months ended | Nine months ended | operations (March 28, 2012) | ||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | through September 30, 2012 | ||||||||||||
| Income | |||||||||||||||
| Realized and unrealized (loss) gain on trading of securities: | |||||||||||||||
| Realized (loss) gain on securities | $ | (40,341 | ) | $ | 354,075 | $ | (68,970 | ) | $ | (615,762 | ) | ||||
| Net change in unrealized appreciation or depreciation on securities | (42,823 | ) | (107,824 | ) |
(317,072 |
) |
(34,555 |
) | |||||||
| Interest income | (3 | ) | 4 | (6 | ) | 21 | |||||||||
| Total (loss) income | (83,167 | ) | 246,255 | (386,048 | ) | (650,296 | ) | ||||||||
| Expenses | |||||||||||||||
| Professional fees | 751 | 1,199 | 2,602 | 938 | |||||||||||
| Distribution and marketing fees | 1,740 | 1,116 | 5,167 | 12,915 | |||||||||||
| Custodian fees and expenses | 24 | 356 | 68 | 1,631 | |||||||||||
| Business permits and licenses fees | 38 | 447 | (31 | ) | 234 | ||||||||||
| General and administrative expenses | 31 | 475 | 346 | 2,179 | |||||||||||
| Brokerage commissions | 21 | - | 83 | 1,249 | |||||||||||
| Other expenses | - | (32 | ) | 49 | 332 | ||||||||||
| Total expenses | 2,605 | 3,561 | 8,284 | 19,478 | |||||||||||
| Net (loss) income | $ | (85,772 | ) | $ | 242,694 | $ | (394,332 | ) | $ | (669,774 | ) | ||||
| Net (loss) income per share | $ | (1.71 | ) | $ | 3.80 | $ | (7.88 | ) | $ | 3.39 | |||||
| Net (loss) income per weighted average share | $ | (1.72 | ) | $ | 4.56 | $ | (7.89 | ) | $ | (5.14 | ) | ||||
| Weighted average shares outstanding | 50,002 | 53,263 | 50,002 | 130,216 | |||||||||||
The accompanying notes are an integral part of these financial statements.
| 106 |
TEUCRIUM AGRICULTURAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| From the commencement of | ||||||||
| Nine months ended | operations (March 28, 2012) | |||||||
| September 30, 2013 | through September 30, 2012 | |||||||
| Operations | ||||||||
| Net loss | $ | (394,332 | ) | $ | (669,774 | ) | ||
| Capital transactions | ||||||||
| Issuance of Shares | - | 17,706,578 | ||||||
| Redemption of Shares | - | (14,367,093 | ) | |||||
| Total capital transactions | - | 3,339,485 | ||||||
| Net change in net assets | (394,332 | ) | 2,669,711 | |||||
| Net assets, beginning of period | 2,436,721 | 100 | ||||||
| Net assets, end of period | $ | 2,042,389 | $ | 2,669,811 | ||||
| Net asset value per share at beginning of period | $ | 48.73 | $ | 50.00 | ||||
| At end of period | $ | 40.85 | $ | 53.39 | ||||
The accompanying notes are an integral part of these financial statements.
| 107 |
TEUCRIUM AGRICULTURAL FUND
(Unaudited)
| From the commencement of | ||||||||
| Nine months ended | operations (March 28, 2012) | |||||||
| September 30, 2013 | through September 30, 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (394,332 | ) | $ | (669,774 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on securities | 317,072 | 34,555 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Net purchases and sales of investments in securities | 79,976 | (2,682,915 | ) | |||||
| Receivable for investments sold | - | (25,882 | ) | |||||
| Other assets | (6,457 | ) | (7,376 | ) | ||||
| Payable for investments purchased | - | 16,178 | ||||||
| Other liabilities | (489 | ) | 38 | |||||
| Net cash used in operating activities | (4,230 | ) | (3,335,176 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of Shares | - | 17,706,578 | ||||||
| Redemption of Shares | - | (14,367,093 | ) | |||||
| Net cash (used in) provided by financing activities | - | 3,339,485 | ||||||
| Net change in cash and cash equivalents | (4,230 | ) | 4,309 | |||||
| Cash and cash equivalents, beginning of period | 6,419 | 100 | ||||||
| Cash and cash equivalents, end of period | $ | 2,189 | $ | 4,409 | ||||
The accompanying notes are an integral part of these financial statements.
| 108 |
September 30, 2013
(Unaudited)
Note 1 — Organization and Business
Teucrium Agricultural Fund (referred to herein as “TAGS” or the “Fund”) is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust organized on September 11, 2009. The Fund operates pursuant to the Trust’s Second Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). The Fund was formed on March 29, 2011 and is managed and controlled by Teucrium Trading, LLC (the “Sponsor”). The Sponsor is a limited liability company formed in Delaware on July 28, 2009 that is registered as a commodity pool operator (“CPO”) with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”).
On April 22, 2011, a registration statement was filed with the Securities and Exchange Commission (“SEC”). On February 10, 2012, the Fund’s initial registration of 5,000,000 shares on Form S-1 was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On March 28, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “TAGS.” On the business day prior to that, the Fund issued 300,000 shares in exchange for $15,000,000 at the Fund’s initial NAV of $50 per share. The Fund also commenced investment operations on March 28, 2012 by purchasing shares of the Underlying Funds. On December 31, 2011, the Fund had two shares outstanding, which were owned by the Sponsor.
The investment objective of the Fund is to have the daily changes in percentage terms of the Net Asset Value (“NAV”) of its common units (“Shares”) reflect the daily changes in percentage terms of a weighted average (the “Underlying Fund Average”) of the NAVs per share of four other commodity pools that are series of the Trust and are sponsored by the Sponsor: the Teucrium Corn Fund, the Teucrium Wheat Fund, the Teucrium Soybean Fund and the Teucrium Sugar Fund (collectively, the “Underlying Funds”). The Underlying Fund Average will have a weighting of 25% to each Underlying Fund, and the Fund’s assets will be rebalanced, generally on a daily basis, to maintain the approximate 25% allocation to each Underlying Fund. The Fund does not intend to invest directly in futures contracts (“Futures Contracts”), although it reserves the right to do so in the future, including if an Underlying Fund ceases operations.
The investment objective of each Underlying Fund is to have the daily changes in percentage terms of its shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for certain Futures Contracts for the commodity specified in the Underlying Fund’s name. (This weighted average is referred to herein as the Underlying Fund’s “Benchmark,” the Futures Contracts that at any given time make up an Underlying Fund’s Benchmark are referred to herein as the Underlying Fund’s “Benchmark Component Futures Contracts,” and the commodity specified in the Underlying Fund’s name is referred to herein as its “Specified Commodity.”) Specifically, the Teucrium Corn Fund’s Benchmark is: (1) the second-to-expire Futures Contract for corn traded on the Chicago Board of Trade (“CBOT”), weighted 35%, (2) the third-to-expire CBOT corn Futures Contract, weighted 30%, and (3) the CBOT corn Futures Contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%. The Teucrium Wheat Fund’s Benchmark is: (1) the second-to-expire CBOT wheat Futures Contract, weighted 35%, (2) the third-to-expire CBOT wheat Futures Contract, weighted 30%, and (3) the CBOT wheat Futures Contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%. The Teucrium Soybean Fund’s Benchmark is: (1) the second-to-expire CBOT soybean Futures Contract, weighted 35%, (2) the third-to-expire CBOT soybean Futures Contract, weighted 30%, and (3) the CBOT soybean Futures Contract expiring in the November following the expiration month of the third-to-expire contract, weighted 35%, except that CBOT soybean Futures Contracts expiring in August and September will not be part of the Teucrium Soybean Fund’s Benchmark because of the less liquid market for these Futures Contracts. The Teucrium Sugar Fund’s Benchmark is: (1) the second-to-expire Sugar No. 11 Futures Contract traded on ICE Futures US (“ICE Futures”), weighted 35%, (2) the third-to-expire ICE Futures Sugar No. 11 Futures Contract, weighted 30%, and (3) the ICE Futures Sugar No. 11 Futures Contract expiring in the March following the expiration month of the third-to-expire contract, weighted 35%.
While the Fund expects to maintain substantially all of its assets in shares of the Underlying Funds at all times, the Fund may hold some residual amount of assets in obligations of the United States government (“Treasury Securities”) or cash equivalents, and/or merely hold such assets in cash (generally in interest-bearing accounts). The Underlying Funds invest in Commodity Interests to the fullest extent possible without being leveraged or unable to satisfy their expected current or potential margin or collateral obligations with respect to their investments in Commodity Interests. After fulfilling such margin and collateral requirements, the Underlying Funds will invest the remainder of the proceeds from the sale of baskets in Treasury Securities or cash equivalents, and/or merely hold such assets in cash. Therefore, the focus of the Sponsor in managing the Underlying Funds is investing in Commodity Interests and in Treasury Securities, cash and/or cash equivalents. The Fund and Underlying Funds will earn interest income from the Treasury Securities and/or cash equivalents that it purchases and on the cash it holds through the Fund’s custodian, the Bank of New York Mellon (the “Custodian”).
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
| 109 |
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Revenue Recognition
Investment transactions are accounted for on a trade-date basis. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on investments are reflected in the statements of operations as the difference between the original amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations.
Brokerage Commissions
Brokerage commissions are accrued on a full-turn basis.
Income Taxes
The Fund will be treated as a partnership for United States federal income tax purposes. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. The Fund is subject to income tax examinations by major taxing authorities for all tax years since inception. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. This policy has been applied to all existing tax positions upon the Fund’s initial adoption. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of and for the periods ended September 30, 2013 and December 31, 2012. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2013 and 2012.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
Effective August 23, 2012, the number of shares in a “Basket” was reduced from 50,000 to 25,000.
The Fund will receive the proceeds from shares sold or will pay for redeemed shares within three business days after the trade date of the purchase or redemption, respectively. The amounts due from Authorized Purchasers will be reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption will be reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares. The Fund currently is at this minimum number of shares outstanding and no redemptions can be made until additional shares are created.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
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Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. Assets deposited with the bank may, at times, exceed federally insured limits. TAGS had a balance of $2,189 and $6,419 in money market funds at September 31, 2013 and December 31, 2012, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Due from/to Broker for Securities Transactions
Due from/to broker for investments in securities are securities transactions pending settlement. For the nine months ended September 30, 2013 and for the period from the commencement of operations (March 28, 2012) through December 31, 2012, all of the Fund’s securities transactions for the shares of the Underlying Funds, money balances were transacted with the Bank of New York Mellon and security transactions for the sale and purchase of shares of the Underlying Funds were principally transacted with the Bank of New York Mellon Capital Markets. The Fund is subject to credit risk to the extent any broker with whom it conducts business is unable to fulfill contractual obligations on its behalf. The management of the Funds monitors the financial condition of such brokers and does not anticipate any losses from these counterparties.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| • | Taking the current market value of its total assets and |
| • | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, will calculate the NAV of the Fund once each trading day. It will calculate the NAV as of the earlier of the close of the New York Stock Exchange or 4:00 p.m. New York time. The NAV for a particular trading day will be released after 4:15 p.m. New York time.
For purposes of the determining the Fund’s NAV, the Fund’s investments in the Underlying Funds will be valued based on the Underlying Funds’ NAVs. In turn, in determining the value of the Futures Contracts held by the Underlying Funds, the Administrator will use the closing price on the exchange on which they are traded. The Administrator will determine the value of all other Fund and Underlying Fund investments as of the earlier of the close of the New York Stock Exchange or 4:00 p.m. New York time, in accordance with the current Services Agreement between the Administrator and the Trust. The value of Cleared Swaps and over-the-counter Commodity Interests will be determined based on the value of the commodity or Futures Contract underlying such Commodity Interest, except that a fair value may be determined if the Sponsor believes that the Underlying Fund is subject to significant credit risk relating to the counterparty to such Commodity Interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV of an Underlying Fund where necessary to reflect the “fair value” of a Futures Contract held by an Underlying Fund when a Futures Contract held by an Underlying Fund closes at its price fluctuation limit for the day. Treasury Securities held by the Fund or Underlying Funds will be valued by the Administrator using values received from recognized third-party vendors (such as Reuters) and dealer quotes. NAV will include any unrealized profit or loss on open Commodity Interests and any other credit or debit accruing to the Fund but unpaid or not received by the Fund.
Market value per share represents the closing price on the last trading day of the quarter as reported by the NYSE Arca. If such a closing price is not available, the bid/ask midpoint at 4 p.m. as reported by the NYSE Arca was used.
Sponsor Fee and Allocation of Expenses
The Fund pays no direct management fees to the Sponsor. The Underlying Funds are contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum; these fees are recognized in the statements contained in this Form on 10-Q for each of the Underlying Funds. The Fund pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements.
The Sponsor may, at its discretion waive the payment by the Fund of certain expenses. This election is subject to change by the Sponsor, at its discretion. For the three and nine months ended September 30, 2013, approximately $9,300 and $45,200, respectively, of expenses were paid by the Sponsor. For the three months ended September 30, 2012 and from the commencement of operations (March 28, 2012) through September 30, 2012, approximately $14,000 and $14,500, respectively, of expenses were paid by the Sponsor. Certain aggregate expenses common to all Funds managed by the Sponsor are allocated to each Fund based on activity drivers deemed most appropriate by the Sponsor for such expenses. All asset-based fees and expenses are calculated on the prior day’s net assets. The Sponsor can elect to adjust the daily expense accruals at its discretion.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. We anticipate the adoption will not have a significant impact on the financial statements disclosures for the Trust or the Fund.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Amendments of the FASB Accounting Standards Codification and Disclosures about Offsetting Assets and Liabilities in U.S. GAAP and IFRS.” ASU No. 2011-11 clarifies existing requirements for balance sheet offsetting and for disclosures about the offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in converged guidance of the FASB and the International Accounting Standards Board. The amendments are to be applied retrospectively for all comparative periods presented. For public entities, the amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption did not have a significant impact on the financial statement disclosures for the Fund.
Fair Value - Definition and Hierarchy
In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the Net Asset Value (“NAV”) on a particular day using the Level 1 valuation, but will later recalculate the NAV
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for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
Investments in the securities of the Underlying Funds are freely tradable and listed on the NYSE Arca. These investments are valued at the NAV of the Underlying Fund as of the valuation date as calculated by the administrator based on the exchange-quoted prices of the commodity futures contracts held by the Underlying Funds.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
Note 3 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 2. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012:
September 30, 2013
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | September 30, 2013 | ||||||||
| Exchange-traded funds | $ | 2,029,139 | $ | - | $ | - | $ | 2,029,139 | ||||
| Cash equivalents | 2,189 | - | - | 2,189 | ||||||||
| Total | $ | 2,031,328 | $ | - | $ | - | $ | 2,031,328 | ||||
December 31, 2012
| Balance as of | ||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | December 31, 2012 | ||||||||
| Exchange-traded funds | $ | 2,426,187 | $ | - | $ | - | $ | 2,426,187 | ||||
| Cash equivalents | 6,419 | - | - | 6,419 | ||||||||
| Total | $ | 2,432,606 | $ | - | $ | - | $ | 2,432,606 | ||||
Note 4 - Financial Highlights
The following table presents per unit performance data and other supplemental financial data for the nine months ended September 30, 2013 and from the commencement of operations (March 28, 2012) through September 30, 2012. This information has been derived from information presented in the financial statements.
| Per Share Operation Performance for the nine months ended September 30, 2013 | ||||
| Net asset value at beginning of period | $ | 48.73 | ||
| Income from investment operations: | ||||
| Investment income | - | |||
| Net realized and unrealized loss on investment transactions | (7.71 | ) | ||
| Total expenses | (0.17 | ) | ||
| Net decrease in net asset value | (7.88 | ) | ||
| Net asset value at end of period | $ | 40.85 | ||
| Total Return | (16.17 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 0.50 | % | ||
| Net investment loss | (0.50 | )% |
| Per Share Operation Performance from the commencement of operations (March 28, 2012) through September 30, 2012 | ||||
| Net asset value at beginning of period | $ | 50.00 | ||
| Income from investment operations: | ||||
| Investment income | - | |||
| Net realized and unrealized gain on investment transactions | 3.54 | |||
| Total expenses | (0.15 | ) | ||
| Net increase in net asset value | 3.39 | |||
| Net asset value at end of period | $ | 53.39 | ||
| Total Return | 6.78 | % | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 0.60 | % | ||
| Net investment loss | (0.60 | )% | ||
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The Sponsor may, at its discretion waive the payment by the Fund of certain expenses. This election is subject to change by the Sponsor, at its discretion. For the nine months ended September 30, 2013, approximately $45,200 of expenses were paid by the Sponsor. From the commencement of operations (March 28, 2012) through September 30, 2012, approximately $14,500 of expenses were paid by the Sponsor. The Sponsor can elect to adjust the daily expense accruals at its discretion.
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios, excluding non-recurring expenses, have been annualized.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 5 – Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees, were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 6 – Subsequent Events
The Trust evaluates subsequent events through the date when financial statements are filed with the SEC.
For the period October 1, 2013 through November 11, 2013 there was nothing to report.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This information should be read in conjunction with the financial statements and notes included in Item 1 of Part I of this Quarterly Report (the “Report”). The discussion and analysis which follows may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “outlook” and “estimate,” as well as similar words and phrases, signify forward-looking statements. Teucrium Commodity Trust’s (the “Trust’s”) forward-looking statements are not guarantees of future results and conditions, and important factors, risks and uncertainties may cause our actual results to differ materially from those expressed in our forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, Teucrium Trading, LLC (the “Sponsor”) undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.
Overview/Introduction
Teucrium Commodity Trust (“Trust”), a Delaware statutory trust organized on September 11, 2009, is a series trust consisting of seven series: Teucrium Corn Fund (“CORN”), Teucrium WTI Crude Oil Fund (“CRUD”), Teucrium Natural Gas Fund (“NAGS”), Teucrium Sugar Fund (“CANE”), Teucrium Soybean Fund (“SOYB”), Teucrium Wheat Fund (“WEAT”), and Teucrium Agricultural Fund (“TAGS”). All these series of the Trust are collectively referred to as the “Funds” and singularly as the “Fund.” Each Fund is a commodity pool that is a series of the Trust. The Funds issue common units, called the “Shares,” representing fractional undivided beneficial interests in a Fund. The Trust and the Funds operate pursuant to the Trust’s Second Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”).
On June 5, 2010, the initial Form S-1 for CORN was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On June 8, 2010, four Creation Baskets for CORN were issued representing 200,000 shares and $5,000,000. CORN began trading on the New York Stock Exchange (“NYSE”) Arca on June 9, 2010.
On October 22, 2010, the initial Forms S-1 for NAGS and CRUD were declared effective by the SEC. On January 31, 2011, four Creation Baskets for NAGS were issued representing 200,000 shares and $5,000,000. NAGS began trading on the NYSE Arca on February 1, 2011. On February 22, 2011, four Creation Baskets for CRUD were issued representing 100,000 shares and $5,000,000. CRUD began trading on the NYSE Arca on February 23, 2011.
On June 17, 2011, the Forms S-1 for CANE, SOYB, and WEAT were declared effective by the SEC. On September 16, 2011, two Creation Baskets were issued for each Fund, representing 100,000 shares and $2,500,000, for CANE, SOYB, and WEAT. On September 19, 2011, CANE, SOYB, and WEAT started trading on the NYSE Arca.
On February 10, 2012, the Form S-1 for TAGS was declared effective by the SEC. On March 27, 2012, six Creation Baskets for TAGS were issued representing 300,000 shares and $15,000,000. TAGS began trading on the NYSE Arca on March 28, 2012.
The Funds are designed and managed so that the daily changes in percentage terms of the Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for specific futures contracts or the closing Net Asset Value per share of the Underlying Funds (as defined below) in the case of TAGS. Each Fund pursues its investment objective by investing in a portfolio of exchange-traded futures contracts that expire in a specific month and trade on a specific exchange in the commodities comprising the Benchmark, as defined below or shares of the Underlying Funds in the case of TAGS. Each Fund also holds United States Treasury Obligations and/or other high credit quality short-term fixed income securities for deposit with the commodity broker of the Funds as margin.
The Investment Objective of the Funds
The investment objective of CORN is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for corn (“Corn Futures Contracts”) that are traded on the Chicago Board of Trade (“CBOT”), specifically (1) the second-to-expire CBOT Corn Futures Contract, weighted 35%, (2) the third-to-expire CBOT Corn Futures Contract, weighted 30%, and (3) the CBOT Corn Futures Contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%.
The investment objective of NAGS is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the following: the nearest to spot month March, April, October and November Henry Hub Natural Gas Futures Contracts traded on the New York Mercantile Exchange (“NYMEX”), weighted 25% equally in each contract month.
The investment objective of CRUD is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for futures contracts for WTI crude oil, also known as Texas Light Sweet crude oil (“Oil Futures Contracts”) traded on the NYMEX, specifically (1) the nearest to spot June or December Oil Futures Contract, weighted 35%; (2) the June or December Oil Futures Contract following the aforementioned (1), weighted 30%; and (3) the next December Oil Future Contract that immediately follows the aforementioned (2), weighted 35%.
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The investment objective of SOYB is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for soybeans (“Soybean Futures Contracts”) that are traded on the CBOT. The three Soybean Futures Contracts will generally be: (1) second-to-expire CBOT Soybean Futures Contract, weighted 35%, (2) the third-to-expire CBOT Soybean Futures Contract, weighted 30%, and (3) the CBOT Soybean Futures Contract expiring in the November following the expiration month of the third-to-expire contract, weighted 35%.
The investment objective of CANE is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for sugar (“Sugar Futures Contracts”) that are traded on ICE Futures US (“ICE Futures”), specifically: (1) the second-to-expire Sugar No. 11 Futures Contract (a “Sugar No. 11 Futures Contract”), weighted 35%, (2) the third-to-expire Sugar No. 11 Futures Contract, weighted 30%, and (3) the Sugar No. 11 Futures Contract expiring in the March following the expiration month of the third-to-expire contract, weighted 35%.
The investment objective of WEAT is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for wheat (“Wheat Futures Contracts”) that are traded on the CBOT, specifically: (1) the second-to-expire CBOT Wheat Futures Contract, weighted 35%, (2) the third-to-expire CBOT Wheat Futures Contract, weighted 30%, and (3) the CBOT Wheat Futures Contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%.
The investment objective of the TAGS is to have the daily changes in percentage terms of the NAV of its Shares reflect the daily changes in percentage terms of a weighted average (the “Underlying Fund Average”) of the NAVs per share of four other commodity pools that are series of the Trust and are sponsored by the Sponsor: the Teucrium Corn Fund, the Teucrium Wheat Fund, the Teucrium Soybean Fund and the Teucrium Sugar Fund (collectively, the “Underlying Funds”). The Underlying Fund Average will have a weighting of 25% to each Underlying Fund, and the Fund’s assets will be rebalanced, generally on a daily basis, to maintain the approximate 25% allocation to each Underlying Fund.
This weighted average of the referenced specific Futures Contracts for each Fund is referred to herein as the “Benchmark,” and the specific Futures Contracts that at any given time make up the Benchmark for that Fund and are referred to herein as the “Benchmark Component Futures Contracts.”
The notional amount of each Benchmark Component Futures Contract included in each Benchmark is intended to reflect the changes in market value of each such Benchmark Component Futures Contract within the Benchmark. The closing level of each Benchmark is calculated on each business day by the Bank of New York Mellon (the “Administrator”) based on the closing price of the futures contracts for each of the underlying Benchmark Component Futures Contracts and the notional amounts of such Benchmark Component Futures Contracts.
Each Benchmark is rebalanced periodically to ensure that each of the Benchmark Component Futures Contracts is weighted in the same proportion as in the investment objective for each Fund. The following tables reflect the September 30, 2013, Benchmark Component Futures Contracts weights for each of the Funds:
| CORN Benchmark Component Futures Contracts | Notional Value | Weight (%) | ||||||
| CBOT Corn Futures (759 contracts, settlement date March 14, 2014) |
$ | 17,248,275 | 35 | % | ||||
| CBOT Corn Futures (639 contracts, settlement date May 14, 2014) |
14,768,888 | 30 | ||||||
| CBOT Corn Futures (719 contracts, settlement date December 12, 2014) |
17,291,950 | 35 | ||||||
| Total at September 30, 2013 | $ | 49,309,113 | 100 | % | ||||
| NAGS Benchmark Component Futures Contracts | Notional Value | Weight (%) | ||||||
| NYMEX Natural Gas Futures (21 contracts, settlement date February 26, 2014) |
$ | 800,100 | 25 | % | ||||
| NYMEX Natural Gas Futures (22 contracts, settlement date March 27, 2014) |
827,420 | 25 | ||||||
| NYMEX Natural Gas Futures (21 contracts, settlement date September 26, 2014) |
813,330 | 25 | ||||||
| NYMEX Natural Gas Futures (21 contracts, settlement date October 29, 2014) |
828,240 | 25 | ||||||
| Total at September 30, 2013 | $ | 3,269,090 | 100 | % | ||||
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| CRUD Benchmark Component Futures Contracts | Notional Value | Weight (%) | ||||||
| WTI Crude Oil Futures (7 contracts, settlement date November 20, 2013) |
$ | 713,300 | 35 | % | ||||
| WTI Crude Oil Futures (6 contracts, settlement date May 20, 2014) |
578,640 | 29 | ||||||
| WTI Crude Oil Futures (8 contracts, settlement date November 20, 2014) |
740,320 | 36 | ||||||
| Total at September 30, 2013 | $ | 2,032,260 | 100 | % | ||||
| SOYB Benchmark Component Futures Contracts | Notional Value | Weight (%) | ||||||
| CBOT Soybean Futures (35 contracts, settlement date January 14, 2014) |
$ | 2,248,750 | 35 | % | ||||
| CBOT Soybean Futures (30 contracts, settlement date March 14, 2014) |
1,900,500 | 30 | ||||||
| CBOT Soybean Futures (39 contracts, settlement date November 14, 2014) |
2,252,250 | 35 | ||||||
| Total at September 30, 2013 | $ | 6,401,500 | 100 | % | ||||
| CANE Benchmark Component Futures Contracts | Notional Value | Weight (%) | ||||||
| ICE Sugar Futures (46 contracts, settlement date April 30, 2014) |
$ | 930,966 | 35 | % | ||||
| ICE Sugar Futures (40 contracts, settlement date June 30, 2014) |
805,504 | 30 | ||||||
| ICE Sugar Futures (44 contracts, settlement date February 27, 2015) |
925,478 | 35 | ||||||
| Total at September 30, 2013 | $ | 2,661,948 | 100 | % | ||||
| WEAT Benchmark Component Futures Contracts | Notional Value | Weight (%) | ||||||
| CBOT Wheat Futures (77 contracts, settlement date March 14, 2014) |
$ | 2,644,950 | 35 | % | ||||
| CBOT Wheat Futures (66 contracts, settlement date May 14, 2014) |
2,276,175 | 30 | ||||||
| CBOT Wheat Futures (76 contracts, settlement date December 12, 2014) |
2,621,050 | 35 | ||||||
| Total at September 30, 2013 | $ | 7,542,175 | 100 | % | ||||
| TAGS Benchmark Component Futures Contracts | Fair Value | Weight (%) | ||||||
| Shares of Teucrium Corn Fund | $ | 503,639 | 25 | % | ||||
| Shares of Teucrium Soybean Fund | 489,072 | 24 | ||||||
| Shares of Teucrium Wheat Fund | 518,037 | 25 | ||||||
| Shares of Teucrium Sugar Fund | 518,391 | 26 | ||||||
| Total at September 30, 2013 | $ | 2,029,139 | 100 | % | ||||
The price relationship between the near month Futures Contract to expire and the Benchmark Component Futures Contracts will vary and may impact both the total return of each Fund over time and the degree to which such total return tracks the total return of the price indices related to the commodity of each Fund. In cases in which the near month contract’s price is lower than later-expiring contracts’ prices (a situation known as “contango” in the futures markets), then absent the impact of the overall movement in commodity prices the value of the Benchmark Component Futures Contracts would tend to decline as they approach expiration. In cases in which the near month contract’s price is higher than later-expiring contracts’ prices (a situation known as “backwardation” in the futures markets), then absent the impact of the overall movement in a Fund’s prices the value of the Benchmark Component Futures Contracts would tend to rise as they approach expiration.
The total portfolio composition for each Fund is disclosed each business day that the NYSE Arca is open for trading on the Fund’s website. The website for CORN is www.teucriumcornfund.com; for NAGS is www.teucriumnagsfund.com; for CRUD is www.teucriumcrudfund.com; for CANE is www.teucriumcanefund.com; for SOYB is www.teucriumsoybfund.com; for WEAT is www.teucriumweatfund.com; for TAGS is www.teucriumtagsfund.com. These sites are accessible at no charge. The website disclosure of portfolio holdings is made daily and includes, as applicable, the name and value of each Futures Contract and Cleared Swap (for example, like Corn Futures Contracts, Cleared Corn Swaps are standardized as to certain material economic terms, including that each such swap be for a quantity of 5,000 bushels, which permits less flexibility in their structuring than with over-the-counter Corn Interests. The two parties to a Cleared Corn Swap agree on the specific fixed price component and the calendar month of expiration, and agree to submit the Cleared Corn Swap to the clearing organization. The clearing organization assumes the credit risk relating to the transaction, which effectively eliminates the creditworthiness of the counterparty as a risk. Unlike Corn Futures Contracts, Cleared Corn Swaps call for settlement in cash, and do not permit settlement by delivery or receipt of physical corn). The specific types of Other Interests (in addition to futures contracts, options on futures contracts and cleared swaps, derivative contracts)
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that are tied to various commodities are entered into outside of public exchanges. These “over-the-counter” contracts are entered into between two parties in private contracts. For example, unlike Futures Contracts and Cleared Corn Swaps, which are guaranteed by a clearing organization, each party to an over-the-counter derivative contract bears the credit risk of the other party, (i.e., the risk that the other party will not be able to perform its obligations under its contract), and characteristics of such Other Interests, and the amount of cash and cash equivalents held in the Fund’s portfolio.
Consistent with achieving a Fund’s investment objective of closely tracking the Benchmark, the Sponsor may for certain reasons cause the Fund to enter into or hold Futures Contracts other than the Benchmark Component Futures Contracts, Cleared Swaps and/or Other Interests. For example, certain Cleared Corn Swaps have standardized terms similar to, and are priced by reference to, a corresponding Benchmark Component Futures Contract. Additionally, Other Corn Interests that do not have standardized terms and are not exchange-traded, referred to as “over-the-counter” Corn Interests, can generally be structured as the parties to the Corn Interest contract desire. Therefore, each Fund might enter into multiple Cleared Swaps and/or over-the-counter Interests intended to exactly replicate the performance of each of the Benchmark Component Futures Contracts for the Fund, or a single over-the-counter Interest designed to replicate the performance of the Benchmark as a whole. Assuming that there is no default by a counterparty to an over-the-counter Interest, the performance of the Interest will necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract. Each Fund might also enter into or hold Interests other than Benchmark Component Futures Contracts to facilitate effective trading, consistent with the discussion of the Fund’s “roll” strategy. In addition, each Fund might enter into or hold Interests that would be expected to alleviate overall deviation between the Fund’s performance and that of the Benchmark that may result from certain market and trading inefficiencies or other reasons. By utilizing certain or all of the investments described above, the Sponsor will endeavor to cause the Fund’s performance to closely track that of the Benchmark of the Fund.
The Sponsor employs a “neutral” investment strategy intended to track the changes in the Benchmark of each Fund regardless of whether the Benchmark goes up or goes down. The Fund’s “neutral” investment strategy is designed to permit investors generally to purchase and sell the Fund’s Shares for the purpose of investing indirectly in the commodity-specific market in a cost-effective manner. Such investors may include participants in the specific industry and other industries seeking to hedge the risk of losses in their commodity-specific-related transactions, as well as investors seeking exposure to that commodity market. Accordingly, depending on the investment objective of an individual investor, the risks generally associated with investing in the commodity-specific market and/or the risks involved in hedging may exist. In addition, an investment in a Fund involves the risks that the changes in the price of the Fund’s Shares will not accurately track the changes in the Benchmark, and that changes in the Benchmark will not closely correlate with changes in the price of the commodity on the spot market. The Sponsor does not intend to operate each Fund in a fashion such that its per share NAV equals, in dollar terms, the spot price of the commodity or the price of any particular commodity-specific Futures Contract.
The Sponsor
Teucrium Trading, LLC is the sponsor of the Trust and each of the series of the Trust. The Sponsor is a Delaware limited liability company, formed on July 28, 2009. The principal office is located at 232 Hidden Lake Road, Brattleboro, Vermont 05301. The Sponsor is registered as a commodity pool operator (“CPO”) with the Commodity Futures Trading Commission (“CFTC”) and became a member of the National Futures Association (“NFA”) on November 10, 2009. The Trust and the Funds operate pursuant to the Trust Agreement.
Under the Trust Agreement, the Sponsor is solely responsible for the management, and conducts or directs the conduct of the business of the Trust, the Funds, and any other Fund that may from time to time be established and designated by the Sponsor. The Sponsor is required to oversee the purchase and sale of Shares by firms designated as “Authorized Purchasers” and to manage the Funds’ investments, including to evaluate the credit risk of futures commission merchants and swap counterparties and to review daily positions and margin/collateral requirements. The Sponsor has the power to enter into agreements as may be necessary or appropriate for the offer and sale of the Funds’ Shares and the conduct of the Trust’s activities. Accordingly, the Sponsor is responsible for selecting the Trustee, Administrator, Distributor, the independent registered public accounting firm of the Trust, and any legal counsel employed by the Trust. The Sponsor is also responsible for preparing and filing periodic reports on behalf of the Trust with the SEC and providing any required certification for such reports. No person other than the Sponsor and its principals was involved in the organization of the Trust or the Funds.
Teucrium Trading, LLC designs the Funds to offer liquidity, transparency, and capacity in single-commodity investing for a variety of investors, including institutions and individuals, in an exchange-traded product format. The Funds have also been designed to mitigate the impacts of contango and backwardation, situations that can occur in the course of commodity trading which can affect the potential returns to investors. Backwardation is defined as a market condition in which a futures price of a commodity is lower in the distant delivery months than in the near delivery months, while contango, the opposite of backwardation, is defined as a condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity.
The Sponsor has a patent pending on certain business methods and procedures used with respect to the Funds.
Performance Summary
This report covers the period from January 1, 2013 to September 30, 2013, for each Fund.
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| CORN Per Share Operation Performance | ||||
| Net asset value at beginning of period | $ | 44.34 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (8.80 | ) | ||
| Total expenses | (2.10 | ) | ||
| Net decrease in net asset value | (10.89 | ) | ||
| Net asset value end of period | $ | 33.45 | ||
| Total Return | (24.56 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 7.11 | % | ||
| Net investment loss | (7.06 | )% | ||
| NAGS Per Share Operation Performance | ||||
| Net asset value at beginning of period | $ | 11.56 | ||
| Income from investment operations: | ||||
| Investment income | - | |||
| Net realized and unrealized loss on commodity futures contracts | (0.49 | ) | ||
| Total expenses | (0.14 | ) | ||
| Net decrease in net asset value | (0.63 | ) | ||
| Net asset value at end of period | $ | 10.93 | ||
| Total Return | (5.45 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 1.47 | % | ||
| Net investment loss | (1.43 | )% | ||
|
CRUD Per Share Operation Performance |
||||
| Net asset value at beginning of period | $ | 39.87 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized gain on commodity futures contracts | 2.16 | |||
| Total expenses | (0.45 | ) | ||
| Net increase in net asset value | 1.72 | |||
| Net asset value at end of period | $ | 41.59 | ||
| Total Return | 4.31 | % | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 1.50 | % | ||
| Net investment loss | (1.45 | )% |
| SOYB Per Share Operation Performance | ||||
| Net asset value at beginning of period | $ | 24.13 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized gain on commodity futures contracts | 0.17 | |||
| Total expenses | (1.06 | ) | ||
| Net decrease in net asset value | (0.88 | ) | ||
| Net asset value at end of period | $ | 23.25 | ||
| Total Return | (3.65 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 5.93 | % | ||
| Net investment loss | (5.88 | )% |
| CANE Per Share Operation Performance | ||||
| Net asset value at beginning of period | $ | 17.81 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (2.43 | ) | ||
| Total expenses | (0.18 | ) | ||
| Net decrease in net asset value | (2.60 | ) | ||
| Net asset value at end of period | $ | 15.21 | ||
| Total Return | (14.60 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 1.53 | % | ||
| Net investment loss | (1.48 | )% |
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| WEAT Per Share Operation Performance | ||||
| Net asset value at beginning of period | $ | 21.25 | ||
| Income from investment operations: | ||||
| Investment income | 0.01 | |||
| Net realized and unrealized loss on commodity futures contracts | (3.77 | ) | ||
| Total expenses | (0.75 | ) | ||
| Net decrease in net asset value | (4.51 | ) | ||
| Net asset value at end of period | $ | 16.74 | ||
| Total Return | (21.22 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 5.52 | % | ||
| Net investment loss | (5.47 | )% |
| TAGS Per Share Operation Performance | ||||
| Net asset value at beginning of period | $ | 48.73 | ||
| Income from investment operations: | ||||
| Investment income | - | |||
| Net realized and unrealized loss on investment transactions | (7.71 | ) | ||
| Total expenses | (0.17 | ) | ||
| Net decrease in net asset value | (7.88 | ) | ||
| Net asset value at end of period | $ | 40.85 | ||
| Total Return | (16.17 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||
| Total expense | 0.50 | % | ||
| Net investment loss | (0.50 | )% |
The performance of each Fund for the period January 1, 2013 to September 30, 2013 and the exchange-traded Shares are detailed below in “Results of Operations.” Past performance of a Fund is not necessarily indicative of future performance.
Results of Operations
The discussion below addresses the material changes in the results of operations for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 and for the three months ended September 30, 2013 compared to the three months ended June 30, 2013. CORN, NAGS, CRUD, SOYB, WEAT and CANE operated for the entirety of both the 2012 periods. TAGS did not commence operations until March 28, 2012.
The Teucrium Corn Fund
For the quarter ended September 30, 2013, CORN had a total loss of $(5,484,081) compared to a total income of $12,998,376 for the quarter ended September 30, 2012 and a total loss of $(1,815,942) for the quarter ended June 30, 2013. The change in total income was driven by a change in the value of the underlying commodity contracts which generated realized and unrealized losses. The NAV per share of the Fund decreased from $48.40 on September 30, 2012 to $33.45 on September 30, 2013, from $44.34 on December 31, 2012, and from $38.70 on June 30, 2013. The NAV per share in the three months ended September 30, 2012 had increased $6.38, a change which is reflected in the income for that quarter. Realized gain or loss on trading of commodity futures contracts is a function of: 1) the change in the price of the particular contracts sold as part of a “roll” in contracts as the nearest to expire contracts are exchanged for the appropriate contract given the investment objective of the fund, 2) the change in the price of particular contracts sold in relation to redemption of shares, 3) the gain or loss associated with rebalancing trades which are made to ensure conformance to the benchmark and 4) the number of contracts held and then sold for either circumstance aforementioned. Unrealized gain or loss on trading of commodity futures contracts is a function of the change in the price of contracts held on the final date of the period versus the purchase price for each contract and the number of contracts held in each contract month. The Sponsor has a static benchmark as described above and trades futures contracts to adhere to that benchmark and to adjust for the creation or redemption of shares.
The decrease in the NAV per share when compared to the periods ending September 30, 2012, December 31, 2012 and June 30, 2013 has been driven principally by updates to the USDA’s outlook for corn prices, supply and demand. In general, the USDA’s estimate of corn production in the United States for the crop year 2013-14 is significantly improved over last year’s production which was impacted by the drought in the Midwest. A summary of the USDA’s most recent monthly report, which was released on September 12, 2013, is presented in the Market Outlook section of this filing.
For the quarter ended September 30, 2013, CORN had total expenses of $837,482 compared to $929,296 for the quarter ended September 30, 2012 and $675,057 for the quarter ended June 30, 2013. This decrease of $91,814 for the quarter, year over year, was driven entirely by decreases in the management fee, partially offset by a slight increase in other expense categories. The approximately $109,000 decrease in the management fee was a result of lower average assets under management in the 2013 period than in 2012. Although there were changes in the year over year accrual by expense category, the overall level of expense accruals without the management fee was relatively flat. There were reclasses of expenses in the third quarter of 2012, part of which related to accruals in the first and second quarter of the 2012. The large increase in professional fees was driven in part by a $320,000 expense reclass in the third quarter of 2012 from professional fees to distribution and marketing expenses. This accounted for nearly all of the decrease in distribution and marketing fees on a year over year basis. In addition, there was a $10,000 expense reclass in 2012 from general and administrative expenses to other expenses. The increase in business permits and license fees resulted principally from a timing difference in accruals for fees to the New York Stock Exchange. The decrease in brokerage commissions in the current period reflects the Sponsor’s most current estimate, taking into account contract rolls.
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For the nine months ended September 30, 2013, CORN had total expenses of $2,186,466 compared to $2,641,115 for the nine months ended September 30, 2012. This decrease of $454,649 for the nine months year over year was driven primarily by decreases of approximately $227,000 in the management fee, $315,000 in accruals for distribution and marketing fees, and approximately $93,000 in accruals for general and administrative expenses related to the ongoing operations of the Fund. These decreases were partially offset by increases in other expense categories, principally professional fees which increased by approximately $155,000. The Sponsor has reduced the overall costs for operating the Funds over the twelve-month period.
The total expense ratio for the nine month period ended September 30, 2013 was 7.11% while it was 4.95% for the period ended September 30, 2012. This higher expense ratio was driven by a reduction in average net assets, offset partially by a reduction in total expenses. Other than the management fee payable to the Sponsor and the brokerage commissions, most of the expenses incurred by the Fund are associated with the day-to-day operation of the Fund and the necessary functions related to regulatory compliance. These are generally based on contracts, which extend for some period of time and up to one year, or commitments regardless of the level of assets under management.
Shares outstanding increased by approximately 23% period over period from 1,200,004 on September 30, 2012 to 1,475,004 on September 30, 2013; however, the average shares outstanding for the three month period ending September 30, 2013 decreased by approximately 30% over the same period last year. This reduction in the average shares outstanding was due primarily to macro market trends which saw a shift, in general, from commodities to other investment classes, a concern about the possibility of continued global economic growth, particularly in developing nations, which could sustain demand for agricultural commodities at current prices, and the more favorable corn production situation in the United States. Shares outstanding increased by 475,000 from June 30, 2013 to September 30, 2013.
The seasonality patterns for corn futures prices are impacted by a variety of factors. These include, but are not limited to, the harvest in the fall, the planting conditions in the spring, and the weather throughout the critical germination and growing periods. Prices for corn futures are affected by the availability and demand for substitute agricultural commodities, including soybeans and wheat, and the demand for corn as an additive for fuel, through the production of ethanol. The price of corn futures contracts is also influenced by global economic conditions, including the demand for exports to other countries. Such factors will impact the performance of the Fund and the results of operations on an ongoing basis. The Sponsor cannot predict the impact of such factors.
The Teucrium Natural Gas Fund
For the quarter ended September 30, 2013, NAGS had a total loss of $(59,346) compared to a total income of $239,893 for the quarter ended September 30, 2012 and a total loss of $(416,068) for the quarter ended June 30, 2013. The change in total income was driven by a change in the value of the underlying commodity contracts which generated realized and unrealized losses. The NAV per share of the Fund decreased from $12.59 on September 30, 2012 to $10.93 on September 30, 2013; the NAV per share was $11.56 on December 31, 2012, and $11.17 on June 30, 2013. The NAV per share in the three months ended September 30, 2012 had increased $0.76, a change which is reflected in the income for that quarter. Realized gain or loss on trading of commodity futures contracts is a function of: 1) the change in the price of the particular contracts sold as part of a “roll” in contracts as the nearest to expire contracts are exchanged for the appropriate contract given the investment objective of the fund, 2) the change in the price of particular contracts sold in relation to redemption of shares, 3) the gain or loss associated with rebalancing trades which are made to ensure conformance to the benchmark and 4) the number of contracts held and then sold for either circumstance aforementioned. Unrealized gain or loss on trading of commodity futures contracts is a function of the change in the price of contracts held on the final date of the period versus the purchase price for each contract and the number of contracts held in each contract month. The Sponsor has a static benchmark as described above and trades futures contracts to adhere to that benchmark and to adjust for the creation or redemption of shares.
In general, the price of Natural Gas Futures had been generally falling since early 2011, reaching a multi-year low before stabilizing in the spring of 2012. After peaking for the season in the spring 2013, the price of Natural Gas Futures fell as the cold weather season ended and inventories increased; the price has remained relatively stable since then. Price changes in the upcoming months will be driven by U.S. weather conditions and supply.
On July 29, 2011, the Sponsor filed a Form 8-K with the SEC which stated that effective August 1, 2011, the Sponsor has agreed to voluntarily cap the management fee and expenses of NAGS at 1.5% per annum of the daily net assets of the Fund. Total expenses for the quarter ended September 30, 2013 were $12,444; total expenses for the same quarter in 2012 were $13,085 and for the quarter ended June 30, 2013 were $13,739. For the nine months ended September 30, 2013, the total expenses were $41,113 compared to $27,823 for the same period in 2012. The total expense ratio for all these periods was approximately 1.50% as outlined in the July 29, 2011 8-K. Of the total expenses in the quarter ending September 30, 2013, $8,459 was attributable to payment of the management fee to the Sponsor; this expense was $27,999 for the nine month period in 2013. The management fee recorded in the comparable quarter or nine month period of 2012 was $5,833; there was no management fee recorded for the first six months of 2012. The management fee for the quarter ended June 30, 2013 was $9,358. The management fee is calculated at an annual rate of 1% of the Fund’s daily average net assets.
The Sponsor paid approximately $17,500 of expenses in the quarter ending September 30, 2013 and $53,800 for the nine month period that normally would have been borne by the Fund. For the quarter and nine months ended September 30, 2012 respectively, the Sponsor waived management fees of approximately $3,200 and $12,800. In addition for these periods in 2012, the Sponsor paid other expenses on behalf of the Fund of approximately $1,800 and $9,800, respectively. In general, the increase in total expenses for the nine month period of 2013 compared to 2012 was the result of higher assets under management. Other than the management fee payable to the Sponsor and the brokerage commissions, most of the expenses incurred by the Fund are associated with the day-to-day operation of the Fund and the necessary functions related to regulatory compliance. These are generally based on contracts, which extend for some period of time and up to one year, or commitments regardless of the level of assets under management.
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Shares outstanding on September 30, 2013 of 300,004 was the same as on June 30, 2013 and September 30, 2012; it was down 25% from the December 31, 2012 balance of 400,004.
Natural gas prices fluctuate seasonally. For example, in some parts of the United States and other markets, the natural gas demand for power peaks during the cold winter months, with market prices peaking at that time. As a result, in the future, the overall price of natural gas may fluctuate substantially on a seasonal and quarterly basis and thus make consecutive period to period comparisons less relevant. In addition, weather patterns and government policy may impact the demand and or supply of natural gas. Such factors will impact the performance of the Fund and the results of operations on an ongoing basis. The Sponsor cannot predict the impact of such factors.
The Teucrium WTI Crude Oil Fund
For the quarter ended September 30, 2013 CRUD had a total income of $127,409 compared to total income of $119,754 for the quarter ended September 30, 2012 and a total loss of $(62,392) for the quarter ended June 30, 2013. The change in total income was driven by a change in the value of the underlying commodity contracts which generated realized and unrealized losses. The NAV per share of the Fund increased from $40.33 on September 30, 2012 to $41.59 on September 30, 2013; the NAV per share also increased from $39.87 on December 31, 2012, and from $39.20 on June 30, 2013. The NAV per share in the three months ended September 30, 2012 had increased $1.76, a change which is reflected in the income for that quarter. Realized gain or loss on trading of commodity futures contracts is a function of: 1) the change in the price of the particular contracts sold as part of a “roll” in contracts as the nearest to expire contracts are exchanged for the appropriate contract given the investment objective of the fund, 2) the change in the price of particular contracts sold in relation to redemption of shares, 3) the gain or loss associated with rebalancing trades which are made to ensure conformance to the benchmark and 4) the number of contracts held and then sold for either circumstance aforementioned. Unrealized gain or loss on trading of commodity futures contracts is a function of the change in the price of contracts held on the final date of the period versus the purchase price for each contract and the number of contracts held in each contract month. The Sponsor has a static benchmark as described above and trades futures contracts to adhere to that benchmark and to adjust for the creation or redemption of shares.
In general, the price of WTI Crude Oil has risen relative to the prices in September and December of 2012 and in June of 2013 in response to renewed geo-political fears and the impact of supply interruptions.
Effective August 1, 2012 the Sponsor reduced the daily expense accruals for the Fund from $252 per day to $50 per day. Effective January 1, 2013, the Sponsor initiated daily expense accruals, including any management fee, equal to 1.5% of total net assets for the Fund on an annual basis. Total expenses for the quarter ended September 30, 2013 were $7,909; total expenses for the same quarter in 2012 were $31,572 and for the quarter ended June 30, 2013 were $7,339. In the quarter ended September 30, 2012, there were reclassifications between expense categories relating to the first and second quarters, as well as the third, which did not impact total expenses. These reclassifications increased distribution and marketing fees by approximately $27,000 and general and administrative fees by approximately $4,000, while decreasing professional fees by $14,000 and custodian fees by $16,000.
For the nine months ended September 30, 2013, the total expenses were $22,675 compared to $157,895 for the same period in 2012. The total expense ratio for the nine months ended September 30, 2013 was 1.50% compared to the 7.26% for the same period in 2012. Of the total expenses in the quarter or nine months ended September 30, 2013 none was attributable to payment of the management fee. The management fee recorded in the comparable quarter or nine month period of 2012 was $5,097 and $21,769 respectively. The management fee is calculated at an annual rate of 1% of the Fund’s daily average net assets.
The Sponsor paid approximately $11,300 of expenses in the quarter ending September 30, 2013 and $39,800 for the nine month period that normally would have been borne by the Fund. In addition, for these periods, the Sponsor waived management fees of approximately $5,200 and $15,000. For 2012, the Sponsor paid expenses on behalf of the Fund of approximately $13,500 for the quarter and $28,000 for the nine months ended September 30. In general, the decrease in total expenses from 2013 to 2012 was the result of expenses paid by the Sponsor and the waiving of management fees.
The structure of the Fund and the nature of the expenses are such that as total net assets grow, there is a scalability of expenses that may allow the total expense ratio to be reduced. As the Sponsor has initialed a percentage based daily expense accrual for the Fund, even if total net assets for the Fund fall, the total expense ratio of the Fund will not increase. The Sponsor can elect to adjust the daily expense accruals at its discretion. Other than the management fee payable to the Sponsor and the brokerage commissions, most of the expenses incurred by the Fund are associated with the day-to-day operation of the Fund and the necessary functions related to regulatory compliance. These are generally based on contracts, which extend for some period of time and up to one year, or commitments regardless of the level of assets under management.
Shares outstanding remained constant at 50,002 for the periods ended September 30, 2012, June 30, 2013 and September 30, 2013; this represents a minimum level of shares outstanding for the Fund.
The risks and hazards that are inherent in oil production may cause the price of crude oil to fluctuate widely. Price movements for crude oil are influenced by, among other things, many operating risks. Such operating risks include, but are not limited to, risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, ruptures and discharges of toxic gases. Crude oil operations are also subject to various U.S. federal, state and local regulations that materially affect operations. Global political risks, including geopolitical conflicts and war, and global economic forecasts could cause the price of WTI light sweet crude oil to fluctuate greatly. Such factors will impact the performance of the Fund and the results of operations on an ongoing basis. The Sponsor cannot predict the impact of such factors.
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The Teucrium Soybean Fund
For the quarter ended September 30, 2013, SOYB had a total loss of $(4,165) compared to total income of $316,460 for the quarter ended September 30, 2012 and total income of $56,902 for the quarter ended June 30, 2013. The change in total income was driven by a change in the value of the underlying commodity contracts which generated realized and unrealized losses. The NAV per share of the Fund decreased from $26.58 on September 30, 2012 to $23.25 on September 30, 2013, from $24.13 on December 31, 2012, and from $23.72 on June 30, 2013. The NAV per share in the three months ended September 30, 2012 had increased $2.18, a change which is reflected in the income for that quarter. Realized gain or loss on trading of commodity futures contracts is a function of: 1) the change in the price of the particular contracts sold as part of a “roll” in contracts as the nearest to expire contracts are exchanged for the appropriate contract given the investment objective of the fund, 2) the change in the price of particular contracts sold in relation to redemption of shares, 3) the gain or loss associated with rebalancing trades which are made to ensure conformance to the benchmark and 4) the number of contracts held and then sold for either circumstance aforementioned. Unrealized gain or loss on trading of commodity futures contracts is a function of the change in the price of contracts held on the final date of the period versus the purchase price for each contract and the number of contracts held in each contract month. The Sponsor has a static benchmark as described above and trades futures contracts to adhere to that benchmark and to adjust for the creation or redemption of shares.
The decrease in the NAV per share when compared to the periods ending September 30, 2012, December 31, 2012, and June 30, 2013 has been driven principally by updates to the USDA’s outlook for soybean prices, supply and demand. In general, the USDA’s estimate of soybean production in the United States for the crop year 2013-14 is improved over last year’s production which was impacted by the drought in the Midwest. A summary of the USDA’s most recent monthly report, which was released on September 12, 2013, is presented in the Market Outlook section of this filing.
For the quarter ended September 30, 2013, SOYB had total expenses of $123,362 compared to $116,735 for the quarter ended September 30, 2012 and $76,305 for the quarter ended June 30, 2013. This increase of approximately $6,600 for the quarter, year over year, was driven by decreases in the management fee, more than offset by increases in other expense categories. The approximately $9,900 decrease in the management fee was a result of lower average assets under management in the 2013 period than in 2012. The increases in the other expense categories were the result of the higher relative assets under management of the fund, when compared to the other Funds, in 2013 than in 2012. There were reclasses of expenses in the third quarter of 2012, part of which related to accruals in the first and second quarter of the 2012. The large increase in professional fees was driven, in part, by a $26,300 expense reclass in the third quarter of 2012 from professional fees to other expense categories, including $7,500 to distribution and marketing expenses, $11,700 to general and administrative and $5,500 to business permits and licenses.
For the nine months ended September 30, 2013, SOYB had total expenses of $291,790 compared to $330,223 for the nine months ended September 30, 2012. This decrease of $38,433 for the nine months year over year was driven primarily by decreases of approximately $71,000 in custodian fees and expenses, offset by small increases in other expenses related to the ongoing operations of the Fund. The Sponsor has reduced the overall costs for operating the Funds over the twelve-month period.
The Sponsor paid approximately $5,700 in fees that normally would have been borne by the Fund for the nine month period ended September 30, 2013; there were no such expenses for the three month period. For 2012, the Sponsor paid expenses on behalf of the Fund of approximately $7,500 for the quarter and $11,700 for the nine months ended September 30.
The total expense ratio for the nine month period ended September 30, 2013 was 5.93% while it was 7.47% for the period ended September 30, 2012. This lower expense ratio was driven by an increase in average net assets and a reduction in total expenses. Other than the management fee payable to the Sponsor and the brokerage commissions, most of the expenses incurred by the Fund are associated with the day-to-day operation of the Fund and the necessary functions related to regulatory compliance. These are generally based on contracts, which extend for some period of time and up to one year, or commitments regardless of the level of assets under management.
Shares outstanding decreased by approximately 31% period over period from 400,004 on September 30, 2012 to 275,004 on September 30, 2013. This change was due primarily to a focus on soybean production resulting from the drought conditions in the United States in the summer of 2012, tempered slightly by macro market trends which saw a shift, in general, from commodities to other investment classes, a concern about the possibility of continued global economic growth, particularly in developing nations, which could sustain demand for agricultural commodities at current prices, and the more favorable 2013 soybean production situation in the United States. Shares outstanding were flat from June 30, 2013 to September 30, 2013.
The seasonality patterns for soybean futures prices are impacted by a variety of factors. These include, but are not limited to, the harvest in the fall, the planting conditions in the spring, and the weather throughout the critical germination and growing periods. Prices for soybean futures are affected by the availability and demand for substitute agricultural commodities, including corn and wheat. The price of soybean futures contracts is also influenced by global economic conditions, including the demand for exports to other countries. Such factors will impact the performance of the Fund and the results of operations on an ongoing basis. The Sponsor cannot predict the impact of such factors.
The Teucrium Sugar Fund
For the quarter ended September 30, 2013 CANE had total income of $61,872 compared to a total loss of $(79,015) for the quarter ended September 30, 2012 and a total loss of $(173,905) for the quarter ended June 30, 2013. The change in total income was driven by a change in the value of the underlying commodity contracts which generated realized and unrealized losses. The NAV per share of the Fund decreased from $18.56 on September 30, 2012 to $15.21 on September 30, 2013, and from $17.81 on December 31, 2012, but increased from $14.92 on June 30, 2013. The NAV per share in the three months ended September 30, 2012 had decreased $0.74, a change which is reflected in the income for that
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quarter. Realized gain or loss on trading of commodity futures contracts is a function of: 1) the change in the price of the particular contracts sold as part of a “roll” in contracts as the nearest to expire contracts are exchanged for the appropriate contract given the investment objective of the fund, 2) the change in the price of particular contracts sold in relation to redemption of shares, 3) the gain or loss associated with rebalancing trades which are made to ensure conformance to the benchmark and 4) the number of contracts held and then sold for either circumstance aforementioned. Unrealized gain or loss on trading of commodity futures contracts is a function of the change in the price of contracts held on the final date of the period versus the purchase price for each contract and the number of contracts held in each contract month. The Sponsor has a static benchmark as described above and trades futures contracts to adhere to that benchmark and to adjust for the creation or redemption of shares.
This change in the NAV year over year has been driven principally by estimates for an increase in the Brazilian sugar cane crop for the current year; the change in the price of sugar futures contracts, however, has stabilized over the last three months. Brazil continues to be the largest producer of sugar cane. Estimates indicate that this year’s Brazilian harvest could be between 8-10% larger than last year’s.
Effective January 1, 2013, the Sponsor reduced the expense accruals for the Fund to reflect the impact of operational efficiencies undertaken by the Sponsor and the impact of renegotiated contracts. These daily expense accruals, including any management fee, are targeted to equal approximately 1.5% of total net assets for the Fund on an annual basis. Total expenses for the quarter ended September 30, 2013 were $9,606; total expenses for the same quarter in 2012 were $11,255 and for the quarter ended June 30, 2013 were $9,357. In the quarter ended September 30, 2012, there were reclassifications of expenses which related to the entire nine-month period. These reduced professional fees by approximately $10,600 and custodian fees by $4,000, while increasing distribution and marketing fees by approximately $6,600, business permits and licenses by approximately $3,000 and general and administrative expenses by approximately $4,700.
For the nine months ended September 30, 2013, the total expenses were $27,692 compared to $222,040 for the same period in 2012. The total expense ratio for the nine months ended September 30, 2013 was 1.53% compared to the 12.46% for the same period in 2012. Of the total expenses in the quarter or nine months ended September 30, 2013 none was attributable to payment of the management fee. The management fee recorded in the comparable quarter or nine month period of 2012 was $0 and $14,055 respectively. There was no management fee for the quarter ended June 30, 2013. The management fee is calculated at an annual rate of 1% of the Fund’s daily average net assets.
The Sponsor paid approximately $12,200 of expenses in the quarter ending September 30, 2013 and $50,000 for the nine month period that normally would have been borne by the Fund. In addition, for these periods, the Sponsor waived management fees of approximately $5,800 and $17,500. For these periods in 2012, the Sponsor paid expenses on behalf of the Fund of approximately $17,600 and $33,300 respectively, and waived management fees of approximately $4,000 for both periods. In general, the decrease in total expenses from 2013 to 2012 was the result of a higher level of expenses paid by the Sponsor and the waiving of management fees.
The structure of the Fund and the nature of the expenses are such that as total net assets grow, there is a scalability of expenses that may allow the total expense ratio to be reduced. As the Sponsor has initialed a percentage based daily expense accrual for the Fund, even if total net assets for the Fund fall, the total expense ratio of the Fund will not increase. The Sponsor can elect to adjust the daily expense accruals at its discretion. Other than the management fee payable to the Sponsor and the brokerage commissions, most of the expenses incurred by the Fund are associated with the day-to-day operation of the Fund and the necessary functions related to regulatory compliance. These are generally based on contracts, which extend for some period of time and up to one year, or commitments regardless of the level of assets under management.
Shares outstanding increased by approximately 75% period over period from 100,004 on September 30, 2012 to 175,004 on September 30, 2013; shares outstanding did not change between June 30, 2013 and September 30, 2013.
The Teucrium Wheat Fund
For the quarter ended September 30, 2013, WEAT had a total loss of $(31,966) compared to total income of $372,367 for the quarter ended September 30, 2012 and a total loss of $(448,080) for the quarter ended June 30, 2013. The change in total income was driven by a change in the value of the underlying commodity contracts which generated realized and unrealized losses. The NAV per share of the Fund decreased from $24.55 on September 30, 2012 to $16.74 on September 30, 2013, from $21.25 on December 31, 2012, and from $17.16 on June 30, 2013. The NAV per share in the three months ended September 30, 2012 had increased $2.47, a change which is reflected in the income for that quarter. Realized gain or loss on trading of commodity futures contracts is a function of: 1) the change in the price of the particular contracts sold as part of a “roll” in contracts as the nearest to expire contracts are exchanged for the appropriate contract given the investment objective of the fund, 2) the change in the price of particular contracts sold in relation to redemption of shares, 3) the gain or loss associated with rebalancing trades which are made to ensure conformance to the benchmark and 4) the number of contracts held and then sold for either circumstance aforementioned. Unrealized gain or loss on trading of commodity futures contracts is a function of the change in the price of contracts held on the final date of the period versus the purchase price for each contract and the number of contracts held in each contract month. The Sponsor has a static benchmark as described above and trades futures contracts to adhere to that benchmark and to adjust for the creation or redemption of shares.
The decrease in the NAV per share when compared to the periods ending September 30, 2012, December 31, 2012 and June 30, 2013 has been driven principally by updates to the USDA’s outlook for global wheat prices, supply and demand. In general, the USDA’s estimate of wheat production worldwide for the crop year 2013-14 is significantly improved over last year’s production which was impacted by the unfavorable weather conditions. A summary of the USDA’s most recent monthly report, which was released on September 12, 2013, is presented in the Market Outlook section of this filing.
For the quarter ended September 30, 2013, WEAT had total expenses of $125,635 compared to $61,781 for the quarter ended September 30, 2012 and $76,384 for the quarter ended June 30, 2013. This increase of $63,854 for the quarter year over year was driven primarily by an
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increase in the management fee of approximately $9,700, a result of average assets under management, and increases in the expense accruals due to the higher relative assets under management of the Fund when compared to the other Funds in 2013 versus 2012. There were reclasses of expenses in the third quarter of 2012, part of which related to accruals in the first and second quarter of the 2012. The large increase in professional fees was driven, in part, by a $19,000 expense reclass in the third quarter of 2012 from professional fees to other expense categories, including $7,500 to distribution and marketing expenses, $8,200 to general and administrative and $2,500 to business permits and licenses.
For the nine months ended September 30, 2013, WEAT had total expenses of $262,308 compared to $274,956 for the nine months ended September 30, 2012. The decrease of approximately $12,600 for the nine months year over year was driven primarily by a decrease of approximately $65,000 in the accruals for custodian fees which was partially offset by an increase of approximately $22,000 in management fees resulting from higher average net assets. The Sponsor has reduced the overall costs for operating the Funds over the twelve-month period.
The Sponsor paid approximately $5,600 in fees that normally would have been borne by the Fund for the nine month period ended September 30, 2013; there were no such expenses for the three month period. For 2012, the Sponsor paid expenses on behalf of the Fund of approximately $31,800 for the quarter and $36,500 for the nine months ended September 30.
The total expense ratio for the nine-month period ended September 30, 2013 was 5.52% while it was 11.04% for the period ended September 30, 2012. This lower expense ratio was driven by an increase in average net assets and a reduction in total expenses. Other than the management fee payable to the Sponsor and the brokerage commissions, most of the expenses incurred by the Fund are associated with the day-to-day operation of the Fund and the necessary functions related to regulatory compliance. These are generally based on contracts, which extend for some period of time and up to one year, or commitments regardless of the level of assets under management.
Shares outstanding increased by 260% period over period from 125,004 on September 30, 2012 to 450,004 on September 30, 2013. This increase was due primarily to a renewed focus on wheat production resulting from the drought conditions in the United States in the summer of 2012, tempered slightly by macro market trends which saw a shift, in general, from commodities to other investment classes, a concern about the possibility of continued global economic growth, particularly in developing nations, which could sustain demand for agricultural commodities at current prices; although there has been a more favorable 2013 wheat production situation across the globe, interest has remained relatively high. Shares outstanding increased by 50,000 from June 30, 2013 to September 30, 2013.
The seasonality patterns for wheat futures prices are impacted by a variety of factors. These include, but are not limited to, the harvest in the fall, the planting conditions in the spring, and the weather throughout the critical germination and growing periods. Prices for wheat futures are affected by the availability and demand for substitute agricultural commodities, including corn and soybeans. The price of wheat futures contracts is also influenced by global economic conditions, including the demand for exports to other countries. Such factors will impact the performance of the Fund and the results of operations on an ongoing basis. The Sponsor cannot predict the impact of such factors.
The Teucrium Agricultural Fund
TAGS commenced operations on March 28, 2012 and operated for only a minimal number of days in the first quarter of that year. Therefore, comparisons of income and expenses for the nine months ended September 30, 2013 and 2012 are not presented below as they would not be meaningful.
For the quarter ended September 30, 2013, TAGS had a total loss of $(83,167) compared to total income of $246,255 for the quarter ended September 30, 2012. The NAV per share of the Fund decreased from $53.39 on September 30, 2012 to $40.85 on September 30, 2013; the NAV on September 30, 2013 also decreased from $48.73 on December 31, 2012 and from $42.56 on June 30, 2013. Realized gain or loss on the securities of the Underlying Funds is a function of: 1) the change in the price of particular contracts sold in relation to redemption of shares, and 2) the gain or loss associated with rebalancing trades which are made to ensure conformance to the benchmark. Unrealized gain or loss on the securities of the Underlying Funds is a function of the change in the price of shares held on the final date of the period versus the purchase price for each and the number held. The Sponsor has a static benchmark as described above and trades futures contracts to adhere to that benchmark and to adjust for the creation or redemption of shares.
This change in the NAVs of the Underlying Funds has been driven principally by updates to the USDA’s outlook for corn, soybean and wheat prices, supply and demand. In addition, the price of sugar future contracts also fell in the first half of 2013 as a result of the anticipated increase in the Brazilian sugar cane harvest, although there was some stabilization in the third quarter of 2013. Summaries of the USDA’s most recent monthly report for corn, soybeans and wheat, which was released on September 12, 2013, are presented in the Market Outlook section of this filing.
Total expenses for the quarter ended September 30, 2013 were $2,605 and $3,561 for the quarter ended September 30, 2012. The Fund does not pay a management fee to the Sponsor. In the current quarter, the Sponsor paid approximately $9,300 of expenses that normally would have been borne by the Fund. For the nine months ended September 30, 2013, the Sponsor has paid approximately $45,200 of expenses on behalf of the Fund. For the period ended September 30, 2012, the Sponsor paid approximately $14,000 and $14,500 of expenses on behalf of the Fund for the three and operating nine month periods respectively. Other than the brokerage commissions, most of the expenses incurred by the Fund are associated with the day-to-day operation of the Fund and the necessary functions related to regulatory compliance. These are generally based on contracts, which extend for some period of time and up to one year, or commitments regardless of the level of assets under management. The Sponsor can elect to adjust the daily expense accruals at its discretion.
Shares outstanding remained constant at 50,002 for the periods ended September 30, 2012, June 30, 2013, and September 30, 2013; this represents a minimum level of shares outstanding for the Fund.
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Market Outlook
The Corn Market
Corn is the most widely produced livestock feed grain in the United States, and the majority of the United States’ corn crop is used in livestock feed. Corn is also processed into food and industrial products, including starch, sweeteners, corn oil, beverages and industrial alcohol. Additionally, corn is used in ethanol production.
The United States is the world’s leading producer and exporter of corn. For the Crop Year 2011-2012, the United States produced approximately 36% of all the corn globally; about 88% of the U.S. produced corn was sold domestically, while approximately 12% was exported. For 2011-2012, consumption of 880.81 Million Metric Tons (MMT) was exceeded by global production of 884.37 MMT. Besides the United States for the Crop Year 2011-2012, other principal world corn exporters included Argentina and South Africa. Brazil, Canada, the Ukraine and China also produced significant corn exports.
Standard Corn Futures Contracts trade on the CBOT in units of 5,000 bushels, although 1,000 bushel “mini-corn” Corn Futures Contracts also trade. Three grades of corn are deliverable under CBOT Corn Futures Contracts: Number 1 yellow, which may be delivered at 1.5 cents over the contract price; Number 2 yellow, which may be delivered at the contract price; and Number 3 yellow, which may be delivered at 1.5 cents under the contract price. There are five months each year in which CBOT Corn Futures Contracts expire: March, May, July, September and December.
If the futures market is in a state of backwardation (i.e., when the price of corn in the future is expected to be less than the current price), the Fund will buy later-to-expire contracts for a lower price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no changes to either prevailing corn prices or the price relationship between immediate delivery, soon-to-expire contracts and later-to-expire contracts, the value of a contract will rise as it approaches expiration. Over time, if backwardation remained constant, the differences would continue to increase. If the futures market is in contango, the Fund will buy later-to-expire contracts for a higher price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no other changes to either prevailing corn prices or the price relationship between the spot price, soon-to-expire contracts and later-to-expire contracts, the value of a contract will fall as it approaches expiration. Over time, if contango remained constant, the difference would continue to increase. Historically, the corn futures markets have experienced periods of both contango and backwardation. Frequently, whether contango or backwardation exists is a function, among other factors, of the seasonality of the corn market and the corn harvest cycle.
The United States Department of Agriculture (“USDA”) publishes weekly, monthly, quarterly and annual updates for U.S. domestic and worldwide corn production and consumption. These reports are available on the USDA’s website, www.usda.gov, at no charge. On September 12, 2013, the USDA released its monthly World Agricultural and Supply and Demand Estimates (WASDE) for the Crop Year 2013-14. The USDA estimated that the yield per acre for U.S. production would be 155.3 bushels per acre with 97.4 million acres planted and 89.1 million acres harvested. The total domestic supply of corn is estimated to be 14,530 million bushels with total usage, including exports, forecast at 12,675 million bushels. The supply for 2013-14 is a significant increase over the 11,931 estimated for 2012-13 and usage is estimated to be up approximately 12.5% period over period. The USDA projects that the resulting “Ending Stocks” or inventory will be 1,855 million bushels, up significantly from the 989 million bushels for the 2011-12 Crop Year and from the 661 million bushels estimated for the 2012-2013 Crop Year. The USDA’s projected “Carry-out Days Supply,” which is defined as the Ending Stocks divided by the demand per day, is projected at 53.4 days for 2013-14, up significantly from the 21.4 days estimated for 2012-2013.
Global corn production as projected by the USDA is estimated to increase from 860 MMT in 2012-13 to 957 MMT in 2013-14. Usage in 2012-13 exceeded production by 9 MMT in 2012-13, and this year production is projected to exceed usage by approximately 27 MMT.
The USDA did not release the regularly scheduled WASDE report on October 11, 2013 due to the U.S. government shutdown.
Natural Gas and the Natural Gas Market
Natural gas accounts for almost a quarter of U.S. energy consumption. The price of natural gas is established by the supply and demand conditions in the North American market, and more particularly, in the main refining center of the U.S. Gulf Coast.
Natural gas has limited means of transportation and distribution and therefore is not a commodity with a “global” price. As a result, the natural gas market is mostly affected by events that happen locally or are confined to the North American Continent. The primary means for transporting natural gas is through pipeline, although natural gas may be liquefied in order to be transported outside the pipeline structure.
There are four main costs, therefore prices, associated with natural gas – wellhead price, transport (long-distance and local distribution), storage and delivery. Wellhead prices are deregulated in North America. Transportation costs are regulated by the National Energy Boards and local regulators regulate local distribution costs. Prices are also measured for different end-users such as residential usage, commercial, industrial or electrical utility. The largest share of the final price to all end-users is the distribution costs due to the limited means of distribution. Most large commercial users buy natural gas directly from producers or market makers, thereby reducing price.
Both weather and population changes affect consumption of natural gas. In addition, alternative fuels and competition from other sources of energy such as oil, wind energy and coal can affect the price of natural gas.
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The natural gas market essentially constitutes an auction, where the highest bidder wins the supply. When markets are “strong” ( i.e., when demand is high and/or supply is low), the bidder must be willing to pay a higher premium to capture the supply. When markets are “weak” (i.e., when demand is low and/or supply is high), a bidder may choose not to outbid competitors, waiting instead for later, possibly lower priced, supplies. Demand for natural gas by consumers, as well as agricultural, manufacturing and transportation industries, determines overall demand for natural gas. Since the precursors of product demand are linked to economic activity, natural gas demand will tend to reflect economic conditions.
The NYMEX is the world’s largest physical commodity futures exchange and the dominant market for the trading of energy and precious metals. The Natural Gas Futures Contracts trades in units of 10,000 MMBtu and is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest and up to the Canadian border.
Over time, the price of natural gas fluctuates based on a number of market factors, including demand for the commodity relative to its supply. The value of Natural Gas contracts likewise fluctuates in reaction to a number of market factors. If investors seek to maintain their holdings in Natural Gas contracts with a roughly constant expiration profile and not take delivery of the natural gas, they must on an ongoing basis sell their current positions as they approach expiration and invest in later-to-expire contracts.
If the futures market is in a state of backwardation (i.e., when the price of natural gas in the future is expected to be less than the current price), the Fund will buy later-to-expire contracts for a lower price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no changes to either prevailing natural gas prices or the price relationship between immediate delivery, soon-to-expire contracts and later-to-expire contracts, the value of a contract will rise as it approaches expiration. Over time, if backwardation remained constant, the differences would continue to increase. If the futures market is in contango, the Fund will buy later-to-expire contracts for a higher price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no other changes to either prevailing natural gas prices or the price relationship between the spot price, soon-to-expire contracts and later-to-expire contracts, the value of a contract will fall as it approaches expiration. Over time, if contango remained constant, the difference would continue to increase. Historically, the natural gas futures markets have experienced periods of extreme contango but very few periods with backwardation. Since early 2008, the deepest contango structure has historically occurred during September or October. It is during these periods natural gas storage reaches its highest level as the market tries to build the optimal inventory for the upcoming winter heating season.
The United States Energy Information Administration (“EIA”) publishes daily, weekly, monthly and annual information regarding the natural gas industry, usage and supply estimates. The information is available on the EIA’s website, www.eia.gov, at no charge.
WTI Light Sweet Crude Oil and the Oil Industry
WTI light, sweet crude oil comprises a blend of several U.S. domestic streams of crude oil delivered to Cushing, Oklahoma, where there are many intersecting pipelines and storage facilities, along with easy access to refiners and suppliers. WTI light, sweet crude oil flows both inbound and outbound from Cushing.
Light sweet crudes are preferred by refiners because of the low sulfur content and relatively high yields of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel. The price of light sweet crude oil has historically exhibited periods of significant volatility.
Demand for petroleum products by consumers, as well as agricultural, manufacturing and transportation industries, determines demand for crude oil by refiners. Since product demand is linked to economic activity, crude oil demand will tend to reflect economic conditions. According to the September 2012 Annual Energy Review published by the U.S. Energy Information Administration, for 2011, about 70% of petroleum was used for transportation, 24% by industry, 5% for residential and 1% for electricity production. Changes in consumer behavior, such as mass transportation initiatives, alternative fuels, and change in economic standards in China and India may change petroleum consumption. In addition, other factors such as weather also influence product and crude oil demand.
WTI Crude Oil Futures contracts are most widely traded on the NYMEX and the ICE exchanges in 1,000 barrel contracts.
Crude oil supply is determined by economic, political and environmental factors. Oil prices (along with drilling costs, availability of attractive prospects for drilling, taxes and technology, among other factors) determine exploration and development spending, which influence output capacity with a lag. In the short run, production decisions by OPEC also affect supply and prices. Oil export embargoes represent other routes through which political developments move the market. Oil extraction may also have a significant impact on the environment, from accidents and routine activities such as seismic exploration and drilling. It is not possible to predict the aggregate effect of all or any combination of these factors.
If the futures market is in a state of backwardation (i.e., when the price of crude oil in the future is expected to be less than the current price), the Fund will buy later-to-expire contracts for a lower price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no changes to either prevailing crude oil prices or the price relationship between immediate delivery, soon-to-expire contracts and later-to-expire contracts, the value of a contract will rise as it approaches expiration. Over time, if backwardation remained constant, the differences would continue to increase. If the futures market is in contango, the Fund will buy later-to-expire contracts for a higher price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no other changes to either prevailing crude oil prices or the price relationship between the spot price, soon-to-expire contracts and later-to-expire contracts, the value of a contract will fall as it approaches expiration. Over time, if contango remained constant, the difference would continue to increase. Historically, the crude oil futures markets have experienced periods of both contango and backwardation. During 2006 and the first half of 2007, the crude oil futures markets experienced contango. However, starting early in the third
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quarter 2007, the crude oil futures markets moved into backwardation and remained in backwardation until late in the second quarter 2008 when the crude oil futures markets moved into contango. The crude oil markets remained in contango until late third quarter 2008, when they moved into backwardation. The crude oil markets moved back into contango for the balance of 2008, reaching supercontango in December 2008. Crude oil since early 2009 has fluctuated between mild contango, spiking into deep contango for several weeks at a time during third and fourth quarters of 2009, second and third quarters 2010 and finally the last major contango during first quarter 2011. Since this point the crude oil markets continue to see moderate contango structure in the market.
The United States Energy Information Administration (“EIA”) publishes daily, weekly, monthly and annual information regarding the crude oil industry, usage and supply estimates. The information is available on the EIA’s website, www.eia.gov, at no charge.
The Soybean Market
Global soybean production is concentrated in the central U.S., Brazil, Argentina, and China. The United States Department of Agriculture has estimated that, for the Crop Year 2011-2012, the United States produced approximately 84.19 MMT of soybeans or approximately 35% of estimated world production, with Brazil producing approximately 28% for 2011-2012 and Argentina almost 17%. For 2011-2012, global production of 239.15 MMT was less than the consumption of 256.94 MMT.
The soybean processing industry converts soybeans into soybean meal, soybean hulls, and soybean oil. Soybean meal and soybean hulls are processed into soy flour or soy protein, which are used, along with other commodities, by livestock producers and the farm fishing industry as feed. Soybean oil is sold in multiple grades and is used by the food, petroleum and chemical industries. The food industry uses soybean oil in cooking and salad dressings, baking and frying fats, and butter substitutes, among other uses. In addition, the soybean industry continues to introduce soy-based products as substitutes to various petroleum-based products including lubricants, plastics, ink, crayons and candles. Soybean oil is also converted to biodiesel for use as fuel.
Standard Soybean Futures Contracts trade on the CBOT in units of 5,000 bushels, although 1,000 bushel “mini-sized” Soybean Futures Contracts also trade. Three grades of soybean are deliverable under CBOT Soybean Futures Contracts: Number 1 yellow, which may be delivered at 6 cents per bushel over the contract price; Number 2 yellow, which may be delivered at the contract price; and Number 3 yellow, which may be delivered at 6 cents per bushel under the contract price. There are seven months each year in which CBOT Soybean Futures Contracts expire: January, March, May, July, August, September and November.
If the futures market is in a state of backwardation (i.e., when the price of soybeans in the future is expected to be less than the current price), the Fund will buy later-to-expire contracts for a lower price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no changes to either prevailing soybean prices or the price relationship between immediate delivery, soon-to-expire contracts and later-to-expire contracts, the value of a contract will rise as it approaches expiration. Over time, if backwardation remained constant, the differences would continue to increase. If the futures market is in contango, the Fund will buy later-to-expire contracts for a higher price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no other changes to either prevailing soybean prices or the price relationship between the spot price, soon-to-expire contracts and later-to-expire contracts, the value of a contract will fall as it approaches expiration. Over time, if contango remained constant, the difference would continue to increase. Historically, the soybeans futures markets have experienced periods of both contango and backwardation. Frequently, whether contango or backwardation exists is a function, among other factors, of the seasonality of the soybean market and the soybean harvest cycle.
The United States Department of Agriculture (“USDA”) publishes weekly, monthly, quarterly and annual updates for U.S. domestic and worldwide soybean production and consumption. These reports are available on the USDA’s website, www.usda.gov, at no charge. On September 12, 2013, the USDA released its monthly World Agricultural and Supply and Demand Estimates (WASDE) for the Crop Year 2013-14. The USDA estimated that the yield per acre for U.S. production would be 41.2 bushels per acre with 77.2 million acres planted and 76.4 million acres harvested. The yield per acre in the September report is an improvement from the 39.6 bushels per acre estimated for the 2012-13 Crop Year; the improvement is a result of improvements in the 2012 drought conditions in the principal soybean growing areas of the US. The total domestic supply of soybeans is estimated to be 3,289 million bushels with total usage, including exports, forecast at 3,140 million bushels. The USDA projects that the resulting “Ending Stocks” or inventory will be 150 million bushels, down from the 169 million bushels for the 2011-12 Crop Year, and from the 125 million bushels estimated for the 2012-2013 Crop Year. The USDA’s projected “Carry-out Days Supply,” which is defined as the Ending Stocks divided by the demand per day, is projected at 17 days for 2013-14, up from the 15 days estimated for 2012-2013.
Global soybean production as projected by the USDA is estimated to increase from 267 MMT in 2012-13 to 282 MMT in 2013-14. Production in both 2012-13 and this year is projected to exceed usage.
The USDA did not release the regularly scheduled WASDE report on October 11, 2013 due to the U.S. government shutdown.
The Sugar Market
Sugarcane accounts for about 70% of the world’s sugar production, and sugar beets account for the remainder of the world’s sugar production. Sugar manufacturers use sugar beets and sugarcane as the raw material from which refined sugar (sucrose) for industrial and consumer use is produced. Sugar is produced in various forms, including granulated, powdered, liquid, brown, and molasses. The food industry (in particular, producers of baked goods, beverages, cereal, confections, and dairy products) uses sugar and sugarcane molasses to make sugar-containing food products. Sugar beet pulp and molasses products are used as animal feed ingredients. Ethanol is an important by-product of
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sugarcane processing. Additionally, the material that is left over after sugarcane is processed is used to manufacture paper, cardboard, and “environmentally friendly” eating utensils.
In 2009, the leading producers of sugarcane were Brazil, India, Thailand and China, with Brazil producing nearly one-quarter of the world’s sugarcane. The principal world producers of sugar beets in 2008 included the European Union, the United States and Russia.
The Sugar No. 11 Futures Contract is the world benchmark contract for raw sugar trading. This contract prices the physical delivery of raw cane sugar, delivered to the receiver’s vessel at a specified port within the country of origin of the sugar. Sugar No. 11 Futures Contracts trade on the ICE Futures and the NYMEX in units of 112,000 pounds.
If the futures market is in a state of backwardation (i.e., when the price of sugar in the future is expected to be less than the current price), the Fund will buy later-to-expire contracts for a lower price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no changes to either prevailing soybean prices or the price relationship between immediate delivery, soon-to-expire contracts and later-to-expire contracts, the value of a contract will rise as it approaches expiration. Over time, if backwardation remained constant, the differences would continue to increase. If the futures market is in contango, the Fund will buy later-to-expire contracts for a higher price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no other changes to either prevailing sugar prices or the price relationship between the spot price, soon-to-expire contracts and later-to-expire contracts, the value of a contract will fall as it approaches expiration. Over time, if contango remained constant, the difference would continue to increase. Historically, the sugar futures markets have experienced periods of both contango and backwardation. Frequently, whether contango or backwardation exists is a function, among other factors, of the seasonality of the sugar market and the sugar harvest cycle.
The United States Department of Agriculture (“USDA”) publishes two major reports annually on U.S. domestic and worldwide sugar production and consumption. These are usually released in November and May. In addition, the USDA publishes periodic, but not as comprehensive, reports on sugar monthly. All of these reports are available on the USDA’s website, www.usda.gov, at no charge.
The Wheat Market
Wheat is used to produce flour, the key ingredient for breads, pasta, crackers and many other food products, as well as several industrial products such as starches and adhesives. Wheat by-products are used in livestock feeds. Wheat is the principal food grain produced in the United States, and the United States’ output of wheat is typically exceeded only by that of China, the European Union and India. For 2011-12, Russia’s production of wheat exceeded that of the United States. Typically, almost half of the U.S. wheat crop is exported, although the United States also imports some wheat, principally from Canada. Global wheat production was 697.17 MMT for 2011-2012, which was basically equal to consumption of 696.92 MMT.
There are several types of wheat grown in the U.S., which are classified in terms of color, hardness, and growing season. CBOT Wheat Futures Contracts call for delivery of #2 soft red winter wheat, which is generally grown in the eastern third of the United States, but other types and grades of wheat may also be delivered (Grade #1 soft red winter wheat, Hard Red Winter, Dark Northern Spring and Northern Spring wheat may be delivered at 3 cents premium per bushel over the contract price and #2 soft red winter wheat, Hard Red Winter, Dark Northern Spring and Northern Spring wheat may be delivered at the contract price.) Winter wheat is planted in the fall and is harvested in the late spring or early summer of the following year, while spring wheat is planted in the spring and harvested in late summer or fall of the same year.
Standard Wheat Futures Contracts trade on the CBOT in units of 5,000 bushels, although 1,000 bushel “mini-wheat” Wheat Futures Contracts also trade. There are five months each year in which CBOT Wheat Futures Contracts expire: March, May, July, September and December.
If the futures market is in a state of backwardation (i.e., when the price of wheat in the future is expected to be less than the current price), the Fund will buy later-to-expire contracts for a lower price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no changes to either prevailing wheat prices or the price relationship between immediate delivery, soon-to-expire contracts and later-to-expire contracts, the value of a contract will rise as it approaches expiration. Over time, if backwardation remained constant, the differences would continue to increase. If the futures market is in contango, the Fund will buy later-to-expire contracts for a higher price than the sooner-to-expire contracts that it sells. Hypothetically, and assuming no other changes to either prevailing wheat prices or the price relationship between the spot price, soon-to-expire contracts and later-to-expire contracts, the value of a contract will fall as it approaches expiration. Over time, if contango remained constant, the difference would continue to increase. Historically, the wheat futures markets have experienced periods of both contango and backwardation. Frequently, whether contango or backwardation exists is a function, among other factors, of the seasonality of the wheat market and the wheat harvest cycle.
The United States Department of Agriculture (“USDA”) publishes weekly, monthly, quarterly and annual updates for U.S. domestic and worldwide wheat production and consumption. These reports are available on the USDA’s website, www.usda.gov, at no charge. On September 12, 2013, the USDA released its monthly World Agricultural and Supply and Demand Estimates (WASDE) for the Crop Year 2013-14. The USDA estimated that the yield per acre for U.S. production would be 46.2 bushels per acre with 56.5 million acres planted and 45.7 million acres harvested. The total domestic supply of wheat is estimated to be 2,972 million bushels with total usage, including exports, forecast at 2,411 million bushels. The USDA projects that the resulting “Ending Stocks” or inventory will be 561 million bushels, down significantly from the 743 million bushels for the 2011-12 Crop Year, and from the 718 million bushels estimated for the 2012-2013 Crop Year. The USDA’s projected “Carry-out Days Supply,” which is defined as the Ending Stocks divided by the demand per day, is projected at 84.9 days for 2013-14, down from the 108.5 days in 2012-2013.
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Global wheat production as projected by the USDA is estimated to increase from 655 MMT in 2012-13 to 705 MMT in 2013-14. Usage in 2012-13 exceeded supply by approximately 25 MMT and is estimated to be roughly equal to production this year.
The USDA did not release the regularly scheduled WASDE report on October 11, 2013 due to the U.S. government shutdown.
Calculating NAV
The NAV of each Fund is calculated by:
| • | Taking the current market value of its total assets, and |
| • | Subtracting any liabilities. |
The Administrator, the Bank of New York Mellon, calculates the NAV of each Fund once each trading day. It calculates NAV as of the earlier of the close of the New York Stock Exchange or 4:00 p.m., New York time. The NAV for a particular trading day will be released after 4:15 p.m., New York time.
In determining the value of the Futures Contracts for each Fund, the Administrator uses the closing price on the exchange on which the commodity is traded. The Administrator determines the value of all other investments for each Fund as of the earlier of the close of the New York Stock Exchange or 4:00 p.m., New York time, in accordance with the current Services Agreement between the Administrator and the Trust.
The value of Cleared Swaps and over-the-counter Interests will be determined based on the value of the commodity or Futures Contract underlying such Interest, except that a fair value may be determined if the Sponsor believes that a Fund is subject to significant credit risk relating to the counterparty to such Interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV of a specific Fund where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract of such Fund closes at its price fluctuation limit for the day. Treasury Securities held by the Fund are valued by the Administrator using values received from recognized third-party vendors (such as Reuters) and dealer quotes. The NAV includes any unrealized profit or loss on open Interests and any other credit or debit accruing to each Fund but unpaid or not received by the Fund.
| In addition, in order to provide updated information relating to the Funds for use by investors and market professionals, the NYSE Arca calculates and disseminates throughout the trading day an updated indicative fund value for each Fund. The indicative fund value is calculated by using the prior day’s closing NAV per share of the Fund as a base and updating that value throughout the trading day to reflect changes in the value of the Fund’s commodity Interests during the trading day. Changes in the value of Treasury Securities and cash equivalents will not be included in the calculation of indicative value. For this and other reasons, the indicative fund value disseminated during NYSE Arca trading hours should not be viewed as an actual real time update of the NAV for each Fund. The NAV is calculated only once at the end of each trading day. |
The indicative fund value is disseminated on a per share basis every 15 seconds during regular NYSE Arca trading hours of 9:30 a.m., New York time, to 4:00 p.m., New York time. The CBOT, the NYMEX and the ICE are generally open for trading only during specified hours which vary by exchange and may be adjusted by the exchange. However, the futures markets on these exchanges do not currently operate twenty-four hours per day. In addition, there may be some trading hours which may be limited to electronic trading only. This means that there is a gap in time at the beginning and the end of each day during which the Fund’s Shares are traded on the NYSE Arca, when, for example, real-time CBOT trading prices for Corn Futures Contracts traded on such Exchange are not available. As a result, during those gaps there will be no update to the indicative fund values. The most current trading hours for each exchange may be found on the website of that exchange.
The NYSE Arca disseminates the indicative fund value through the facilities of CTA/CQ High Speed Lines. In addition, the indicative fund value is published on the NYSE Arca’s website and is available through on-line information services such as Bloomberg and Reuters.
Dissemination of the indicative fund values provides additional information that is not otherwise available to the public and is useful to investors and market professionals in connection with the trading of Shares of the Funds on the NYSE Arca. Investors and market professionals are able throughout the trading day to compare the market price of each Fund and its indicative fund value. If the market price of the Shares of a Fund diverges significantly from the indicative fund value, market professionals will have an incentive to execute arbitrage trades. For example, if a Fund appears to be trading at a discount compared to the indicative fund value, a market professional could buy a Fund’s Shares on the NYSE Arca, aggregate them into Redemption Baskets, and receive the NAV of such Shares by redeeming them to the Trust. Such arbitrage trades can tighten the tracking between the market price of a Fund and the indicative fund value and thus can be beneficial to all market participants.
Critical Accounting Policies
The Trust’s critical accounting policies for all the Funds are as follows:
| 1. | Preparation of the financial statements and related disclosures in conformity with U.S. generally-accepted accounting principles (“GAAP”) requires the application of appropriate accounting rules and guidance, as well as the use of estimates, and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense and |
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related disclosure of contingent assets and liabilities during the reporting period of the consolidated financial statements and accompanying notes. The Trust’s application of these policies involves judgments and actual results may differ from the estimates used.
- The Sponsor has determined that the valuation of Commodity Interests that are not traded on a U.S. or internationally recognized futures exchange (such as swaps and other over-the-counter contracts) involves a critical accounting policy. The values which are used by the Funds for futures contracts will be provided by the commodity broker who will use market prices when available, while over-the-counter contracts will be valued based on the present value of estimated future cash flows that would be received from or paid to a third party in settlement of these derivative contracts prior to their delivery date. Values will be determined on a daily basis.
- Commodity futures contracts held by the Funds and are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statement of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statement of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Funds earn interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant at a rate equal to 85% of the overnight of Federal Funds Rate. In addition, the Funds earn interest on funds held at the custodian at prevailing market rates for such investments.
- Cash equivalents are highly-liquid investments with original maturity dates of three months or less at inception. The Funds reported cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Funds have a substantial portion of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits.
- The use of fair value to measure financial instruments, with related unrealized gains or losses recognized in earnings in each period is fundamental to the Trust’s financial statements. In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Trust uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Trust. Unobservable inputs reflect the Trust’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels: a) Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment, b) Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly, and c) Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. See the notes within the financial statements for further information.
The Funds and the Trust record their derivative activities at fair value. Gains and losses from derivative contracts are included in the statement of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the New York Mercantile Exchange (“NYMEX”), or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
- Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
- Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Funds’ clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements
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established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Funds’ trading, the Funds (and not its shareholders personally) are subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated, and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
- Due from/to broker for investments in securities are securities transactions pending settlement. The Trust and TAGS are subject to credit risk to the extent any broker with whom it conducts business is unable to fulfill contractual obligations on its behalf. The management of the Trust and the Funds monitors the financial condition of such brokers and does not anticipate any losses from these counterparties. Since the inception of the Fund, the principal broker through which the Trust and TAGS clear securities transactions for TAGS is the Bank of New York Mellon Capital Markets.
- The investment objective of TAGS is to have the daily changes in percentage terms of the Net Asset Value (“NAV”) of its common units (“Shares”) reflect the daily changes in percentage terms of a weighted average (the “Underlying Fund Average”) of the NAVs per share of four other commodity pools that are series of the Trust and are sponsored by the Sponsor: the Teucrium Corn Fund, the Teucrium Wheat Fund, the Teucrium Soybean Fund and the Teucrium Sugar Fund (collectively, the “Underlying Funds”). The Underlying Fund Average will have a weighting of 25% to each Underlying Fund, and the Fund’s assets will be rebalanced, generally on a daily basis, to maintain the approximate 25% allocation to each Underlying Fund. As such, TAGS will buy, sell and hold as part of its normal operations shares of the four Underlying Funds. The Trust excludes the shares of the other series of the Trust owned by the Teucrium Agricultural Fund from its statements of assets and liabilities. The Trust excludes the net change in unrealized appreciation or depreciation on securities owned by the Teucrium Agricultural Fund from its statements of operations. Upon the sale of the Underlying Funds by the Teucrium Agricultural Fund, the Trust includes any realized gain or loss in its statements of changes in net assets.
- For tax purposes, the Funds will be treated as partnerships. Therefore, the Funds do not record a provision for income taxes because the partners report their share of a Fund’s income or loss on their income tax returns. The financial statements reflect the Funds’ transactions without adjustment, if any, required for income tax purposes.
Credit Risk
When any of the Funds enters into Commodity Interests, it is exposed to the credit risk that the counterparty will not be able to meet its obligations. For purposes of credit risk, the counterparty for the Futures Contracts traded on the CBOT, the NYMEX, and the ICE and for Cleared Swaps is the clearinghouse associated with those exchanges. In general, clearinghouses are backed by their members who may be required to share in the financial burden resulting from the nonperformance of one of their members, which should significantly reduce credit risk. Some foreign exchanges are not backed by their clearinghouse members but may be backed by a consortium of banks or other financial institutions. Unlike in the case of exchange-traded futures contracts, the counterparty to an over-the-counter Corn Interest contract is generally a single bank or other financial institution. As a result, there is greater counterparty credit risk in over-the-counter transactions. There can be no assurance that any counterparty, clearing house, or their financial backers will satisfy their obligations to the Fund.
The Sponsor attempts to manage the credit risk of each Fund by following certain trading limitations and policies. In particular, each Fund intends to post margin and collateral and/or hold liquid assets that will be equal to approximately the face amount of the Interests it holds. The Sponsor has implemented procedures that include, but are not limited to, executing and clearing trades and entering into over-the-counter transactions only with parties it deems creditworthy and/or requiring the posting of collateral by such parties for the benefit of each Fund to limit its credit exposure.
Any commodity broker for and of the Funds, when acting as the FCM in accepting orders to purchase or sell futures contracts on United States exchanges, will be required by CFTC regulations to separately account for and treat as belonging to the Fund all of the Fund’s assets that relate to domestic futures contract trading. These commodity brokers are not allowed to commingle the assets of that Fund with the commodity broker’s other assets, although commodity brokers are allowed to commingle the assets of multiple customers in a bulk segregated account. In addition, the CFTC requires commodity brokers to hold in a secure account the assets of each Fund related to foreign futures contract trading.
On November 14, 2012, the CFTC proposed new regulations that would require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for FCMs. The proposed rules are intended to afford greater assurances to market participants that: customer segregated funds and secured amounts are protected; customers are provided with appropriate notice of the risks of futures trading and of the FCMs with which they may choose to do business; FCMs are monitoring and managing risks in a robust manner; the capital and liquidity of FCMs are strengthened to safeguard their continued operations; and the auditing and examination programs of the CFTC and the SROs are monitoring the activities of FCMs in a thorough manner. The final regulations have not yet been adopted.
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Liquidity and Capital Resources
The Funds do not anticipate making use of borrowings or other lines of credit to meet their obligations. The Funds meet their liquidity needs in the normal course of business from the proceeds of the sale of their investments or from the cash, cash equivalents and/or the Treasuries Securities that they intend to hold. The Funds’ liquidity needs include: redeeming their shares, providing margin deposits for existing Futures Contracts or the purchase of additional Futures Contracts, posting collateral for over-the-counter Commodity Interests, and paying expenses.
The Funds generate cash primarily from (i) the sale of Creation Baskets and (ii) interest earned on cash, cash equivalents and their investments in Treasuries Securities. Generally, all of the net assets of the Funds are allocated to trading in Commodity Interests. Most of the assets of the Funds are held in Treasury Securities, cash and/or cash equivalents that could or are used as margin or collateral for trading in Commodity Interests. The percentage that such assets bear to the total net assets will vary from period to period as the market values of the Commodity Interests change. Interest earned on interest-bearing assets of a Fund are paid to that Fund.
The investments of a Fund in Commodity Interests are subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, U.S. futures exchanges limit the fluctuations in the prices of certain Futures Contracts during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of such a Futures Contract has increased or decreased by an amount equal to the daily limit, positions in the contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Such market conditions could prevent the Fund from promptly liquidating a position in Futures Contracts.
Market Risk
Trading in Commodity Interests such as Futures Contracts will involve the Funds entering into contractual commitments to purchase or sell specific amounts of commodities at a specified date in the future. The gross or face amount of the contracts is expected to significantly exceed the future cash requirements of each Fund as each Fund intends to close out any open positions prior to the contractual expiration date. As a result, each Fund’s market risk is the risk of loss arising from the decline in value of the contracts, not from the need to make delivery under the contracts. The Funds consider the “fair value” of derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated with the commitment by the Funds to purchase a specific commodity will be limited to the aggregate face amount of the contracts held.
The exposure of the Funds to market risk will depend on the market price of the specific commodities held by the Fund. The market price of the commodities depends in part on the volatility of interest rates and foreign exchange rates and the liquidity of the commodity-specific markets.
Over-the-Counter Derivatives Risk
In addition to futures contracts, options on futures contracts and cleared swaps, derivative contracts that are tied to various commodities, are entered into outside of public exchanges. These “over-the-counter” contracts are entered into between two parties in private contracts. Unlike Futures Contracts and Cleared Swaps, which are guaranteed by a clearing organization, each party to an over-the-counter derivative contract bears the credit risk of the other party, i.e., the risk that the other party will not be able to perform its obligations under its contract.
Some over-the-counter derivatives contracts contain relatively standardized terms and conditions and are available from a wide range of participants. Others have highly customized terms and conditions and are not as widely available. While the Fund may enter into these more customized contracts, the Fund will only enter into over-the-counter contracts containing certain terms and conditions, as discussed further below, that are designed to minimize the credit risk to which the Fund will be subject and only if the terms and conditions of the contract are consistent with achieving the Fund’s investment objective of closely tracking the Benchmark. The over-the-counter contracts that the Fund may enter into will take the form of either forward contracts or swaps.
A forward contract is a contractual obligation to purchase or sell a specified quantity of a commodity at or before a specified date in the future at a specified price and, therefore, is economically similar to a futures contract. Unlike futures contracts, however, forward contracts are typically traded in the over-the-counter markets. In some instances, such contracts may provide for cash settlement instead of making or taking delivery of the underlying commodity. Forward contracts for a given commodity are generally available for various amounts and maturities and are subject to individual negotiation between the parties involved. Moreover, generally there is no direct means of offsetting or closing out a forward contract by taking an offsetting position as one would a futures contract on a U.S. exchange. If a trader desires to close out a forward contract position, he generally will establish an opposite position in the contract but will settle and recognize the profit or loss on both positions simultaneously on the delivery date. Thus, unlike in the futures contract market where a trader who has offset positions will recognize profit or loss immediately, in the forward market a trader with a position that has been offset at a profit will generally not receive such profit until the delivery date, and likewise a trader with a position that has been offset at a loss will generally not have to pay money until the delivery date. However, in some instances such contracts may provide a right of offset that will allow for the receipt of profit and payment for losses prior to the delivery date.
Like a Cleared Swap, an over-the-counter swap agreement is a bilateral contract to exchange a periodic stream of payments determined by reference to a notional amount, with payment typically made between the parties on a net basis. For instance, in the case of a corn swap, the Fund may be obligated to pay a fixed price per bushel of corn multiplied by a notional number of bushels and be entitled to receive an amount per bushel equal to the current value of an index of corn prices, the price of a specified Corn Futures Contract, or the average price of a group of Corn Futures Contracts such as the Benchmark (times the same notional number of bushels). Unlike Cleared Swaps, however, each party to the
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swap is subject to the credit risk of the other party. The Funds only enter into over-the-counter swaps on a net basis, where the two payment streams are netted out on a daily basis, with the parties receiving or paying, as the case may be, only the net amount of the two payments. Swaps do not generally involve the delivery of underlying assets or principal. Accordingly, a Fund’s risk of loss with respect to an over-the-counter swap generally is limited to the net amount of payments that the counterparty is contractually obligated to make less any collateral deposits the Fund is holding.
To reduce the credit risk that arises in connection with over-the-counter contracts, a Fund generally enters into an agreement with each counterparty based on the Master Agreement published by the International Swaps and Derivatives Association, Inc. that provides for the netting of the Fund’s overall exposure to its counterparty and for daily payments based on the marked to market value of the contract.
The creditworthiness of each potential counterparty will be assessed by the Sponsor. The Sponsor assesses or reviews, as appropriate, the creditworthiness of each potential or existing counterparty to an over-the-counter contract pursuant to guidelines approved by the Sponsor. The creditworthiness of existing counterparties will be reviewed periodically by the Sponsor. The Sponsor’s President and Chief Investment Officer has over 25 years of experience in over-the-counter derivatives trading, including the counterparty creditworthiness analysis inherent therein, and the Sponsor’s Chief Executive Officer, through his prior experience as a Chief Financial Officer and Treasurer, has extensive experience evaluating the creditworthiness of business partners and counterparties to commercial and derivative contracts. Notwithstanding this experience, there is no guarantee that the Sponsor’s creditworthiness analysis will be successful and that counterparties selected for Fund transactions will not default on their contractual obligations.
A Fund also may require that a counterparty be highly rated and/or provide collateral or other credit support. The Sponsor on behalf of a Fund may enter into over-the-counter contracts with various types of counterparties, including: (a) banks regulated by a United States federal bank regulator, (b) broker-dealers regulated by the SEC, (c) insurance companies domiciled in the United States, (d) producers of commodities, such as farmers and related agricultural enterprises, (e) users of commodities, for example for corn, such as producers of prepared food products and ethanol producers, (f) any other person (including affiliates of any of the above) who are engaged to a substantial degree in the business of trading commodities. Certain of these types of counterparties will not be subject to regulation by the CFTC or any other significant federal or state regulatory structure. While it is the Sponsor’s preference to use regulated entities as counterparties, the Sponsor primarily considers creditworthiness in selecting counterparties rather than the primary business of the prospective counterparty or the regulatory structure to which it is subject.
Regulatory Environment
The regulation of futures markets, futures contracts and futures exchanges has historically been comprehensive. The CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading.
The regulation of commodity interest transactions in the United States is a rapidly changing area of law and is subject to ongoing modification by governmental and judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed in the United States. There is a possibility of future regulatory changes within the United States altering, perhaps to a material extent, the nature of an investment in the Funds, or the ability of a Fund to continue to implement its investment strategy. In addition, various national governments outside of the United States have expressed concern regarding the disruptive effects of speculative trading in the commodities markets and the need to regulate the derivatives markets in general. The effect of any future regulatory change on the Funds is impossible to predict but could be substantial and adverse.
The Dodd-Frank
Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act”), which was
enacted in response to the economic crisis of 2008 and 2009, significantly alters the regulatory regime to which the securities
and commodities markets are subject. In particular, the Dodd-Frank Act alters the regulation of commodity interests. Provisions
of the new law include the requirement that position limits be established on a wide range of commodity interests, including energy-based,
metal and agricultural commodity futures contracts, options on such futures contracts and cleared and uncleared swaps that are
economically equivalent to such futures contracts and options (“Reference Contracts”); new registration and recordkeeping
requirements for swap market participants; capital and margin requirements for “swap dealers” and “major swap
participants,” as determined by the new law and applicable regulations; and the mandatory use of clearinghouse mechanisms
for sufficiently standardized swap transactions that are currently entered into in the over-the-counter market. On November 28,
2012 the CFTC issued its final clearing determination requiring that certain credit default swaps and interest rate swaps be cleared
by registered derivatives clearing organizations (DCOs). This is the CFTC’s first clearing determination under the Dodd-Frank
Act and became effective February 11, 2013. Beginning on March 11, 2013, “swap dealers,” “major swap participants,”
and certain active funds were required to clear certain credit default swaps and interest rate swaps; and beginning on June 10,
2013, commodity pools, certain private funds and entities predominately engaged in financial activities were required to clear
the same types of swaps. As a result, if a Fund enters into or had entered into certain interest rate or credit default swaps on
or after June 10, 2013, such swaps will be required to be centrally cleared. Determinations
on other types of swaps are expected in the future and, when finalized, could require the Fund to centrally clear certain over-the-counter
instruments presently entered into and settled on a bi-lateral basis. If a swap is required to be cleared, the initial margin will
be set by the clearing organization, subject to certain regulatory requirements and guidelines. Initial and variation margin requirements
for swap dealers and major swap participants which enter into uncleared swaps and capital requirements for swap dealers and major
swap participants which enter into both cleared and uncleared trades will be set by the CFTC, the SEC or the applicable “Prudential
Regulator.”
The Dodd-Frank Act also requires that certain swaps determined to be available to trade on a swap execution facility (“SEF”) must be executed over such a facility. On June 5, 2013, the CFTC published a final rule regarding the obligations of SEFs, including the obligation for facilities offering multiple person execution services to register as a SEF by October 2, 2013. On September 27 and 30, 2013, the CFTC’s Division of
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Market Oversight granted no-action relief to SEFs from compliance with certain regulatory and reporting requirements. The no-action relief granted on September 27th included relief, which will be in effect until November 1, 2013, from a requirement that a SEF enforce its own rulebooks and compel its participants to consent to the jurisdiction of the SEF. Based upon applications filed by several SEFs with the CFTC in the second half of October 2013, it is expected that the CFTC will determine that certain interest rate swaps will be determined to be available to trade on those SEFs in the first quarter of 2014.
In late 2011, the CFTC adopted rules that impose new position limits on Reference Contracts involving 28 energy, metals and agricultural commodities (the “Position Limit Rules”). The Position Limit Rules were scheduled to become effective on October 12, 2012. However, on September 28, 2012, the United States District Court for the District of Columbia vacated these regulations on the basis of ambiguities in the provisions of the Commodity Exchange Act (“CEA”) (as modified by the Dodd-Frank Act) upon which the regulations were based. In its September 28th decision, the court remanded the Position Limit Rules to the CFTC with instructions to use its expertise and experience to resolve the ambiguities in the statute. On November 15, 2012, the CFTC indicated that it will move forward with an appeal of the District Court’s decision to vacate the Position Limit Rules. At this time, it is not possible to predict how the CFTC’s appeal could affect a Fund, but it may be substantial and adverse. Furthermore, until such time as the appeal is resolved or, if applicable revisions to the Position Limit Rules are proposed and adopted, the regulatory architecture in effect prior to the enactment of the Position Limit Rules will govern transactions in commodities and related derivatives. Under that system, the CFTC enforces federal limits on speculation in agricultural products (e.g., corn, wheat and soy), while futures exchanges enforce position limits and accountability levels for agricultural and certain energy products (e.g., oil and gas). As a result, a Fund may be limited with respect to the size of its investments in any commodities subject to these limits. Finally, subject to certain narrow exceptions, the vacated Position Limit Rules would have required the aggregation, for purposes of the position limits, of all positions in the 28 Reference Contracts held by a single entity and its affiliates, regardless of whether such positions existed on U.S. futures exchanges, non-U.S. futures exchanges, in cleared swaps or in over-the-counter swaps. The CFTC is presently considering new aggregation rules, under a rulemaking proposal that is distinct from the Position Limit Rules. At this time, it is unclear how any modified aggregation rules may affect the Fund, but it may be substantial and adverse. By way of example, the aggregation rules in combination with any potential revised Position Limit Rules may negatively impact the ability of a Fund to meet its investment objectives through limits that may inhibit the Sponsor’s ability to sell additional Creation Baskets of the Fund.
For the nine months ended September 30, 2013, no Fund exceeded applicable position limits on any exchange. Based on its current understanding of existing position limit requirements and the likely scope of any limits that are proposed in the future, the Funds do not anticipate significant negative impact on the ability of any Fund to achieve its investment objective.
Accountability levels differ from position limits in that they do not represent a fixed ceiling, but rather a threshold above which a futures exchange may exercise greater scrutiny and control over an investor’s positions. If a Fund were to exceed an applicable accountability level for investments in futures contracts, the exchange will monitor the Fund’s exposure and may ask for further information on its activities, including the total size of all positions, investment and trading strategy, and the extent of liquidity resources of the Fund. If deemed necessary by the exchange, the Fund could be ordered to reduce its aggregate net position back to the accountability level. For the nine months ended September 30, 2013, no Fund exceeded applicable accountability limits on any exchange.
The CFTC, along with the SEC and other federal regulators, has been tasked with developing the rules and regulations enacting the provisions noted above. To date, the CFTC has issued proposed versions of all of the rules it is required to promulgate under the Dodd-Frank Act, but it continues to issue proposed versions of additional rules that it has authority to promulgate. In addition, the CFTC has begun to issue final rules under the Dodd-Frank Act, including rules relating to recordkeeping and reporting of swap transactions, mandatory clearing of certain classes of credit default swaps and interest rate swaps, as well as the definition of key terms such as “swap” and “swap dealer.” Final rules are likely to continue to be adopted throughout 2013.
On April 11, 2013, the CFTC published a final rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement. The rule permits affiliated counterparties to elect not to clear a swap subject to the clearing requirement if, among other things, the counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements and whose swaps are documented and subject to a centralized risk management program. However, the exemption does not apply to swaps entered into by affiliated counterparties with unaffiliated counterparties.
The CFTC published final rules on February 17, 2012 and April 3, 2012 that require “swap dealers” and "major swap participants” to: 1) adhere to business conduct standards, 2) implement policies and procedures to ensure compliance with the Commodity Exchange Act and 3) maintain records of such compliance. These new requirements may impact the documentation requirements for both cleared and non-cleared swaps and cause swap dealers and major swap participants to face increased compliance costs that, in turn, may be passed along to counterparties, such as the Funds, in the form of higher fees and expenses that relate to trading swaps.
On April 5, 2013, the CFTC’s Division of Clearing and Risk issued a letter granting no-action relief from certain swap data reporting requirements for swaps entered into between affiliated counterparties. In general, the letter grants relief from, among others: real-time, historical and regular swap reporting (under Part 43, Part 45 and Part 46 of the CFTC’s regulations, respectively).
On April 9, 2013, the CFTC’s Division of Market Oversight issued a letter granting time-limited no-action relief to non-swap dealer, non-major swap participant counterparties from the real-time, regular and historical swap reporting requirements (under Part 43, Part 45 and Part 46 of the CFTC’s regulations, respectively). The regular reporting requirements (Part 45 of the CFTC regulations) for interest rate and credit swaps of a financial entity (including a commodity pool such as a Fund) began on April 10, 2013. The letter delays implementation of the reporting requirements based upon the asset class underlying the swap and the classification of the reporting counterparty. For a financial entity (including
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a commodity pool such as a Fund), regular reporting requirements for equity, foreign exchange and other commodity swaps began on May 29, 2013 and reporting of all historical swaps for all asset classes begins on September 30, 2013.
In addition to the rules and regulations imposed under the Dodd-Frank Act, swap dealers that are European banks may also be subject to European Market Infrastructure Regulation (“EMIR”). These regulations have not yet been fully implemented.
Management believes that as September 30, 2013 it had fulfilled in a timely manner all Dodd-Frank reporting requirements, both historical and on-going, for the categories under which the firm operates and is registered.
The effect of future regulatory change on the Funds, and the exact timing of such changes, is impossible to predict but it may be substantial and adverse. Specifically, the new law, the rules that have been promulgated thereunder, and the rules that are expected to be promulgated may negatively impact the ability of the Funds to meet their investment objectives, either through position limits or requirements imposed on them and/or on their counterparties. In particular, new position limits imposed on the Funds or any counterparties may impact the ability of the Funds to invest in a manner that most efficiently meets its investment objective. New requirements, including capital imposed on the counterparties of the Funds and the mandatory clearing and margining of swaps, may increase the cost of the Fund’s investments and doing business.
In addition, considerable regulatory attention has recently been focused on non-traditional publicly distributed investment pools such as the Funds. Furthermore, various national governments have expressed concern regarding the disruptive effects of speculative trading in certain commodity markets and the need to regulate the derivatives markets in general. The effect of any future regulatory change on the Funds is impossible to predict, but could be substantial and adverse.
On August 12, 2013, the CFTC issued final rules establishing compliance obligations for commodity pool operators (“CPOs”) of investment companies registered under the Investment Company Act of 1940 that are required to register due to recent changes to Commission Regulation 4.5. For entities that are registered with both the CFTC and Securities and Exchange Commission (“SEC”), the CFTC will accept the SEC’s disclosure, reporting, and recordkeeping regime as substituted compliance for substantially all of Part 4 of the CFTC’s regulations, so long as they comply with comparable requirements under the SEC’s statutory and regulatory compliance regime. Thus, the final rules (the “Harmonization Rules”) allow dually registered entities to meet certain CFTC regulatory requirements for CPOs by complying with SEC rules to which they are already subject. Although the Funds are not series of a registered investment company under the Investment Company Act, the Harmonization Rules amended certain CFTC disclosure rules to make the requirements for all CPOs to periodically update their disclosure documents, consistent with those of the SEC. This change will decrease the burden to the Funds and the Sponsor of having to comply with inconsistent regulatory requirements. It is not known whether the CFTC will make additional amendments to its disclosure, reporting and recordkeeping rules to further harmonize these obligations with those of the SEC as they apply to the Funds and the Sponsor, but any such further rule changes could result in additional operating efficiencies for the Funds and the Sponsor.
Off Balance Sheet Financing
As of September 30, 2013, neither the Trust nor any of the Funds has any loan guarantees, credit support or other off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions relating to certain risks service providers undertake in performing services which are in the best interests of the Funds. While the exposure of each Fund under these indemnification provisions cannot be estimated, they are not expected to have a material impact on the financial positions of each Fund.
Redemption Basket Obligation
Other than as necessary to meet the investment objective of the Funds and pay the contractual obligations described below, the Funds will require liquidity to redeem Redemption Baskets. Each Fund intends to satisfy this obligation through the transfer of cash of the Fund (generated, if necessary, through the sale of Treasury Securities) in an amount proportionate to the number of units being redeemed.
Contractual Obligations
The primary contractual obligations of each Fund will be with the Sponsor and certain other service providers. Except for TAGS, which has no management fee, the Sponsor, in return for its services, will be entitled to a management fee calculated as a fixed percentage of each Fund’s NAV, currently 1.00% of its average net assets. Each Fund will also be responsible for all ongoing fees, costs and expenses of its operation, including (i) brokerage and other fees and commissions incurred in connection with the trading activities of the Fund; (ii) expenses incurred in connection with registering additional Shares of the Fund or offering Shares of the Fund; (iii) the routine expenses associated with the preparation and, if required, the printing and mailing of monthly, quarterly, annual and other reports required by applicable U.S. federal and state regulatory authorities, Trust meetings and preparing, printing and mailing proxy statements to Shareholders; (iv) the payment of any distributions related to redemption of Shares; (v) payment for routine services of the Trustee, legal counsel and independent accountants; (vi) payment for routine accounting, bookkeeping, custodial and transfer agency services, whether performed by an outside service provider or by affiliates of the Sponsor; (vii) postage and insurance; (viii) costs and expenses associated with client relations and services; (ix) costs of preparation of all federal, state, local and foreign tax returns and any taxes payable on the income, assets or operations of the Fund; and (xi) extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification related thereto). On July 29, 2011, the Sponsor filed a Form 8-K with the SEC which stated that effective August 1, 2011, the Sponsor has agreed to voluntarily cap the management fee and expenses of NAGS at 1.5% per annum of the daily net assets of the Fund. The cap may be terminated by the Sponsor at any time with 90 days’ notice.
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While the Sponsor has agreed to pay registration fees to the SEC, FINRA and any other regulatory agency in connection with the offer and sale of the Shares offered through each Fund’s prospectus, the legal, printing, accounting and other expenses associated with such registrations, and the initial fee of $5,000 for listing the Shares on the NYSE Arca, each Fund will be responsible for any registration fees and related expenses incurred in connection with any future offer and sale of Shares of the Fund in excess of those offered through its prospectus.
Any general expenses of the Trust will be allocated among the Funds and any other series of the Trust as determined by the Sponsor in its sole and absolute discretion. The Trust is also responsible for extraordinary expenses, including, but not limited to, legal claims and liabilities and litigation costs and any indemnification related thereto. The Trust and/or the Sponsor may be required to indemnify the Trustee, Distributor or Administrator under certain circumstances.
The parties cannot anticipate the amount of payments that will be required under these arrangements for future periods as the NAV and trading levels to meet investment objectives for each Fund will not be known until a future date. These agreements are effective for a specific term agreed upon by the parties with an option to renew, or, in some cases, are in effect for the duration of each Fund’s existence. The parties may terminate these agreements earlier for certain reasons listed in the agreements.
Benchmark Performance
The Funds are new and have a limited operating history. Investing in commodity interests, or the Underlying Funds in the case of TAGS, subjects the Funds to the risks of the underlying commodities market, and this could result in substantial fluctuations in the price of each Fund’s Shares. Unlike mutual funds, the Funds generally will not distribute dividends to Shareholders. Investors may choose to use the Funds as a means of investing indirectly in the underlying commodities, and there are risks involved in such investments. The Sponsor has limited experience operating a commodity pool. Investors may choose to use the Funds as vehicles to hedge against the risk of loss, and there are risks involved in hedging activities.
During the period from January 1, 2013 through September 30, 2013 the average daily change in the NAV of each Fund was within plus/minus 10 percent of the average daily change in the Benchmark of each Fund, as stated in the applicable prospectus for each Fund.
Frequency Distribution of Premiums and Discounts: NAV versus the 4pm Bid/Ask Midpoint on the NYSE Arca
CORN
| The performance data above for the Teucrium Corn Fund represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund’s Shares will fluctuate so that an investor's Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. The NAV reflected on this graph has been adjusted for March 31, 2013, when Corn Futures Contracts traded on the CBOT which were due to settle on July 12, 2013 (the “JUL13 Corn Contracts”) were in a “limit down” condition, and, in the opinion of the Trust and the Fund, the reported value at the close of market on that day did not fairly value the JUL13 Corn Contracts held by CORN. Therefore, the Trust and the Fund have used alternative verifiable sources to value the JUL13 Corn Contracts on March 31, 2013 and the NAV of the Fund for that date. |
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NAGS
The performance data above for the Teucrium Natural Gas Fund represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund’s Shares will fluctuate so that an investor's Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted.
CRUD
The performance data above for the Teucrium WTI Crude Oil Fund represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund’s Shares will fluctuate so that an investor's Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted.
SOYB
The performance data above for the Teucrium Soybean Fund represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund’s Shares will fluctuate so that an investor's Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted.
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CANE
The performance data above for the Teucrium Sugar Fund represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund’s Shares will fluctuate so that an investor's Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted.
WEAT
The performance data above for the Teucrium Wheat Fund represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund’s Shares will fluctuate so that an investor's Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted.
TAGS
The performance data above for the Teucrium Agricultural Fund represents past performance. Past performance is not a guarantee of future results. Investment return and value of the Fund’s Shares will fluctuate so that an investor's Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. The NAV reflected on this graph have been adjusted for March 31, 2013, when Corn Futures Contracts traded on the CBOT which were due to settle on July 12, 2013 (the “JUL13 Corn Contracts”) were in a “limit down” condition, and, in the opinion of the Trust and the Fund, the reported value at the close of market on that day did not fairly value the JUL13 Corn Contracts held by CORN, one of the Underlying Funds held by TAGS. Therefore, the Trust and the Fund have used alternative verifiable sources to value the JUL13 Corn Contracts on March 31, 2013 and the NAV of the Fund for that date.
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As of August 2, 2012, TAGS has 50,002 shares currently outstanding; this represents the minimum number of shares and, thus, no shares can be redeemed until additional shares have been created. This situation has, over the past 12 months, generated a situation in which the spread between bid/ask midpoint at 4pm and the NAV falls outside of the “1 to 49” or “-1 to -49” range. The situation does not affect the actual NAV of the Fund.
Description
The above frequency distribution charts presents information about the difference between the daily market price for Shares of each Fund and the Fund's reported Net Asset Value per share. The amount that a Fund's market price is above the reported NAV is called the premium. The amount that a Fund's market price is below the reported NAV is called the discount. The market price is determined using the midpoint between the highest bid and the lowest offer on the listing exchange, as of the time that a Fund's NAV is calculated (usually 4:00 p.m., New York time). The horizontal axis of the chart shows the premium or discount expressed in basis points. The vertical axis indicates the number of trading days in the period covered by the chart. Each bar in the chart shows the number of trading days in which a Fund traded within the premium/discount range indicated.
*A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
NEITHER THE PAST PERFORMANCE OF A FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE PERFORMANCE.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Trading in Commodity Interests such as Futures Contracts will involve the Funds entering into contractual commitments to purchase or sell specific amounts of commodities at a specified date in the future. The gross or face amount of the contracts is expected to significantly exceed the future cash requirements of each Fund as each Fund intends to close out any open positions prior to the contractual expiration date. As a result, each Fund’s market risk is the risk of loss arising from the decline in value of the contracts, not from the need to make delivery under the contracts. The Funds consider the “fair value” of derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated with the commitment by the Funds to purchase a specific commodity will be limited to the aggregate face amount of the contracts held.
The exposure of the Funds to market risk will depend primarily on the market price of the specific commodities held by the Fund. The market price of the commodities depends in part on the volatility of interest rates and foreign exchange rates and the liquidity of the commodity-specific markets.
TAGS is subject to the risks of the commodity-specific futures contracts of the Underlying Funds as the fair value of its holdings is based on the NAV of each of the Underlying Funds, each of which is directly impacted by the factors discussed above.
The tables below present a quantitative analysis of hypothetical impact of price decreases and increases in each of the commodity futures contracts held by each of the Funds, or the Underlying Funds in the case of TAGS, on the actual holdings and NAV per share as of September 30, 2013. For purposes of this analysis, all futures contracts held by the Funds and the Underlying Funds are assumed to change by the same percentage. In addition, the cash held by the Funds and any management fees paid to the Sponsor are assumed to remain constant and not impact the NAV per share. There may be very slight and immaterial differences, due to rounding, in the tables presented below.
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CORN:
| September 30, 2013 as Reported | 10% Decrease | 15% Decrease | 20% Decrease | 10% Increase | 15% Increase | 20% Increase | |||
| Holdings as of September 30, 2013 | Number of Contracts Held | Closing Price | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount |
| CBOT Corn Futures Mar14 | 759 | $ 4.5450 | $ 17,248,275 | $ 15,523,448 | $ 14,661,034 | $ 13,798,620 | $ 18,973,103 | $ 19,835,516 | $ 20,697,930 |
| CBOT Corn Futures May14 | 639 | $ 4.6225 | $ 14,768,888 | $ 13,291,999 | $ 12,553,554 | $ 11,815,110 | $ 16,245,776 | $ 16,984,221 | $ 17,722,665 |
| CBOT Corn Futures Dec14 | 719 | $ 4.8100 | $ 17,291,950 | $ 15,562,755 | $ 14,698,158 | $ 13,833,560 | $ 19,021,145 | $ 19,885,743 | $ 20,750,340 |
| Total CBOT Corn Futures | $ 49,309,114 | $ 44,378,201 | $ 41,912,746 | $ 39,447,290 | $ 54,240,024 | $ 56,705,479 | $ 59,170,935 | ||
| Shares outstanding | 1,475,004 | 1,475,004 | 1,475,004 | 1,475,004 | 1,475,004 | 1,475,004 | 1,475,004 | ||
| Net Asset Value per Share attributable directly to CBOT Corn Futures | $ 33.43 | $ 30.09 | $ 28.42 | $ 26.74 | $ 36.77 | $ 38.44 | $ 40.12 | ||
| Total Net Asset Value per Share as reported | $ 33.45 | ||||||||
| Change in the Net Asset Value per Share | $ (3.34) | $ (5.01) | $ (6.69) | $ 3.34 | $ 5.01 | $ 6.69 | |||
| Percent Change in the Net Asset Value per Share | -9.99% | -14.99% | -19.99% | 9.99% | 14.99% | 19.99% | |||
NAGS:
| September 30, 2013 as Reported | 10% Decrease | 15% Decrease | 20% Decrease | 10% Increase | 15% Increase | 20% Increase | |||
| Holdings as of September 30, 2013 | Number of Contracts Held | Closing Price | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount |
| Henry Hub NYMEX Natural Gas Futures Mar14 | 21 | $ 3.8100 | $ 800,100 | $ 720,090 | $ 680,085 | $ 640,080 | $ 880,110 | $ 920,115 | $ 960,120 |
| Henry Hub NYMEX Natural Gas Futures Apr14 | 22 | $ 3.7610 | $ 827,420 | $ 744,678 | $ 703,307 | $ 661,936 | $ 910,162 | $ 951,533 | $ 992,904 |
| Henry Hub NYMEX Natural Gas Futures Oct14 | 21 | $ 3.8730 | $ 813,330 | $ 731,997 | $ 691,331 | $ 650,664 | $ 894,663 | $ 935,330 | $ 975,996 |
| Henry Hub NYMEX Natural Gas Futures Nov14 | 21 | $ 3.9440 | $ 828,240 | $ 745,416 | $ 704,004 | $ 662,592 | $ 911,064 | $ 952,476 | $ 993,888 |
| Total Henry Hub NYMEX Natural Gas Futures | $ 3,269,090 | $ 2,942,181 | $ 2,778,727 | $ 2,615,272 | $ 3,595,999 | $ 3,759,454 | $ 3,922,908 | ||
| Shares outstanding | 300,004 | 300,004 | 300,004 | 300,004 | 300,004 | 300,004 | 300,004 | ||
| Net Asset Value per Share attributable directly to NYMEX Natural Gas Futures | $ 10.90 | $ 9.81 | $ 9.26 | $ 8.72 | $ 11.99 | $ 12.53 | $ 13.08 | ||
| Total Net Asset Value per Share as reported | $ 10.93 | ||||||||
| Change in the Net Asset Value per Share | $ (1.09) | $ (1.63) | $ (2.18) | $ 1.09 | $ 1.63 | $ 2.18 | |||
| Percent Change in the Net Asset Value per Share | -9.97% | -14.95% | -19.94% | 9.97% | 14.95% | 19.94% | |||
CRUD:
| September 30, 2013 as Reported | 10% Decrease | 15% Decrease | 20% Decrease | 10% Increase | 15% Increase | 20% Increase | |||
| Holdings as of September 30, 2013 | Number of Contracts Held | Closing Price | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount |
| WTI Crude Oil Futures Dec13 | 7 | $ 101.9000 | $ 713,300 | $ 641,970 | $ 606,305 | $ 570,640 | $ 784,630 | $ 820,295 | $ 855,960 |
| WTI Crude Oil Futures Jun14 | 6 | $ 96.4400 | $ 578,640 | $ 520,776 | $ 491,844 | $ 462,912 | $ 636,504 | $ 665,436 | $ 694,368 |
| WTI Crude Oil Futures Dec14 | 8 | $ 92.5400 | $ 740,320 | $ 666,288 | $ 629,272 | $ 592,256 | $ 814,352 | $ 851,368 | $ 888,384 |
| Total WTI Crude Oil Futures | $ 2,032,260 | $ 1,829,034 | $ 1,727,421 | $ 1,625,808 | $ 2,235,486 | $ 2,337,099 | $ 2,438,712 | ||
| Shares outstanding | 50,002 | 50,002 | 50,002 | 50,002 | 50,002 | 50,002 | 50,002 | ||
| Net Asset Value per Share attributable directly to WTI Crude Oil Futures | $ 40.64 | $ 36.58 | $ 34.55 | $ 32.51 | $ 44.71 | $ 46.74 | $ 48.77 | ||
| Total Net Asset Value per Share as reported | $ 41.59 | ||||||||
| Change in the Net Asset Value per Share | $ (4.06) | $ (6.10) | $ (8.13) | $ 4.06 | $ 6.10 | $ 8.13 | |||
| Percent Change in the Net Asset Value per Share | -9.77% | -14.66% | -19.54% | 9.77% | 14.66% | 19.54% | |||
SOYB:
| September 30, 2013 as Reported | 10% Decrease | 15% Decrease | 20% Decrease | 10% Increase | 15% Increase | 20% Increase | |||
| Holdings as of September 30, 2013 | Number of Contracts Held | Closing Price | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount |
| CBOT Soybean Futures Jan14 | 35 | $ 12.8500 | $ 2,248,750 | $ 2,023,875 | $ 1,911,438 | $ 1,799,000 | $ 2,473,625 | $ 2,586,063 | $ 2,698,500 |
| CBOT Soybean Futures Mar14 | 30 | $ 12.6700 | $ 1,900,500 | $ 1,710,450 | $ 1,615,425 | $ 1,520,400 | $ 2,090,550 | $ 2,185,575 | $ 2,280,600 |
| CBOT Soybean Futures Nov14 | 39 | $ 11.5500 | $ 2,252,250 | $ 2,027,025 | $ 1,914,413 | $ 1,801,800 | $ 2,477,475 | $ 2,590,088 | $ 2,702,700 |
| Total CBOT Soybean Futures | $ 6,401,500 | $ 5,761,350 | $ 5,441,275 | $ 5,121,200 | $ 7,041,650 | $ 7,361,725 | $ 7,681,800 | ||
| Shares outstanding | 275,004 | 275,004 | 275,004 | 275,004 | 275,004 | 275,004 | 275,004 | ||
| Net Asset Value per Share attributable directly to CBOT Soybean Futures | $ 23.28 | $ 20.95 | $ 19.79 | $ 18.62 | $ 25.61 | $ 26.77 | $ 27.93 | ||
| Total Net Asset Value per Share as reported | $ 23.25 | ||||||||
| Change in the Net Asset Value per Share | $ (2.33) | $ (3.49) | $ (4.66) | $ 2.33 | $ 3.49 | $ 4.66 | |||
| Percent Change in the Net Asset Value per Share | -10.01% | -15.02% | -20.02% | 10.01% | 15.02% | 20.02% | |||
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CANE:
| September 30, 2013 as Reported | 10% Decrease | 15% Decrease | 20% Decrease | 10% Increase | 15% Increase | 20% Increase | |||
| Holdings as of September 30, 2013 | Number of Contracts Held | Closing Price | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount |
| ICE #11 Sugar Futures May14 | 46 | $ 0.1807 | $ 930,966 | $ 837,870 | $ 791,321 | $ 744,773 | $ 1,024,063 | $ 1,070,611 | $ 1,117,160 |
| ICE #11 Sugar Futures Jul14 | 40 | $ 0.1798 | $ 805,504 | $ 724,954 | $ 684,678 | $ 644,403 | $ 886,054 | $ 926,330 | $ 966,605 |
| ICE #11 Sugar Futures Mar15 | 44 | $ 0.1878 | $ 925,478 | $ 832,931 | $ 786,657 | $ 740,383 | $ 1,018,026 | $ 1,064,300 | $ 1,110,574 |
| Total ICE #11 Sugar Futures | $ 2,661,949 | $ 2,395,754 | $ 2,262,656 | $ 2,129,559 | $ 2,928,144 | $ 3,061,241 | $ 3,194,339 | ||
| Shares outstanding | 175,004 | 175,004 | 175,004 | 175,004 | 175,004 | 175,004 | 175,004 | ||
| Net Asset Value per Share attributable directly to ICE #11 Sugar Futures | $ 15.21 | $ 13.69 | $ 12.93 | $ 12.17 | $ 16.73 | $ 17.49 | $ 18.25 | ||
| Total Net Asset Value per Share as reported | $ 15.21 | ||||||||
| Change in the Net Asset Value per Share | $ (1.52) | $ (2.28) | $ (3.04) | $ 1.52 | $ 2.28 | $ 3.04 | |||
| Percent Change in the Net Asset Value per Share | -10.00% | -15.00% | -20.00% | 10.00% | 15.00% | 20.00% | |||
WEAT:
| September 30, 2013 as Reported | 10% Decrease | 15% Decrease | 20% Decrease | 10% Increase | 15% Increase | 20% Increase | |||
| Holdings as of September 30, 2013 | Number of Contracts Held | Closing Price | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount | Notional Amount |
| CBOT Wheat Futures Mar14 | 77 | $ 6.8700 | $ 2,644,950 | $ 2,380,455 | $ 2,248,208 | $ 2,115,960 | $ 2,909,445 | $ 3,041,693 | $ 3,173,940 |
| CBOT Wheat Futures May14 | 66 | $ 6.8975 | $ 2,276,175 | $ 2,048,558 | $ 1,934,749 | $ 1,820,940 | $ 2,503,793 | $ 2,617,601 | $ 2,731,410 |
| CBOT Wheat Futures Dec14 | 76 | $ 6.8975 | $ 2,621,050 | $ 2,358,945 | $ 2,227,893 | $ 2,096,840 | $ 2,883,155 | $ 3,014,208 | $ 3,145,260 |
| Total CBOT Wheat Futures | $ 7,542,175 | $ 6,787,958 | $ 6,410,849 | $ 6,033,740 | $ 8,296,393 | $ 8,673,501 | $ 9,050,610 | ||
| Shares outstanding | 450,004 | 450,004 | 450,004 | 450,004 | 450,004 | 450,004 | 450,004 | ||
| Net Asset Value per Share attributable directly to CBOT Wheat Futures | $ 16.76 | $ 15.08 | $ 14.25 | $ 13.41 | $ 18.44 | $ 19.27 | $ 20.11 | ||
| Total Net Asset Value per Share as reported | $ 16.74 | ||||||||
| Change in the Net Asset Value per Share | $ (1.68) | $ (2.51) | $ (3.35) | $ 1.68 | $ 2.51 | $ 3.35 | |||
| Percent Change in the Net Asset Value per Share | -10.01% | -15.02% | -20.02% | 10.01% | 15.02% | 20.02% | |||
TAGS:
| September 30, 2013 as Reported | 10% Decrease | 15% Decrease | 20% Decrease | 10% Increase | 15% Increase | 20% Increase | |||
| Holdings as of September 30, 2013 | Number of Shares Held | Closing NAV | Fair Value | Fair Value | Fair Value | Fair Value | Fair Value | Fair Value | Fair Value |
| Teucrium Wheat Fund | 30,937 | $ 16.7449 | $ 518,037 | $ 466,233 | $ 440,331 | $ 414,430 | $ 569,841 | $ 595,743 | $ 621,644 |
| Teucrium Corn Fund | 15,058 | $ 33.4466 | $ 503,639 | $ 453,275 | $ 428,093 | $ 402,911 | $ 554,003 | $ 579,185 | $ 604,367 |
| Teucrium Soybean Fund | 21,031 | $ 23.2548 | $ 489,072 | $ 440,165 | $ 415,711 | $ 391,257 | $ 537,979 | $ 562,432 | $ 586,886 |
| Teucrium Sugar Fund | 34,074 | $ 15.2137 | $ 518,392 | $ 466,552 | $ 440,633 | $ 414,713 | $ 570,231 | $ 596,150 | $ 622,070 |
| Total value of shares of the Underlying Funds | $ 2,029,139 | $ 1,826,225 | $ 1,724,768 | $ 1,623,311 | $ 2,232,053 | $ 2,333,510 | $ 2,434,967 | ||
| Shares outstanding | 50,002 | 50,002 | 50,002 | 50,002 | 50,002 | 50,002 | 50,002 | ||
| Net Asset Value per Share attributable directly to shares of the Underlying Funds | $ 40.58 | $ 36.52 | $ 34.49 | $ 32.46 | $ 44.64 | $ 46.67 | $ 48.70 | ||
| Total Net Asset Value per Share as reported | $ 40.85 | ||||||||
| Change in the Net Asset Value per Share | $ (4.06) | $ (6.09) | $ (8.12) | $ 4.06 | $ 6.09 | $ 8.12 | |||
| Percent Change in the Net Asset Value per Share | -9.93% | -14.90% | -19.87% | 9.93% | 14.90% | 19.87% | |||
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage (ranging upward from less than 2%) of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Funds’ clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
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When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the various Funds’ trading, the Funds (and not its shareholders personally) are subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
The Dodd-Frank Act requires the CFTC, the SEC and the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit System and the Federal Housing Finance Agency (collectively, the “Prudential Regulators”) to establish “both initial and variation margin requirements on all swaps that are not cleared by a registered clearing organization” (i.e., uncleared or over-the-counter swaps). The proposed rules would require swap dealers and major swap participants to collect both variation and initial margin from their financial entity counterparties such as the Funds or Underlying Funds but would not require these swap dealers or major swap participants to post variation margin or initial margin to the Funds or Underlying Funds. The CFTC and the Prudential Regulators have proposed rules addressing margin requirements but have not implemented any rules on these issues.
During the three months ended September 30, 2013, neither the Sponsor nor the Trust employed any hedging methods such as those described above as all of its investments were made over an exchange. Therefore, during such period, the Funds were not exposed to counterparty risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Trust and each Fund maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the Trust’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms for both the Trust and each Fund thereof.
Management of the Sponsor of the Teucrium Funds (“Management”), including Dale Riker, its Principal Executive Officer and Barbara Riker, its Principal Financial Officer, who perform functions equivalent to those of a principal executive officer and principal financial officer of the Trust if the Trust had any officers, have evaluated the effectiveness of the design and operation of the Trust’s and each Fund’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based upon that evaluation, concluded that the Trust’s and each Fund’s disclosure controls and procedures were effective to ensure that information the Trust is required to disclose in the reports that it files or submits with the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act is accumulated and communicated to management of the Sponsor, as appropriate, to allow timely decisions regarding required disclosure. The scope of the evaluation of the effectiveness of the design and operation of its disclosure controls and procedures covers both the Trust and each Fund thereof.
The certifications of the Chief Executive Officer and Chief Financial Officer are applicable to each Fund individually as well as the Trust as a whole.
Changes in Internal Control over Financial Reporting
There has been no change in internal controls over the financial reporting (as defined in the Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Trust’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.
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None.
There have been no material changes to the risk factors previously disclosed in the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 18, 2013.
The commodity interests in which each of the Funds invests, and in which TAGS invests indirectly through the Shares of the Underlying Funds, are referred to as Commodity Interests and for each Fund individually as the specific commodity interests, e.g. Corn Interests.
Risks Applicable to all Funds
- Unlike mutual funds, commodity pools and other investment pools that manage their investments so as to realize income and gains for distribution to their investors, a Fund generally does not distribute dividends to Shareholders. You should not invest in a Fund if you will need cash distributions from the Fund to pay taxes on your share of income and gains of the Fund, if any, or for other purposes.
- The Sponsor intends to re-invest any income and realized gains of a Fund in additional Commodity Interests, or Shares of the Underlying Funds in the case of TAGS, rather than distributing cash to Shareholders. Therefore, unlike mutual funds, commodity pools or other investment pools that generally distribute income and gains to their investors, a Fund generally will not distribute cash to Shareholders. One should not invest in a Fund if you will need cash distributions from the Fund to pay taxes on your share of income and gains of the Fund, if any, or for any other reason. Although a Fund does not intend to make cash distributions, the income earned from its investments held directly or posted as margin may reach levels that merit distribution, e.g., at levels where such income is not necessary to support its underlying investments in commodity interests, corn for example, and where investors adversely react to being taxed on such income without receiving distributions that could be used to pay such tax. Cash distributions may be made in these and similar instances.
- A Fund must pay for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares, after its initial registration, and all legal, accounting, printing and other expenses associated therewith. Each Fund also pays the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Each Fund, excluding TAGS, is also contractually obligated to pay a management fee to the Sponsor. Such fees may be waived by the Sponsor at its discretion. Accordingly, each Fund must realize interest income and/or gains on Commodity Interests sufficient to cover these fees and expenses before it can earn any profit.
- To the extent that investors use a Fund as a means of investing indirectly in a specific commodity interest, there is the risk that the changes in the price of the Fund’s Shares on the NYSE Arca will not closely track the changes in spot price of that commodity interest. This could happen if the price of Shares traded on the NYSE Arca does not correlate closely with the Fund’s NAV, if the changes in the Fund’s NAV do not correlate closely with changes in the Benchmark, or if the changes in the Benchmark do not correlate closely with changes in the cash or spot price of the specific commodity interest. This is a risk because if these correlations are not sufficiently close, then investors may not be able to use the Fund as a cost-effective way to invest indirectly in the specific commodity interest, or the underlying specific commodity interest in the case of TAGS, or as a hedge against the risk of loss in commodity-related transactions.
- The Sponsor has limited experience operating commodity pools. The Sponsor currently sponsors seven commodity pools (the “Teucrium Funds”), all of which have commenced operations. Prior to June 9, 2010, the Sponsor had never operated a commodity pool.
- Each Fund has a limited operating history, so there is limited performance history to serve as a basis for you to evaluate an investment in the Fund.
- None of the Funds are an investment company subject to the Investment Company Act of 1940. Accordingly, you do not have the protections afforded by that statute, which, for example, requires investment companies to have a board of directors with a majority of disinterested directors and regulates the relationship between the investment company and its investment manager.
- In managing and directing the day-to-day activities and affairs of these Funds, the Sponsor relies almost entirely on a small number of individuals, including Mr. Sal Gilbertie, Mr. Dale Riker, Mr. Steve Kahler and Ms. Barbara Riker. If Mr. Gilbertie, Mr. Riker, Mr. Kahler or Ms. Riker were to leave or be unable to carry out their present responsibilities, it may have an adverse effect on the management of the Funds. To the extent that the Sponsor establishes additional commodity pools, even greater demands will be placed on these individuals.
- The Sponsor was formed for the purpose of managing the Trust, including all the Teucrium Funds, and any other series of the Trust that may be formed in the future, and has been provided with capital primarily by its principals and a small number of outside investors. If the Sponsor operates at a loss for an extended period, its capital will be depleted, and it may be unable to obtain additional financing necessary to continue its operations. If the Sponsor were unable to continue to provide services to these Funds, the Funds would be terminated if a replacement sponsor could not be found.
- The Sponsor has consulted with legal counsel, accountants and other advisers regarding the formation and operation of the Trust and the Funds. No counsel has been appointed to represent you in connection with the offering of Shares. Accordingly, you should consult with your own legal, tax and financial advisers regarding the desirability of an investment in the Shares.
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- The Sponsor’s trading system is quantitative in nature, and it is possible that the Sponsor may make errors. In addition, it is possible that a computer or software program may malfunction and cause an error in computation.
- Increases in assets under management may affect trading decisions. While all of the Funds’ assets are currently at manageable levels, the Sponsor does not intend to limit the amount of any Fund’s assets. The more assets the Sponsor manages, the more difficult it may be for it to trade profitably because of the difficulty of trading larger positions without adversely affecting prices and performance and of managing risk associated with larger positions.
- Under the Trust Agreement, the Trustee and the Sponsor are not liable, and have the right to be indemnified, for any liability or expense incurred absent gross negligence or willful misconduct on the part of the Trustee or Sponsor, as the case may be. That means the Sponsor may require the assets of a Fund to be sold in order to cover losses or liability suffered by the Sponsor or by the Trustee. Any sale of that kind would reduce the NAV of the Fund and the value of its Shares.
- The Shares of a Fund are limited liability investments; Shareholders may not lose more than the amount that they invest plus any profits recognized on their investment. However, Shareholders could be required, as a matter of bankruptcy law, to return to the estate of the Fund any distribution they received at a time when the Fund was in fact insolvent or in violation of its Trust Agreement.
- You cannot be assured that the Sponsor will be willing or able to continue to service each Fund for any length of time. The Sponsor was formed for the purpose of sponsoring the Funds and other commodity pools, and has limited financial resources and no significant source of income apart from its management fees from such commodity pools to support its continued service for each Fund. If the Sponsor discontinues its activities on behalf of a Fund, the Fund may be adversely affected. If the Sponsor’s registrations with the CFTC or memberships in the NFA were revoked or suspended, the Sponsor would no longer be able to provide services to the Funds.
- A Fund may terminate at any time, regardless of whether the Fund has incurred losses, subject to the terms of the Trust Agreement. For example, the dissolution or resignation of the Sponsor would cause the Trust to terminate unless shareholders holding a majority of the outstanding shares of the Trust elect within 90 days of the event to continue the Trust and appoint a successor Sponsor. In addition, the Sponsor may terminate a Fund if it determines that the Fund’s aggregate net assets in relation to its operating expenses make the continued operation of the Fund unreasonable or imprudent. However, no level of losses will require the Sponsor to terminate a Fund. The Fund’s termination would result in the liquidation of its investments and the distribution of its remaining assets to the Shareholders on a pro rata basis in accordance with their Shares, and the Fund could incur losses in liquidating its investments in connection with a termination. Termination could also negatively affect the overall maturity and timing of your investment portfolio.
- A period of recession for the economy as a whole began in 2008, and the financial markets experienced very difficult conditions and volatility during that period. The conditions in these markets resulted in a decrease in availability of corporate credit and liquidity and led indirectly to the insolvency, closure or acquisition of a number of major financial institutions and contributed to further consolidation within the financial services industry. A continued recession or a slow recovery could adversely affect the financial condition and results of operations of the Funds’ service providers and Authorized Purchasers, which would impact the ability of the Sponsor to achieve the Funds’ investment objectives.
- Neither the Sponsor nor the Trustee is obligated to, although each may, in its respective discretion, prosecute any action, suit or other proceeding in respect of any Fund property. The Trust Agreement does not confer upon Shareholders the right to prosecute any such action, suit or other proceeding.
- The arrangements between clearing brokers and counterparties on the one hand and the Funds on the other generally are terminable by the clearing brokers or counterparty upon notice to the Funds. In addition, the agreements between the Funds and their third-party service providers, such as the Distributor and the Custodian, are generally terminable at specified intervals. Upon termination, the Sponsor may be required to renegotiate or make other arrangements for obtaining similar services if the Funds intend to continue to operate. Comparable services from another party may not be available, or even if available, these services may not be available on the terms as favorable as those of the expired or terminated arrangements.
- The Sponsor does not employ trading advisors for the Funds; however, it reserves the right to employ them in the future. The only advisor to the Funds is the Sponsor. A lack of independent trading advisors may be disadvantageous to the Funds because they will not receive the benefit of their expertise.
- The price relationship between the near month Commodity Futures Contract to expire and the Benchmark Component Futures Contracts for each Fund, or the Underlying Funds in the case of TAGS, will vary and may impact both a Fund’s total return over time and the degree to which such total return tracks the total return of the specific commodity price indices. In cases in which the near month contract’s price is lower than later-expiring contracts’ prices (a situation known as “contango” in the futures markets), then absent the impact of the overall movement in the commodity specific prices the value of the Benchmark Component Futures Contracts would tend to decline as they approach expiration which could cause the Benchmark Component Futures Contracts, and therefore the Fund’s total return, to track lower. In cases in which the near month contract’s price is higher than later-expiring contracts’ prices (a situation known as “backwardation” in the futures markets), then absent the impact of the overall movement in commodity specific prices, the value of the Benchmark Component Futures Contracts would tend to rise as they approach expiration.
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- Investors, including those who directly participate in the specific commodity market, may choose to use a Fund as a vehicle to hedge against the risk of loss, and there are risks involved in hedging activities. While hedging can provide protection against an adverse movement in market prices, it can also preclude a hedger’s opportunity to benefit from a favorable market movement.
- The structure and operation of the Funds may involve conflicts of interest. For example, a conflict may arise because the Sponsor and its principals and affiliates may trade for themselves. In addition, the Sponsor has sole current authority to manage the investments and operations, and the interests of the Sponsor may conflict with the Shareholders’ best interests.
- You will have no rights to participate in the management of any of the Funds and will have to rely on the duties and judgment of the Sponsor to manage the Funds.
- As interests in separate series of a Delaware statutory trust, the Shares do not involve the rights normally associated with the ownership of shares of a corporation (including, for example, the right to bring shareholder oppression and derivative actions). In addition, the Shares have limited voting and distribution rights (for example, Shareholders do not have the right to elect directors, as the Trust does not have a board of directors, and generally will not receive regular distributions of the net income and capital gains earned by the Fund). The Funds are also not subject to certain investor protection provisions of the Sarbanes Oxley Act of 2002 and the NYSE Arca governance rules (for example, audit committee requirements).
- Each Fund is a series of a Delaware statutory trust and not itself a legal entity separate from the other Teucrium Funds. The Delaware Statutory Trust Act provides that if certain provisions are included in the formation and governing documents of a statutory trust organized in series and if separate and distinct records are maintained for any series and the assets associated with that series are held in separate and distinct records and are accounted for in such separate and distinct records separately from the other assets of the statutory trust, or any series thereof, then the debts, liabilities, obligations and expenses incurred by a particular series are enforceable against the assets of such series only, and not against the assets of the statutory trust generally or any other series thereof. Conversely, none of the debts, liabilities, obligations and expenses incurred with respect to any other series thereof is enforceable against the assets of such series. The Sponsor is not aware of any court case that has interpreted this inter-series limitation on liability or provided any guidance as to what is required for compliance. The Sponsor intends to maintain separate and distinct records for each Fund and account for each Fund separately from any other Trust series, but it is possible a court could conclude that the methods used do not satisfy the Delaware Statutory Trust Act, which would potentially expose assets in any Fund to the liabilities of one or more of the Teucrium Funds and/or any other Trust series created in the future.
- Each Fund seeks to have the changes in its Shares’ NAV in percentage terms track changes in the Benchmark in percentage terms, rather than profit from speculative trading of the specific Commodity Interests, or the commodity interests of the Underlying Funds in the case of TAGS. The Sponsor therefore endeavors to manage each Fund so that the Fund’s assets are, unlike those of many other commodity pools, not leveraged (i.e., so that the aggregate amount of the Fund’s exposure to losses from its investments in specific Commodity Interests at any time will not exceed the value of the Fund’s assets). There is no assurance that the Sponsor will successfully implement this investment strategy. If the Sponsor permits a Fund to become leveraged, you could lose all or substantially all of your investment if the Fund’s trading positions suddenly turns unprofitable. These movements in price may be the result of factors outside of the Sponsor’s control and may not be anticipated by the Sponsor.
- A Fund may invest in Other Commodity Interests. To the extent that these Other Commodity Interests are contracts individually negotiated between their parties, they may not be as liquid as Commodity Futures Contracts and will expose the Fund to credit risk that its counterparty may not be able to satisfy its obligations to the Fund.
- The futures markets are subject to comprehensive statutes, regulations and requirements. In addition, the CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency including, for example, the retroactive implementation of speculative position limits, increased margin requirements, the establishment of daily price limits and the suspension of trading.
- The regulation of commodity interest transactions in the United States is a rapidly changing area of law and is subject to ongoing modification by governmental and judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed in the United States. There is a possibility of future regulatory changes within the United States altering, perhaps to a material extent, the nature of an investment in the Funds, or the ability of a Fund to continue to implement its investment strategy. In addition, various national governments outside of the United States have expressed concern regarding the disruptive effects of speculative trading in the commodities markets and the need to regulate the derivatives markets in general. The effect of any future regulatory change on the Funds is impossible to predict but could be substantial and adverse.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd
-Frank Act”),which was enacted in response to the economic crisis of 2008 and 2009, significantly alters the regulatory regime to which the securities and commodities markets are subject. In particular, the Dodd-Frank Act alters the regulation of commodity interests. Provisions of the new law include the requirement that position limits be established on a wide range of commodity interests, including energy-based, metal and agricultural commodity futures contracts, options on such futures contracts and cleared and uncleared swaps that are economically equivalent to such futures contracts and options (“Reference Contracts”); new registration and recordkeeping requirements for swap market participants; capital and margin requirements for “swap dealers” and “major swap participants,” as determined by the new law and applicable regulations; and the mandatory use of clearinghouse mechanisms for sufficiently standardized swap transactions that are
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- currently entered into in the over-the-counter market. On November 28, 2012 the CFTC issued its final clearing determination requiring that certain credit default swaps and interest rate swaps be cleared by registered derivatives clearing organizations (DCOs). This is the CFTC’s first clearing determination under the Dodd-Frank Act and became effective February 11, 2013. Beginning on March 11, 2013, “swap dealers,” “major swap participants,” and certain active funds were required to clear certain credit default swaps and interest rate swaps; and beginning on June 10, 2013, commodity pools, certain private funds and entities predominately engaged in financial activities were required to clear the same types of swaps. As a result, if a Fund enters into or had entered into certain interest rate or credit default swaps on or after June 10, 2013, such swaps will be required to be centrally cleared. Determinations on other types of swaps are expected in the future and, when finalized, could require the Fund to centrally clear certain over-the-counter instruments presently entered into and settled on a bi-lateral basis. If a swap is required to be cleared, the initial margin will be set by the clearing organization, subject to certain regulatory requirements and guidelines. Initial and variation margin requirements for swap dealers and major swap participants which enter into uncleared swaps and capital requirements for swap dealers and major swap participants which enter into both cleared and uncleared trades will be set by the CFTC, the SEC or the applicable “Prudential Regulator.”
| ○ | In late 2011, the CFTC adopted rules that impose new position limits on Reference Contracts involving 28 energy, metals and agricultural commodities (the “Position Limit Rules”). The Position Limit Rules were scheduled to become effective on October 12, 2012. However, on September 28, 2012, the United States District Court for the District of Columbia vacated these regulations on the basis of ambiguities in the provisions of the Commodity Exchange Act (“CEA”) (as modified by the Dodd-Frank Act) upon which the regulations were based. In its September 28th decision, the court remanded the Position Limit Rules to the CFTC with instructions to use its expertise and experience to resolve the ambiguities in the statute. On November 15, 2012, the CFTC indicated that it will move forward with an appeal of the District Court’s decision to vacate the Position Limit Rules. At this time, it is not possible to predict how the CFTC’s appeal could affect a Fund, but it may be substantial and adverse. Furthermore, until such time as the appeal is resolved or, if applicable revisions to the Position Limit Rules are proposed and adopted, the regulatory architecture in effect prior to the enactment of the Position Limit Rules will govern transactions in commodities and related derivatives. Under that system, the CFTC enforces federal limits on speculation in agricultural products (e.g., corn, wheat and soy), while futures exchanges enforce position limits and accountability levels for agricultural and certain energy products (e.g., oil and gas). As a result, a Fund may be limited with respect to the size of its investments in any commodities subject to these limits. Finally, subject to certain narrow exceptions, the vacated Position Limit Rules would have required the aggregation, for purposes of the position limits, of all positions in the 28 Reference Contracts held by a single entity and its affiliates, regardless of whether such positions existed on U.S. futures exchanges, non-U.S. futures exchanges, in cleared swaps or in over-the-counter swaps. The CFTC is presently considering new aggregation rules, under a rulemaking proposal that is distinct from the Position Limit Rules. At this time, it is unclear how any modified aggregation rules may affect the Fund, but it may be substantial and adverse. By way of example, the aggregation rules in combination with any potential revised Position Limit Rules may negatively impact the ability of a Fund to meet its investment objectives through limits that may inhibit the Sponsor’s ability to sell additional Creation Baskets of the Fund. |
| ○ | The CFTC, along with the SEC and other federal regulators, has been tasked with developing the rules and regulations enacting the provisions noted above. To date, the CFTC has issued proposed versions of all of the rules it is required to promulgate under the Dodd-Frank Act, but it continues to issue proposed versions of additional rules that it has authority to promulgate. In addition, the CFTC has begun to issue final rules under the Dodd-Frank Act, including rules relating to recordkeeping and reporting of swap transactions, mandatory clearing of certain classes of credit default swaps and interest rate swaps, as well as the definition of key terms such as “swap” and “swap dealer.” Final rules are likely to continue to be adopted throughout 2013. |
| ○ | The CFTC published final rules on February 17, 2012 and April 3, 2012 that require “swap dealers” and "major swap participants” to: 1) adhere to business conduct standards, 2) implement policies and procedures to ensure compliance with the Commodity Exchange Act and 3) maintain records of such compliance. These new requirements may impact the documentation requirements for both cleared and non-cleared swaps and cause swap dealers and major swap participants to face increased compliance costs that, in turn, may be passed along to counterparties, such as the Funds, in the form of higher fees and expenses that relate to trading swaps. |
| o | On April 5, 2013, the CFTC’s Division of Clearing and Risk issued a letter granting no-action relief from certain swap data reporting requirements for swaps entered into between affiliated counterparties. In general, the letter grants relief from, among others: real-time, historical and regular swap reporting (under Part 43, Part 45 and Part 46 of the CFTC’s regulations, respectively). |
| o | On April 9, 2013, the CFTC’s Division of Market Oversight issued a letter granting time-limited no-action relief to non-swap dealer, non-major swap participant counterparties from the real-time, regular and historical swap reporting requirements (under Part 43, Part 45 and Part 46 of the CFTC’s regulations, respectively). The regular reporting requirements (Part 45 of the CFTC regulations) for interest rate and credit swaps of a financial entity (including a commodity pool such as a Fund) began on April 10, 2013. The letter delays implementation of the reporting requirements based upon the asset class underlying the swap and the classification of the reporting counterparty. For a financial entity (including a commodity pool such as a Fund), regular reporting requirements for equity, foreign exchange and other commodity swaps began on May 29, 2013 and reporting of all historical swaps for all asset classes begins on September 30, 2013. |
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| o | On April 11, 2013, the CFTC published a final rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement. The rule permits affiliated counterparties to elect not to clear a swap subject to the clearing requirement if, among other things, the counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements and whose swaps are documented and subject to a centralized risk management program. However, the exemption does not apply to swaps entered into by affiliated counterparties with unaffiliated counterparties. |
| o | On August 12, 2013, the CFTC issued final rules establishing compliance obligations for commodity pool operators (“CPOs”) of investment companies registered under the Investment Company Act of 1940 that are required to register due to recent changes to Commission Regulation 4.5. For entities that are registered with both the CFTC and Securities and Exchange Commission (“SEC”), the CFTC will accept the SEC’s disclosure, reporting, and recordkeeping regime as substituted compliance for substantially all of Part 4 of the CFTC’s regulations, so long as they comply with comparable requirements under the SEC’s statutory and regulatory compliance regime. Thus, the final rules (the “Harmonization Rules”) allow dually registered entities to meet certain CFTC regulatory requirements for CPOs by complying with SEC rules to which they are already subject. Although the Funds are not series of a registered investment company under the Investment Company Act, the Harmonization Rules amended certain CFTC disclosure rules to make the requirements for all CPOs to periodically update their disclosure documents, consistent with those of the SEC. This change will decrease the burden to the Funds and the Sponsor of having to comply with inconsistent regulatory requirements. It is not known whether the CFTC will make additional amendments to its disclosure, reporting and recordkeeping rules to further harmonize these obligations with those of the SEC as they apply to the Funds and the Sponsor, but any such further rule changes could result in additional operating efficiencies for the Funds and the Sponsor. |
- If a Fund is required to sell Treasury Securities or cash equivalents at a price lower than the price at which they were acquired, the Fund will experience a loss. This loss may adversely impact the price of the Shares and may decrease the correlation between the price of the Shares, the Benchmark, and the spot price of the specific commodity interest or the commodity interests of the Underlying Funds in the case of TAGS. The value of Treasury Securities and other debt securities generally moves inversely with movements in interest rates. The prices of longer maturity securities are subject to greater market fluctuations as a result of changes in interest rates. While the short-term nature of a Fund’s investments in Treasury Securities and cash equivalents should minimize the interest rate risk to which the Fund is subject, it is possible that the Treasury Securities and cash equivalents held by the Fund will decline in value.
- If a substantial number of requests for redemption of Redemption Baskets are received by a Fund during a relatively short period of time, the Fund may not be able to satisfy the requests from the Fund’s assets not committed to trading. As a consequence, it could be necessary to liquidate the Fund’s trading positions before the time that its trading strategies would otherwise call for liquidation.
- A portion of a Fund’s investments could be illiquid, which could cause large losses to investors at any time or from time to time.
| o | A Fund may not always be able to liquidate its positions in its investments at the desired price. As to futures contracts, it may be difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in a market. Limits imposed by futures exchanges or other regulatory organizations, such as accountability levels, position limits and price fluctuation limits, may contribute to a lack of liquidity with respect to some exchange-traded commodity Interests. In addition, over-the-counter contracts and cleared swaps may be illiquid because they are contracts between two parties and generally may not be transferred by one party to a third party without the counterparty’s consent. Conversely, a counterparty may give its consent, but the Fund still may not be able to transfer an over-the-counter Commodity Interest to a third party due to concerns regarding the counterparty’s credit risk. |
| o | A market disruption, such as a foreign government taking political actions that disrupt the market in its currency, its commodity production or exports, or in another major export, can also make it difficult to liquidate a position. Unexpected market illiquidity may cause major losses to investors at any time or from time to time. In addition, no Fund intends at this time to establish a credit facility, which would provide an additional source of liquidity, but instead will rely only on the Treasury Securities, cash and/or cash equivalents that it holds to meet its liquidity needs. The anticipated large value of the positions in a specific Commodity Interest that the Sponsor will acquire or enter into for a Fund increases the risk of illiquidity. Because Commodity Interests may be illiquid, a Fund’s holdings may be more difficult to liquidate at favorable prices in periods of illiquid markets and losses may be incurred during the period in which positions are being liquidated. |
- The changing nature of the participants in the commodity specific market will influence whether futures prices are above or below the expected future spot price. Producers of the specific commodity will typically seek to hedge against falling commodity prices by selling Commodity Futures Contracts. Therefore, if commodity producers become the predominant hedgers in the futures market, prices of Commodity Futures Contracts will typically be below expected future spot prices. Conversely, if the predominant hedgers in the futures market are the purchasers of the commodity, who purchase Commodity Futures Contracts to hedge against a rise in prices, prices of the Commodity Futures Contracts will likely be higher than expected future spot prices. This can have significant implications for a Fund when it is time to sell a Commodity Futures Contract that is no longer a Benchmark Component Futures Contract and purchase a new Commodity Futures Contract or to sell a Commodity Futures Contract to meet redemption requests.
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- While it is not the current intention of the Funds to take physical delivery of any Commodity under its Commodity Interests, Commodity Futures Contracts are traditionally not cash-settled contracts, and it is possible to take delivery under these and some Other Interests. Storage costs associated with purchasing the specific commodity could result in costs and other liabilities that could impact the value of the Commodity Futures Contracts or certain Other Interests. Storage costs include the time value of money invested in the physical commodity plus the actual costs of storing the commodity less any benefits from ownership that are not obtained by the holder of a futures contract. In general, Commodity Futures Contracts have a one-month delay for contract delivery and the pricing of back month contracts (the back month is any future delivery month other than the spot month) includes storage costs. To the extent that these storage costs change for the commodity while a Fund holds the Commodity Interests, the value of the Commodity Interests, and therefore the Fund’s NAV, may change as well.
- The design of each Fund’s Benchmark is such that the Benchmark Component Futures Contracts change throughout the year, and the Fund’s investments must be rolled periodically to reflect the changing composition of the Benchmark. For example, when the second-to-expire Commodity Futures Contract becomes the first-to-expire contract, such contract will no longer be a Benchmark Component Futures Contract and the Fund’s position in it will no longer be consistent with tracking the Benchmark. In the event of a commodity futures market where near-to-expire contracts trade at a higher price than longer-to-expire contracts, a situation referred to as “backwardation,” then absent the impact of the overall movement in the specific commodity prices of the Fund, the value of the Benchmark Component Futures Contracts would tend to rise as they approach expiration. As a result, a Fund may benefit because it would be selling more expensive contracts and buying less expensive ones on an ongoing basis. Conversely, using corn as an example, in the event of a corn futures market where near-to-expire contracts trade at a lower price than longer-to-expire contracts, a situation referred to as “contango,” then absent the impact of the overall movement in corn prices the value of the Benchmark Component Futures Contracts would tend to decline as they approach expiration. As a result the Fund’s total return may be lower than might otherwise be the case because it would be selling less expensive contracts and buying more expensive ones. The impact of backwardation and contango may lead the total return of a Fund to vary significantly from the total return of other price references, such as the spot price of the specific commodity. In the event of a prolonged period of contango, and absent the impact of rising or falling specific commodity prices, this could have a significant negative impact on a Fund’s NAV and total return.
- The Sponsor may use spreads and straddles as part of its overall trading strategy to closely follow the Benchmark. There is a risk that a Fund’s NAV may not closely track the change in its Benchmark. Spreads combine simultaneous long and short positions in related futures contracts that differ by commodity, by market or by delivery month (for example, long April, short November). Spreads gain or lose value as a result of relative changes in price between the long and short positions. Spreads often reduce risk to investors because the contracts tend to move up or down together. However, both legs of the spread could move against an investor simultaneously, in which case the spread would lose value. Certain types of spreads may face unlimited risk, e.g., because the price of a futures contract underlying a short position can increase by an unlimited amount and the investor would have to take delivery or offset at that price. A commodity straddle takes both long and short option position in the same commodity in the same market and delivery month simultaneously. The buyer of a straddle profits if either the long or the short leg of the straddle moves further than the combined cost of both options. The seller of the straddle profits if both the long and short positions do not trade beyond a range equal to the combined premium for selling both options. If the Sponsor were to utilize a spread or straddle position and the position performed differently than expected, the results could impact that Fund’s tracking error. This could affect the Fund’s investment objective of having its NAV closely track the Benchmark. Additionally, a loss on the position would negatively impact the Fund’s absolute return.
- The Sponsor cannot predict to what extent the performance of the commodity interest will or will not correlate to the performance of other broader asset classes such as stocks and bonds. If the performance of a specific Fund were to move more directly with the financial markets, an investment in the Fund may provide you little or no diversification benefits. Thus, in a declining market, the Fund may have no gains to offset your losses from other investments, and you may suffer losses on your investment in the Fund at the same time you may incur losses with respect to other asset classes. Variables such as drought, floods, weather, embargoes, tariffs and other political events may have a larger impact on commodity and Commodity Interests prices than on traditional securities and broader financial markets. These additional variables may create additional investment risks that subject a Fund’s investments to greater volatility than investments in traditional securities. Lower correlation should not be confused with negative correlation, where the performance of two asset classes would be opposite of each other. There is no historic evidence that the spot price of a specific commodity, corn, for example, and prices of other financial assets, such as stocks and bonds, are negatively correlated. In the absence of negative correlation, a Fund cannot be expected to be automatically profitable during unfavorable periods for the stock market, or vice versa.
- A Fund’s NAV includes, in part, any unrealized profits or losses on open swap agreements, futures or forward contracts. Under normal circumstances, the NAV reflects the quoted exchange settlement price of open futures contracts on the date when the NAV is being calculated. In instances when the quoted settlement price of a futures contract traded on an exchange may not be reflective of fair value based on market condition, generally due to the operation of daily limits or other rules of the exchange or otherwise, the NAV may not reflect the fair value of open future contracts on such date. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day.
- In the event that one or more Authorized Purchasers that are actively involved in purchasing and selling Shares cease to be so involved, the liquidity of the Shares will likely decrease, which could adversely affect the market price of the Shares and result in your incurring a loss on your investment. In addition, a decision by a market maker or lead market maker to cease activities for the Fund could adversely affect liquidity, the spread between the bid and ask quotes, and potentially the price of the Shares. The Sponsor can make no guarantees that participation by Authorized Purchasers or market makers will continue.
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- The Trust may, in its discretion, suspend the right to redeem Shares of a Fund or postpone the redemption settlement date: (1) for any period during which an applicable exchange is closed other than customary weekend or holiday closing, or trading is suspended or restricted; (2) for any period during which an emergency exists as a result of which delivery, disposal or evaluation of a Fund’s assets is not reasonably practicable; (3) for such other period as the Sponsor determines to be necessary for the protection of Shareholders; (4) if there is a possibility that any or all of the Benchmark Component Futures Contracts of a Fund on the specific exchange where the Fund is traded and from which the NAV of the Fund is calculated will be priced at a daily price limit restriction; or (5) if, in the sole discretion of the Sponsor, the execution of such an order would not be in the best interest of a Fund or its Shareholders. In addition, the Trust will reject a redemption order if the order is not in proper form as described in the agreement with the Authorized Purchaser or if the fulfillment of the order, in the opinion of its counsel, might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming Shareholder. For example, the resulting delay may adversely affect the value of the Shareholder’s redemption proceeds if the NAV of a Fund declines during the period of delay. The Trust Agreement provides that the Sponsor and its designees will not be liable for any loss or damage that may result from any such suspension or postponement.
| o | A minimum number of baskets and associated Shares are specified for each Fund in its Form S-1. Once that minimum number of Shares outstanding is reached, there can be no further redemptions until there has been a Creation Basket. |
- Under CFTC regulations, a clearing broker with respect to a Fund’s exchange-traded Commodity Interests must maintain customers’ assets in a bulk segregated account. If a clearing broker fails to do so, or is unable to satisfy a substantial deficit in a customer account, its other customers may be subject to risk of a substantial loss of their funds in the event of that clearing broker’s bankruptcy. In that event, the clearing broker’s customers, such as a Fund, are entitled to recover, even in respect of property specifically traceable to them, only a proportional share of all property available for distribution to all of that clearing broker’s customers. A Fund also may be subject to the risk of the failure of, or delay in performance by, any exchanges and markets and their clearing organizations, if any, on which Commodity Interests are traded. From time to time, the clearing brokers may be subject to legal or regulatory proceedings in the ordinary course of their business. A clearing broker’s involvement in costly or time-consuming legal proceedings may divert financial resources or personnel away from the clearing broker’s trading operations, which could impair the clearing broker’s ability to successfully execute and clear a Fund’s trades.
- On November 14, 2012, the CFTC proposed new regulations that would require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for Futures Commission Merchants (“FCMs”). The proposed rules are intended to afford greater assurances to market participants that: 1)customers are provided with appropriate notice of the risks of futures trading and of the FCMs with which they may choose to do business; 2) FCMs are monitoring and managing risks in a robust manner; 3) the capital and liquidity of the FCMs are strengthened to safeguard their continued operations; and 4) the auditing and examination programs of the CFTC and the self-regulatory organizations (“SROs”) are monitoring the activities of FCMs in a thorough manner. The final regulations have not yet been adopted.
- For all Teucrium Funds except for TAGS, the vast majority of each Fund’s assets are held in short-term Treasury Securities, cash and/or cash equivalents with the Custodian. The insolvency of the Custodian could result in a complete loss of a Fund’s assets held by the Custodian, which, at any given time, would likely comprise a substantial portion of a Fund’s total assets. For TAGS, the vast majority of the Fund’s assets are held in Shares of the Underlying Funds. The failure or insolvency of the Custodian could impact the ability to access in a timely manner TAGS’ assets held by the Custodian.
- Third parties may assert that the Sponsor has infringed or otherwise violated their intellectual property rights. Third parties may independently develop business methods, trademarks or proprietary software and other technology similar to that of the Sponsor and claim that the Sponsor has violated their intellectual property rights, including their copyrights, trademark rights, trade names, trade secrets and patent rights. As a result, the Sponsor may have to litigate in the future to determine the validity and scope of other parties’ proprietary rights, or defend itself against claims that it has infringed or otherwise violated other parties’ rights. Any litigation of this type, even if the Sponsor is successful and regardless of the merits, may result in significant costs, may divert resources from the Fund, or may require the Sponsor to change its proprietary software and other technology or enter into royalty or licensing agreements. The Sponsor has a patent pending on certain business methods and procedures used with respect to the Funds. The Sponsor utilizes certain proprietary software. Any unauthorized use of such proprietary software, business methods and/or procedures could adversely affect the competitive advantage of the Sponsor or the Funds and/or cause the Sponsor to take legal action to protect its rights.
- The Sponsor’s trading strategy is quantitative in nature, and it is possible that the Sponsor will make errors in its implementation. The execution of the quantitative strategy is subject to human error, such as incorrect inputs into the Sponsor’s computer systems and incorrect information provided to the Funds’ clearing brokers. In addition, it is possible that a computer or software program may malfunction and cause an error in computation. Any failure, inaccuracy or delay in executing the Funds’ transactions could affect its ability to achieve its investment objective. It could also result in decisions to undertake transactions based on inaccurate or incomplete information. This could cause substantial losses on transactions.
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- The Funds’ trading activities depend on the integrity and performance of the computer and communications systems supporting them. Extraordinary transaction volume, hardware or software failure, power or telecommunications failure, a natural disaster or other catastrophe could cause the computer systems to operate at an unacceptably slow speed or even fail. Any significant degradation or failure of the systems that the Sponsor uses to gather and analyze information, enter orders, process data, monitor risk levels and otherwise engage in trading activities may result in substantial losses on transactions, liability to other parties, lost profit opportunities, damages to the Sponsor’s and Funds’ reputations, increased operational expenses and diversion of technical resources.
- The development of complex computer and communications systems and new technologies may render the existing computer and communications systems supporting the Funds’ trading activities obsolete. In addition, these computer and communications systems must be compatible with those of third parties, such as the systems of exchanges, clearing brokers and the executing brokers. As a result, if these third parties upgrade their systems, the Sponsor will need to make corresponding upgrades to continue effectively its trading activities. The Funds’ future success may depend on the Funds’ ability to respond to changing technologies on a timely and cost-effective basis.
- The Funds depend on the proper and timely function of complex computer and communications systems maintained and operated by the futures exchanges, brokers and other data providers that the Sponsor uses to conduct trading activities. Failure or inadequate performance of any of these systems could adversely affect the Sponsor’s ability to complete transactions, including its ability to close out positions, and result in lost profit opportunities and significant losses on commodity interest transactions. This could have a material adverse effect on revenues and materially reduce the Funds’ available capital. For example, unavailability of price quotations from third parties may make it difficult or impossible for the Sponsor to conduct trading activities so that each Fund will closely track its Benchmark. Unavailability of records from brokerage firms may make it difficult or impossible for the Sponsor to accurately determine which transactions have been executed or the details, including price and time, of any transaction executed. This unavailability of information also may make it difficult or impossible for the Sponsor to reconcile its records of transactions with those of another party or to accomplish settlement of executed transactions.
- The operations of the Funds, the exchanges, brokers and counterparties with which the Funds do business, and the markets in which the Funds do business could be severely disrupted in the event of a major terrorist attack, natural disaster, or the outbreak, continuation or expansion of war or other hostilities. Global terrorist attacks, anti-terrorism initiatives and political unrest continue to fuel this concern.
- Trading in Shares of a Fund may be halted due to market conditions or, in light of NYSE Arca rules and procedures, for reasons that, in the view of the NYSE Arca, make trading in Shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules that require trading to be halted for a specified period based on a specified market decline. There can be no assurance that the requirements necessary to maintain the listing of the Shares will continue to be met or will remain unchanged. A Fund will be terminated if its Shares are delisted.
- Commodity pools’ trading positions in futures contracts or other commodity interests are typically required to be secured by the deposit of margin funds that represent only a small percentage of a futures contract’s (or other commodity interest’s) entire market value. This feature permits commodity pools to “leverage” their assets by purchasing or selling futures contracts (or other commodity interests) with an aggregate notional amount in excess of the commodity pool’s assets. While this leverage can increase a pool’s profits, relatively small adverse movements in the price of a pool’s commodity interests can cause significant losses to the pool. While the Sponsor does not intend to leverage the Funds’ assets, it is not prohibited from doing so under the Trust Agreement. If the Sponsor were to cause or permit a Fund to become leveraged, you could lose all or substantially all of your investment if the Fund’s trading positions suddenly turns unprofitable.
- A portion of the Fund’s assets may be used to trade over-the-counter Commodity Interests, such as forward contracts or swaps. Currently, over-the-counter contracts are typically traded on a principal-to-principal non-cleared basis through dealer markets that are dominated by major money center and investment banks and other institutions and that prior to the passage of the Dodd-Frank Act had been essentially unregulated by the CFTC, although this is an area of pending, substantial regulatory change. The markets for over-the-counter contracts will continue to rely upon the integrity of market participants in lieu of the additional regulation imposed by the CFTC on participants in the futures markets. To date, the forward markets have been largely unregulated, forward contracts have been executed bi-laterally and, in general historically, forward contracts have not been cleared or guaranteed by a third party. On November 16, 2012, the Secretary of the Treasury issued a final determination that exempts both foreign exchange swaps and foreign exchange forwards from the definition of “swap” and, by extension, additional regulatory requirements (such as clearing and margin). The final determination does not extend to other FX derivatives, such as FX options, certain currency swaps, and non-deliverable forwards. While the Dodd-Frank Act and certain regulations adopted thereunder are intended to provide additional protections to participants in the over-the-counter market, the lack of regulation in these markets could expose the Fund in certain circumstances to significant losses in the event of trading abuses or financial failure by participants. While increased regulation of over-the-counter Commodity Interests is likely to result from changes that are required to be effectuated by the Dodd-Frank Act, there is no guarantee that such increased regulation will be effective to reduce these risks.
- Each Fund faces the risk of non-performance by the counterparties to the over-the-counter contracts. Unlike in futures contracts, the counterparty to these contracts is generally a single bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result, there will be greater counterparty credit risk in these transactions. A counterparty may not be able to meet its obligations to a Fund, in which case the Fund could suffer significant losses on these contracts. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, a Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. During any such period, the Fund may have difficulty in determining the value of its contracts with the counterparty, which in turn could result in the overstatement or understatement of the Fund’s NAV. The Fund may eventually obtain only limited recovery or no recovery in such circumstances.
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- Over-the-counter contracts may have terms that make them less marketable than Futures Contracts or cleared swaps. Over-the-counter contracts are less marketable because they are not traded on an exchange, do not have uniform terms and conditions, and are entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral, and in general, they are not transferable without the consent of the counterparty. These conditions make such contracts less liquid than standardized futures contracts traded on a commodities exchange and diminish the ability to realize the full value of such contracts. In addition, even if collateral is used to reduce counterparty credit risk, sudden changes in the value of over-the-counter transactions may leave a party open to financial risk due to a counterparty default since the collateral held may not cover a party’s exposure on the transaction in such situations. In general, valuing OTC derivatives is less certain than valuing actively traded financial instruments such as exchange traded futures contracts and securities or cleared swaps because the price and terms on which such OTC derivatives are entered into or can be terminated are individually negotiated, and those prices and terms may not reflect the best price or terms available from other sources. In addition, while market makers and dealers generally quote indicative prices or terms for entering into or terminating OTC contracts, they typically are not contractually obligated to do so, particularly if they are not a party to the transaction. As a result, it may be difficult to obtain an independent value for an outstanding OTC derivatives transaction.
- A significant portion of the Commodity Futures Contracts entered into by the Fund are traded on United States exchanges, including the CBOT, the NYMEX and the ICE. However, a portion of the Funds’ trades may take place on markets and exchanges outside the United States. Some non-U.S. markets present risks because they are not subject to the same degree of regulation as their U.S. counterparts. Neither the CFTC, the NFA, or any domestic exchange regulates activities of any foreign boards of trade or exchanges, including the execution, delivery and clearing of transactions, nor has the power to compel enforcement of the rules of a foreign board of trade or exchange or of any applicable non-U.S. laws. Similarly, the rights of market participants, such as the Funds, in the event of the insolvency or bankruptcy of a non-U.S. market or broker are also likely to be more limited than in the case of U.S. markets or brokers. As a result, in these markets, the Funds have less legal and regulatory protection than they do when they trade domestically. In some of these non-U.S. markets, the performance on a futures contract is the responsibility of the counterparty and is not backed by an exchange or clearing corporation and therefore exposes the Funds to credit risk. Additionally, trading on non-U.S. exchanges is subject to the risks presented by exchange controls, expropriation, increased tax burdens and exposure to local economic declines and political instability. An adverse development with respect to any of these variables could reduce the profit or increase the loss earned on trades in the affected international markets.
- The price of any non-U.S. Commodity Interest and, therefore, the potential profit and loss on such investment, may be affected by any variance in the foreign exchange rate between the time the order is placed and the time it is liquidated, offset or exercised. As a result, changes in the value of the local currency relative to the U.S. dollar may cause losses to a Fund even if the contract is profitable. The Funds invest primarily in Commodity Interests that are traded or sold in the United States. However, a portion of the trades for a Fund may take place in markets and on exchanges outside the United States. Some non-U.S. markets present risks because they are not subject to the same degree of regulation as their U.S. counterparts. In some of these non-U.S. markets, the performance on a contract is the responsibility of the counterparty and is not backed by an exchange or clearing corporation and therefore exposes a Fund to credit risk. Trading in non-U.S. markets also leaves a Fund susceptible to fluctuations in the value of the local currency against the U.S. dollar.
- Some non-U.S. exchanges also may be in a more developmental stage so that prior price histories may not be indicative of current price dynamics. In addition, a Fund may not have the same access to certain positions on foreign trading exchanges as do local traders, and the historical market data on which the Sponsor bases its strategies may not be as reliable or accessible as it is for U.S. exchanges.
- Cash or property will be distributed at the sole discretion of the Sponsor, and the Sponsor currently does not intend to make cash or other distributions with respect to Shares. You will be required to pay U.S. federal income tax and, in some cases, state, local, or foreign income tax, on your allocable share of a Fund’s taxable income, without regard to whether you receives distributions or the amount of any distributions. Therefore, the tax liability resulting from your ownership of Shares may exceed the amount of cash or value of property (if any) distributed.
- Due to the application of the assumptions and conventions applied by a Fund in making allocations for U.S. federal income tax purposes and other factors, your allocable share of the Fund’s income, gain, deduction or loss may be different than your economic profit or loss from your Shares for a taxable year. This difference could be temporary or permanent and, if permanent, could result in your being taxed on amounts in excess of your economic income.
- The Funds are treated as partnerships for United States federal income tax purposes. The U.S. tax rules pertaining to entities taxed as partnerships are complex and their application to publicly traded partnerships such as the Funds are in many respects uncertain. The Funds apply certain assumptions and conventions in an attempt to comply with the intent of the applicable rules and to report taxable income, gains, deductions, losses and credits in a manner that properly reflects Shareholders’ economic gains and losses. These assumptions and conventions may not fully comply with all aspects of the Internal Revenue Code (the “Code”) and applicable Treasury Regulations, however, and it is possible that the U.S. Internal Revenue Service (the “IRS”) will successfully challenge our allocation methods and require us to reallocate items of income, gain, deduction, loss or credit in a manner that adversely affects you. If this occurs, you may be required to file an amended tax return and to pay additional taxes plus deficiency interest.
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- The Trust has received an opinion of counsel that, under current U.S. federal income tax laws, the Funds will be treated as partnerships that are not taxable as corporations for U.S. federal income tax purposes, provided that (i) at least 90 percent of each Fund’s annual gross income consists of “qualifying income” as defined in the Code, (ii) the Funds are organized and operated in accordance with its governing agreements and applicable law, and (iii) the Funds do not elect to be taxed as corporations for federal income tax purposes. Although the Sponsor anticipates that the Funds have satisfied and will continue to satisfy the “qualifying income” requirement for all of its taxable years, that result cannot be assured. The Funds have not requested and will not request any ruling from the IRS with respect to its classification as partnerships not taxable as corporations for federal income tax purposes. If the IRS were to successfully assert that the Funds are taxable as corporations for federal income tax purposes in any taxable year, rather than passing through its income, gains, losses and deductions proportionately to Shareholders, each Fund would be subject to tax on its net income for the year at corporate tax rates. In addition, although the Sponsor does not currently intend to make distributions with respect to Shares, any distributions would be taxable to Shareholders as dividend income. Taxation of the Funds as corporations could materially reduce the after-tax return on an investment in Shares and could substantially reduce the value of your Shares.
Risks Specific to the Teucrium Corn Fund
- Investors may choose to use the Fund as a means of investing indirectly in corn, and there are risks involved in such investments. The risks and hazards that are inherent in corn production may cause the price of corn to fluctuate widely. Price movements for corn are influenced by, among other things: weather conditions, crop failure, production decisions, governmental policies, changing demand, the corn harvest cycle, and various economic and monetary events. Corn production is also subject to U.S. federal, state and local regulations that materially affect operations.
- The price movements for corn are influenced by, among other things, weather conditions, crop disease, transportation difficulties, various planting, growing and harvesting problems, governmental policies, changing demand, and seasonal fluctuations in supply. More generally, commodity prices may be influenced by economic and monetary events such as changes in interest rates, changes in balances of payments and trade, U.S. and international inflation rates, currency valuations and devaluations, U.S. and international economic events, and changes in the philosophies and emotions of market participants. Because the Fund invests primarily in interests in a single commodity, it is not a diversified investment vehicle, and therefore may be subject to greater volatility than a diversified portfolio of stocks or bonds or a more diversified commodity pool.
- The Fund is subject to the risks and hazards of the corn market because it invests in Corn Interests. The risks and hazards that are inherent in the corn market may cause the price of corn to fluctuate widely. If the changes in percentage terms of the Fund’s Shares accurately track the percentage changes in the Benchmark or the spot price of corn, then the price of its Shares will fluctuate accordingly.
- The price and availability of corn is influenced by economic and industry conditions, including but not limited to supply and demand factors such as: crop disease and infestation (including, but not limited to, Leaf Blight, Ear Rot and Root Rot); transportation difficulties; various planting, growing, or harvesting problems; and severe weather conditions (particularly during the spring planting season and the fall harvest) such as drought, floods, or frost that are difficult to anticipate and which cannot be controlled. Demand for corn in the United States to produce ethanol has also been a significant factor affecting the price of corn. In turn, demand for ethanol has tended to increase when the price of gasoline has increased, and has been significantly affected by United States governmental policies designed to encourage the production of ethanol. Recent changes in government policy have the potential to reduce the demand for ethanol over the next several years. Additionally, demand for corn is affected by changes in consumer tastes, national, regional and local economic conditions, and demographic trends. Finally, because corn is often used as an ingredient in livestock feed, demand for corn is subject to risks associated with the outbreak of livestock disease.
- Corn production is subject to United States federal, state, and local policies and regulations that materially affect operations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, acreage control, and import and export restrictions on agricultural commodities and commodity products, can influence the planting of certain crops, the location and size of crop production, the volume and types of imports and exports, the availability and competitiveness of feedstocks as raw materials, and industry profitability. Additionally, corn production is affected by laws and regulations relating to, but not limited to, the sourcing, transporting, storing, and processing of agricultural raw materials as well as the transporting, storing and distributing of related agricultural products. U.S. corn producers also must comply with various environmental laws and regulations, such as those regulating the use of certain pesticides, and local laws that regulate the production of genetically modified crops. In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions.
- Seasonal fluctuations in the price of corn may cause risk to an investor because of the possibility that Share prices will be depressed because of the corn harvest cycle. In the United States, the corn market is normally at its weakest point, and corn prices are lowest, shortly before and during the harvest (between September and November), due to the high supply of corn in the market. Conversely, corn prices are generally highest during the winter and spring (between December and May), when farmer-owned corn has largely been sold and used. Seasonal corn market peaks generally occur around February or March. These normal market conditions are, however, often influenced by weather patterns, and domestic and global economic conditions, among others factors, and any specific year may not necessarily follow the traditional seasonal fluctuations described above. In the futures market, these seasonal fluctuations are typically reflected in contracts expiring in the relevant season (e.g., contracts expiring during the harvest season are typically priced lower than contracts expiring in the winter and spring). Thus, seasonal fluctuations could result in an investor incurring losses upon the sale of Fund Shares, particularly if the investor needs to sell Shares when the Benchmark Component Futures Contracts are, in whole or part, Corn Futures Contracts expiring in the fall.
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- Position limits and daily price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of Shares to substantially vary from the Benchmark and prevent you from being able to effectively use the Fund as a way to hedge against corn-related losses or as a way to indirectly invest in corn.
| o | The CFTC and U.S. designated contract markets such as the CBOT may establish position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which an investment by the Fund is not) may hold, own or control. For example, the current position limit for investments at any one time in Corn Futures Contracts are 600 spot month contracts, 33,000 contracts expiring in any other single month, and 33,000 total for all months. Cleared Corn Swaps are subject to position limits that of 22,000 for all months and 13,500 for any single month, and are measured separately from, the limits on Corn Futures Contracts. These position limits are fixed ceilings that the Fund would not be able to exceed without specific CFTC authorization. |
| o | In addition to position limits, the exchanges set daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of futures contracts may vary either up or down from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit. |
| o | For example, the CBOT imposes a $2,000 per contract price fluctuation limit for Corn Futures Contracts. This limit is initially based off of the previous trading day’s settlement price. If two or more Corn Futures Contract months within the first five listed non-spot contracts close at the limit, the daily price limit increases to $3,000 per contract for the next business day. |
| o | All of these limits may potentially cause a tracking error between the price of the Shares and the Benchmark. This may in turn prevent you from being able to effectively use the Fund as a way to hedge against corn-related losses or as a way to indirectly invest in corn. |
| o | The Fund does not intend to limit the size of the offering and will attempt to expose substantially all of its proceeds to the corn market utilizing Corn Interests. If the Fund encounters position limits, accountability levels, or price fluctuation limits for Corn Futures Contracts and/or Cleared Corn Swaps on the CBOT, it may then, if permitted under applicable regulatory requirements, purchase Other Corn Interests and/or Corn Futures Contracts listed on foreign exchanges. However, the Corn Futures Contracts available on such foreign exchanges may have different underlying sizes, deliveries, and prices. In addition, the Corn Futures Contracts available on these exchanges may be subject to their own position limits and accountability levels. In any case, notwithstanding the potential availability of these instruments in certain circumstances, position limits could force the Fund to limit the number of Creation Baskets that it sells. |
- Position limits and daily price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of Shares to substantially vary from the Benchmark and prevent you from being able to effectively use the Fund as a way to hedge against corn-related losses or as a way to indirectly invest in corn.
Risks Specific to the Teucrium Natural Gas Fund
- Investors may choose to use the Fund as a means of investing indirectly in natural gas, and there are risks involved in such investments. The risks and hazards that are inherent in natural gas production may cause the price of natural gas to fluctuate widely. The exploration for, and production of, natural gas is an uncertain process with many risks. The cost of drilling, completing and operating wells for natural gas is often uncertain, and a number of factors can delay or prevent drilling operations or production. These include, but are not limited to: unexpected drilling conditions; pressure or irregularities in formations; equipment failures or repairs; fires or other accidents; adverse weather conditions; pipeline ruptures or spills; shortages or delays in the availability of drilling rigs and the delivery of equipment; and environmental hazards. Environmental hazards include natural gas leaks, ruptures and discharges of toxic gases. Natural gas operations are also subject to various U.S. federal, state and local regulations that materially affect operations. Natural gas production is also mostly concentrated to North America in that transporting natural gas is primarily limited to pipelines, although under limited circumstances, natural gas may be liquefied and shipped to or from North America.
- The Fund is subject to the risks and hazards of the natural gas market because it invests in Natural Gas Interests. The risks and hazards that are inherent in the natural gas market may cause the price of natural gas to fluctuate widely. If the changes in percentage terms of the Fund’s Shares accurately track the percentage changes in the Benchmark or the spot price of natural gas, then the price of its Shares will fluctuate accordingly.
- The exploration for, and production of, natural gas is an uncertain process with many risks. The costs of drilling, completing and operating wells for natural gas is often uncertain, and a number of factors can delay or prevent drilling operations or production, including but not limited to:
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| o | Unexpected drilling conditions; |
| o | Pressure or irregularities in formations; |
| o | Equipment failures or repairs; |
| o | Fires or other accidents; |
| o | Pipeline ruptures or spills; |
| o | Shortages or delays in the availability of drilling rigs and the delivery of equipment; |
| o | Adverse weather conditions; |
| o | Political conflicts; |
| o | Compliance with government regulations; and |
| o | Environmental hazards, including natural gas leaks, ruptures and discharges of toxic gases. |
- Natural gas production is subject to U.S. federal, state, and local policies and regulations that materially affect operations. Matters regulated include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells and pooling of properties and taxation. At various times, regulatory agencies have imposed price controls and limitations on production. In order to conserve supplies of natural gas, these agencies have restricted the rates of flow of natural gas wells below actual production capacity. Federal, state and local laws regulate production, handling, storage, transportation and disposal of natural gas, by-products from natural gas and other substances and materials produced or used in connection with natural gas operations.
- There are a variety of hazards inherent in natural gas transmission, distribution, gathering and processing, such as leaks, explosions, pollution, release of toxic substances, adverse weather conditions (such as hurricanes and flooding), pipeline failure, abnormal pressures, uncontrollable flows of natural gas, scheduled and unscheduled maintenance, physical damage to the gathering or transportation system, and other hazards which could affect the price of natural gas. To the extent these hazards limit the supply or delivery of natural gas, natural gas prices will increase.
- Natural gas prices fluctuate seasonally. For example, in some parts of the United States and other markets, the natural gas demand for power peaks during the cold winter months, with market prices peaking at that time. As a result, in the future, the overall price of natural gas may fluctuate substantially on a seasonal and quarterly basis and thus make consecutive period to period comparisons less relevant
- Price movements for natural gas are influenced by, among other things: regional demand for energy, which is affected by economic and seasonal conditions; the domestic supply and inventories of natural gas; weather conditions, including abnormally mild or harsh winters; political conditions; the price and availability of alternative fuels; and the impact of energy conservation efforts. More generally, commodity prices may be influenced by economic and monetary events such as changes in interest rates, changes in balances of payments and trade, U.S. and international inflation rates, currency valuations and devaluations, U.S. and international economic events, and changes in the philosophies and emotions of market participants. Because the Fund invests primarily in interests in a single commodity, it is not a diversified investment vehicle, and therefore may be subject to greater volatility than a diversified portfolio of stocks or bonds or a more diversified commodity pool. There has been tremendous volatility in the price of Natural Gas Futures Contracts in recent years. For example, the price of the NYMEX spot month futures contract on natural gas rose to a high of $13.69 on July 3, 2008 and dropped to a low of $1.90 on April 20, 2012. The Sponsor anticipates that there will be continued volatility in the price of the Natural Gas Futures Contracts. Consequently, investors should know that this volatility can lead to a loss of all or substantially all of their investment in the Fund.
- Natural gas transmission and storage operations in North America are subject to regulation and oversight by the Federal Energy Regulatory Commission, various state regulatory agencies, and Canadian regulatory authorities. These regulatory bodies have the authority to effect rate settlements on natural gas storage, transmission and distribution services. As a consequence, the price of natural gas may be affected by a change in the rate settlements effected by one or more of these regulatory bodies.
- Natural gas is primarily transported and stored throughout the United States by way of pipeline and underground storage facilities. These systems may not be adequate to meet demand, especially in times of peak demand or in areas of the United States where natural gas service is already limited due to minimal pipeline and storage infrastructure. As a result of the limited method for transporting and storing natural gas, the price of natural gas may fluctuate.
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- Accountability levels, position limits and price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of Shares to substantially vary from the Benchmark and prevent you from being able to effectively use the Fund as a way to hedge against natural gas-related losses or as a way to indirectly invest in natural gas.
| o | The CFTC and designated contract markets such as the NYMEX and the ICE may establish accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control may hold, own or control (other than as a hedge, which an investment by the Fund is not). For example, the current accountability level for investments at any one time in Natural Gas Futures Contracts is 12,000 contracts for all months combined and 6,000 contracts for any one month. While this is not a fixed ceiling, it is a threshold above which the NYMEX may exercise scrutiny and control over an investor, including limiting an investor to holding no more than 12,000 Natural Gas Futures Contracts. |
| o | With regard to position limits, the NYMEX limits an investor from holding more than 1,000 net futures in the last three days of trading in the near month contract to expire. It is unlikely that the Fund will be subject to such position limits because of the Fund’s investment strategy to “roll” from the near month contract to expire to the same month of the following year during the period beginning two weeks from the expiration of the contract. On November 18, 2011, the CFTC adopted regulations that will impose position limits on energy futures contracts, including Natural Gas Futures Contracts. The initial spot month position limit of a combined 1,000 Natural Gas Futures Contracts and economically equivalent swaps will not be effective until 60 days after the CFTC further defines the term “swap.” Non-spot month position limits will be determined based on a survey of at least 12 months of the deliverable supply of natural gas. It is not possible at this time to predict when the CFTC will make these regulations effective. The Sponsor does not believe that the proposed rules, if adopted, will have any material impact on the Fund’s investment objective. |
| o | The Cleared Natural Gas Swaps that are most comparable to the Benchmark Component Futures Contracts are subject to accountability levels that are substantially identical to, but are currently measured separately from, the accountability levels on Natural Gas Futures Contracts. Accountability levels are imposed by the ICE of 48,000 contracts for all months (12,000 NYMEX NG contract equivalents), 24,000 contracts for any one month (6,000 NYMEX NG contract equivalents), and 4,000 contracts for the spot month (1,000 NYMEX NG contract equivalents). Exemptions may be obtained from these accountability levels for bona fide hedging, risk management and spread positions. The Fund’s ability to rely on these Cleared Natural Gas Swaps may be further limited when the position limit rules discussed above become effective. |
| o | In addition to accountability levels and position limits, the exchanges may also set price fluctuation limits on futures contracts. The price fluctuation limit establishes the maximum amount that the price of futures contracts may vary either up or down from the previous day’s settlement price or from the price at which the limit was last imposed. When a price fluctuation limit is in effect for a particular futures contract, no trades may be made at a price beyond that limit. |
| o | More specifically, the NYMEX imposes a $1.50 per MMBtu ($15,000 per contract) price fluctuation limit for Natural Gas Futures Contracts. This limit is initially based off of the previous NYMEX trading day’s settlement price. If any of the first three contract months for a Natural Gas Futures Contract is traded, bid or offered at the limit, trading is halted for five minutes. When trading resumes it begins at the point where the limit was imposed and the limit is reset to be $1.50 per MMBtu in either direction of that point. If another halt were triggered, the market would continue to be expanded by $1.50 per MMBtu in either direction after each successive five-minute trading halt. There is not maximum price fluctuation limit during any one trading session. |
| o | All of these limits may potentially cause a tracking error between the price of the Shares and the Benchmark. This may in turn prevent you from being able to effectively use the Fund as a way to hedge against natural gas-related losses or as a way to indirectly invest in natural gas. |
| o | If the Fund encounters position limits, accountability levels, or price fluctuation limits for Natural Gas Futures Contracts on the NYMEX or Cleared Natural Gas Swaps on the ICE, it may then, if permitted under applicable regulatory requirements, purchase Natural Gas Interests, including Natural Gas Futures Contracts listed on foreign exchanges. However, the Natural Gas Futures Contracts available on such foreign exchanges may have different underlying sizes, deliveries, and prices. The Natural Gas Futures Contracts available on such foreign exchanges may be subject to their own position limits and accountability levels. In any case, notwithstanding the potential availability of these instruments in certain circumstances, position limits could force the Fund to limit the number of Creation Baskets that it sells. |
Risks Specific to the Teucrium WTI Crude Oil Fund
- Investors may choose to use the Fund as a means of investing indirectly in crude oil, and there are risks involved in such investments. The risks and hazards that are inherent in oil production may cause the price of crude oil to fluctuate widely. Price movements for crude oil are influenced by, among other things, many operating risks. Such operating risks include, but are not limited to, risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards. Environmental hazards include oil spills, ruptures and discharges of toxic gases. Crude oil operations are also subject to various U.S. federal, state and local regulations that materially affect operations.
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- Global political risks, including geopolitical conflicts and war could cause the price of WTI light sweet crude oil to fluctuate greatly impacting the Fund’s ability to meet its investment strategy. These tensions include concerns over military actions, civil unrest and sabotage affecting the flow of oil. Additionally, production cuts by members of OPEC and refusals to increase oil production may have the impact of tightening world oil markets.
- The Fund is subject to the risks and hazards of the crude oil market because it invests in Oil Interests. The risks and hazards that are inherent in the oil market may cause the price of oil to fluctuate widely. If the changes in percentage terms of the Fund’s Shares accurately track the percentage changes in the Benchmark or the spot price of WTI light sweet crude oil, then the price of its Shares will fluctuate accordingly.
- The price and availability of light sweet crude oil is influenced by economic and industry conditions, including but not limited to:
| o | the economic activity of users - as certain economies expand, oil consumption and prices increase, and as economies contract (in a recession or depression), oil demand and prices fall; |
| o | the increases in oil production due to price increases making it more economical to extract oil from additional sources which may later stabilize further price increases; |
| o | decisions of the cartel of oil producing countries (e.g., OPEC, the Organization of the Petroleum Exporting Countries) to produce more or less oil; |
| o | mechanical difficulties or shortages or delays in the delivery of drilling rigs and other equipment; |
| o | refinery capacity; |
| o | compliance with government regulations; |
| o | adverse weather conditions; |
| o | political conflicts - including war; |
| o | title issues; |
| o | the cancellation, shortening or delaying of crude oil drilling and production activities; |
| o | not finding commercially productive crude oil reservoirs; |
| o | operating risks including risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards; and |
| o | environmental hazards including oil spills, ruptures and the discharge of toxic gases. |
- Crude oil operations are also subject to various U.S. federal, state and local regulations that materially affect operations. Matters regulated include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations the spacing of wells and pooling of properties and taxation. At various times, regulatory agencies have imposed price controls and limitations on production. In order to conserve supplies of crude oil, these agencies have restricted the rates of flow of crude oil wells below actual production capacity. Federal, state and local laws regulate production, handling, storage, transportation and disposal of crude oil, by-products from crude oil and other substances and materials produced or used in connection with crude oil operations.
- Environmental and other governmental laws and regulations have increased the costs to plan, design, drill, install, operate and abandon oil wells. Other laws have prevented exploration and drilling of oil in certain environmentally sensitive federal lands and waters. Several environmental laws that have a direct or an indirect impact on the price of crude oil include, but are not limited to, the Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980.
- Accountability levels, position limits and price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of Shares to substantially vary from the Benchmark and prevent you from being able to effectively use the Fund as a way to hedge against crude oil-related losses or as a way to indirectly invest in crude oil.
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- The CFTC and U.S. designated contract markets such as the NYMEX may establish accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control may hold, own or control (other than as a hedge, which an investment by the Fund is not). For example, the current accountability level for investments at any one time in WTI Oil Futures Contracts is 20,000. While this is not a fixed ceiling, it is a threshold above which the NYMEX may exercise greater scrutiny and control over an investor, including limiting an investor to holding no more than 20,000 Oil Future Contracts. The Cleared Oil Swaps that are most comparable to the Benchmark Component Futures Contracts are subject to accountability levels that are substantially identical to, but measured separately from, the accountability levels for Oil Futures Contracts.
- With regard to position limits, the NYMEX limits an investor from holding more than 3,000 net futures in the last three days of trading in the near month contract to expire. The Fund, however, does not believe the current position limits imposed by the NYMEX will have any impact on the Fund. On November 18, 2011, the CFTC adopted regulations that will impose position limits on energy futures contracts, including Oil Futures Contracts. The initial spot month position limit of a combined 3,000 Oil Futures Contracts and economically equivalent swaps will not be effective until 60 days after the CFTC further defines the term “swap.” Non-spot month position limits will be determined based on a survey of at least 12 months of the deliverable supply of WTI crude oil. It is not possible at this time to predict when the CFTC will make these regulations effective. The Sponsor does not believe that the proposed rules, if adopted, will have any material impact on the Fund’s investment objective.
- In addition to accountability levels and position limits, the exchanges may also set price fluctuation limits on futures contracts. The price fluctuation limit establishes the maximum amount that the price of futures contracts may vary either up or down from the previous day’s settlement price or from the price at which the limit was last imposed. When a price fluctuation limit is in effect for a particular futures contract, no trades may be made at a price beyond that limit.
- More specifically, the NYMEX imposes a $10.00 per barrel ($10,000 per contract) price fluctuation limit for WTI Oil Futures Contracts. This limit is initially based off of the previous trading day’s settlement price. If any of the first three contract months for a WTI Oil Futures Contract is traded, bid or offered at the limit, trading is halted for five minutes. When trading resumes, it begins at the point where the limit was imposed and the limit is reset to be $10.00 per barrel in either direction of that point. If another halt were triggered, the market would continue to be expanded by $10.00 per barrel in either direction after each successive five-minute trading halt. There is no maximum price fluctuation limit during any one trading session.
- All of these limits may potentially cause a tracking error between the price of the Shares and the Benchmark. This may in turn prevent you from being able to effectively use the Fund as a way to hedge against crude oil-related losses or as a way to indirectly invest in crude oil.
- If the Fund encounters position limits, accountability levels, or price fluctuation limits for Oil Futures Contracts and/or Cleared Oil Swaps on the NYMEX or the ICE, it may, if permitted under applicable regulatory requirements, purchase Other Oil Interests and/or Oil Futures Contracts listed on foreign exchanges. However, the Oil Futures Contracts available on such foreign exchanges may have different underlying sizes, deliveries, and prices. In addition, the Oil Futures Contracts available on these exchanges may be subject to their own position limits and accountability levels. In any case, notwithstanding the potential availability of these instruments in certain circumstances, accountability levels and position limits could force the Fund to limit the number of Creation Baskets that it sells.
- Price movements for barrels of crude oil are influenced by, among other things: (1) operational hazards, such as risk of fire, explosions, blow outs, pipe failure and abnormally pressured formations; (2) environmental hazards, such as oil spills, ruptures and the discharge of toxic gases; (4) economic variances, such as changes in interest rates, actions by oil producing countries, such as OPEC, changes in supply and demand, shifts in demand domestically or other countries such as India and China, currency deviations, inflation rates and changes in balances of payment and trade, as well as changes in philosophies and emotions of market participants; and (5) political influences, such as war, counter-terrorism and government regulation and oversight. More generally, commodity prices may be influenced by economic and monetary events such as changes in interest rates, changes in balances of payments and trade, U.S. and international inflation rates, currency valuations and devaluations, U.S. and international economic events, and changes in the philosophies and emotions of market participants. Because the Fund invests primarily in interests in a single commodity, it is not a diversified investment vehicle, and therefore may be subject to greater volatility than a diversified portfolio of stocks or bonds or a more diversified commodity pool.
Risks Specific to the Teucrium Soybean Fund
- Investors may choose to use the Fund as a means of investing indirectly in soybeans, and there are risks involved in such investments. The risks and hazards that are inherent in soybean production may cause the price of soybean to fluctuate widely. Global price movements for soybean are influenced by, among other things: weather conditions, crop failure, production decisions, governmental policies, changing demand, the soybean harvest cycle, and various economic and monetary events. Soybean production is also subject to domestic and foreign regulations that materially affect operations.
- As discussed in more detail above, price movements for soybeans are influenced by, among other things, weather conditions, crop disease, transportation difficulties, various planting, growing and harvesting problems, governmental policies, changing demand, and seasonal fluctuations in supply. More generally, commodity prices may be influenced by economic and monetary events such as changes in interest rates, changes in balances of payments and trade, U.S. and international inflation rates, currency valuations and devaluations, U.S. and international economic events, and changes in the philosophies and emotions of market participants. Because the Fund invests primarily in interests in a single commodity, it is not a diversified investment vehicle, and therefore may be subject to greater volatility than a diversified portfolio of stocks or bonds or a more diversified commodity pool.
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- The Fund is subject to the risks and hazards of the soybean market because it invests in Soybean Interests. The risks and hazards that are inherent in the soybean market may cause the price of soybeans to fluctuate widely. If the changes in percentage terms of the Fund’s Shares accurately track the percentage changes in the Benchmark or the spot price of soybeans, then the price of its Shares will fluctuate accordingly.
| o | The price and availability of soybeans is influenced by economic and industry conditions, including but not limited to supply and demand factors such as: crop disease; weed control; water availability; various planting, growing, or harvesting problems; severe weather conditions such as drought, floods, heavy rains, frost, or natural disasters that are difficult to anticipate and which cannot be controlled; uncontrolled fires, including arson; challenges in doing business with foreign companies; legal and regulatory restrictions; transportation costs; interruptions in energy supply; currency exchange rate fluctuations; and political and economic instability. Additionally, demand for soybeans is affected by changes in international, national, regional and local economic conditions, and demographic trends. The increased production of soybean crops in South America and the rising demand for soybeans in emerging nations such as China and India have increased competition in the soybean market. |
| o | The supply of soybeans could be reduced by the spread of soybean rust. Soybean rust is a wind-borne fungal disease that attacks soybeans. Although soybean rust can be killed with chemicals, chemical treatment increases production costs for farmers. |
| o | Soybean production is subject to United States and foreign policies and regulations that materially affect operations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, acreage control, and import and export restrictions on agricultural commodities and commodity products, can influence the planting of certain crops, the location and size of crop production, the volume and types of imports and exports, and industry profitability. Additionally, soybean production is affected by laws and regulations relating to, but not limited to, the sourcing, transporting, storing and processing of agricultural raw materials as well as the transporting, storing and distributing of related agricultural products. Soybean producers also may need to comply with various environmental laws and regulations, such as those regulating the use of certain pesticides. In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. |
| o | Because processing soybean oil can create trans-fats, the demand for soybean oil may decrease due to heightened governmental regulation of trans-fats or trans-fatty acids. The U.S. Food and Drug Administration currently requires food manufacturers to disclose levels of trans-fats contained in their products, and various local governments have enacted or are considering restrictions on the use of trans-fats in restaurants. Several food processors have either switched or indicated an intention to switch to oil products with lower levels of trans-fats or trans-fatty acids. |
| o | In recent years, there has been increased global interest in the production of biofuels as alternatives to traditional fossil fuels and as a means of promoting energy independence. Soybeans can be converted into biofuels such as biodiesel. Accordingly, the soybean market has become increasingly affected by demand for biofuels and related legislation. |
| o | The costs related to soybean production could increase and soybean supply could decrease as a result of restrictions on the use of genetically modified soybeans, including requirements to segregate genetically modified soybeans and the products generated from them from other soybean products. |
| o | Seasonal fluctuations in the price of soybeans may cause risk to an investor because of the possibility that Share prices will be depressed because of the soybean harvest cycle. In the futures market, fluctuations are typically reflected in contracts expiring in the harvest season (i.e., contracts expiring during the fall are typically priced lower than contracts expiring in the winter and spring). Thus, seasonal fluctuations could result in an investor incurring losses upon the sale of Fund Shares, particularly if the investor needs to sell Shares when the Benchmark Component Futures Contracts are, in whole or part, Soybean Futures Contracts expiring in the fall. |
- Position limits and daily price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of Shares to substantially vary from the Benchmark and prevent you from being able to effectively use the Fund as a way to hedge against soybean-related losses or as a way to indirectly invest in soybeans.
| o | The CFTC and U.S. designated contract markets may establish position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which an investment by the Fund is not) may hold, own or control. For example, the current position limit for investments at any one time in the Soybean Futures Contracts are 600 spot month contracts, 15,000 contracts expiring in any other single month, and 15,000 total for all months. Cleared Soybean Swaps (i.e., Soybean Calendar Swaps as currently offered on the CBOT) are subject to position limits that are currently measured separately from the limits on Soybean Futures Contracts. The position limits for Cleared Soybeans Swaps are 6,500 contracts expiring in any single month and 10,000 contracts total for all months. These position limits are fixed ceilings that the Fund would not be able to exceed without specific CFTC authorization. Additionally, the Fund’s ability to rely on these Cleared Soybean Swaps may be further limited when the position limit rules become effective. |
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| o | In addition to position limits, the exchanges set daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of futures contracts may vary either up or down from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit. |
| o | Currently, the CBOT imposes an initial $3,500 per contract maximum daily price fluctuation limit on Soybean Futures Contracts. This limit is based off the previous trading day’s settlement price. If two or more Soybean Futures Contract months within the first seven listed non-spot contracts close at the limit, the daily price limit increases to $5,250 per contract for the next business day and to $8,000 per contract for the next business day if the limit is met again. |
| o | All of these limits may potentially cause a tracking error between the price of the Shares and the Benchmark. This may in turn prevent you from being able to effectively use the Fund as a way to hedge against soybean-related losses or as a way to indirectly invest in soybeans. |
| o | If the Fund encounters position limits or price fluctuation limits for Soybean Futures Contracts and/or Cleared Soybean Swaps on the CBOT, it may then, if permitted under applicable regulatory requirements, purchase Other Soybean Interests and/or Soybean Futures Contracts listed on foreign exchanges. However, the Soybean Futures Contracts available on such foreign exchanges may have different underlying sizes, deliveries, and prices. In addition, the Soybean Futures Contracts available on these exchanges may be subject to their own position limits or similar restrictions. In any case, notwithstanding the potential availability of these instruments in certain circumstances, position limits could force the Fund to limit the number of Creation Baskets that it sells. |
Risks Specific to the Teucrium Sugar Fund
- Investors may choose to use the Fund as a means of investing indirectly in sugar, and there are risks involved in such investments. The risks and hazards that are inherent in sugar production may cause the price of sugar to fluctuate widely. Global price movements for sugar are influenced by, among other things: weather conditions, crop failure, production decisions, governmental policies, changing demand, the sugar harvest cycle, and various economic and monetary events. Sugar production is also subject to domestic and foreign regulations that materially affect operations.
- As discussed in more detail above, price movements for sugar are influenced by, among other things, weather conditions, crop disease, transportation difficulties, various planting, growing and harvesting problems, governmental policies, changing demand, and seasonal fluctuations in supply. More generally, commodity prices may be influenced by economic and monetary events such as changes in interest rates, changes in balances of payments and trade, U.S. and international inflation rates, currency valuations and devaluations, U.S. and international economic events, and changes in the philosophies and emotions of market participants. Because the Fund invests primarily in interests in a single commodity, it is not a diversified investment vehicle, and therefore may be subject to greater volatility than a diversified portfolio of stocks or bonds or a more diversified commodity pool.
- The Fund is subject to the risks and hazards of the world sugar market because it invests in Sugar Interests. The two primary sources for the production of sugar are sugarcane and sugar beets, both of which are grown in various countries around the world. The risks and hazards that are inherent in the world sugar market may cause the price of sugar to fluctuate widely. If the changes in percentage terms of the Fund’s Shares accurately track the percentage changes in the Benchmark or the spot price of sugar, then the price of its Shares will fluctuate accordingly.
- The global price and availability of sugar is influenced by economic and industry conditions, including but not limited to supply and demand factors such as: crop disease; weed control; water availability; various planting, growing, or harvesting problems; severe weather conditions such as drought, floods, or frost that are difficult to anticipate and which cannot be controlled; uncontrolled fires, including arson; challenges in doing business with foreign companies; legal and regulatory restrictions; fluctuation of shipping rates; currency exchange rate fluctuations; and political and economic instability. Global demand for sugar to produce ethanol has also been a significant factor affecting the price of sugar. Additionally, demand for sugar is affected by changes in consumer tastes, national, regional and local economic conditions, and demographic trends. The spread of consumerism and the rising affluence of emerging nations such as China and India have created demand for sugar. An influx of people in developing countries moving from rural to urban areas may create more disposable income to be spent on sugar products, and might also reduce sugar production in rural areas on account of worker shortages, all of which would result in upward pressure on sugar prices. On the other hand, public health concerns regarding obesity, heart disease and diabetes, particularly in developed countries, may reduce demand for sugar. In light of the time it takes to grow sugarcane and sugar beets and the cost of new facilities for processing these crops, it may not be possible to increase supply quickly or in a cost-effective manner in response to an increase in demand for sugar.
- Sugar production is subject to United States and foreign policies and regulations that materially affect operations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, acreage control, and import and export restrictions on agricultural commodities and commodity products, can influence the planting of certain crops, the location and size of crop production, the volume and types of imports and exports, and industry profitability. Many foreign countries subsidize sugar production, resulting in lower prices, but this has led other countries, including the United States, to impose tariffs and import restrictions on sugar imports. Sugar producers also may need to comply with various environmental laws and regulations, such as those regulating the use of certain pesticides.
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- Seasonal fluctuations in the price of sugar may cause risk to an investor because of the possibility that Share prices will be depressed because of the sugar harvest cycle. In the futures market, contracts expiring during the harvest season are typically priced lower than contracts expiring in the winter and spring. While the sugar harvest seasons varies from country to country, prices of Sugar Futures Contracts tend to be lowest in the late spring and early summer, reflecting the harvest season in Brazil, the world’s leading producer of sugarcane. Thus, seasonal fluctuations could result in an investor incurring losses upon the sale of Fund Shares, particularly if the investor needs to sell Shares when the Benchmark Component Futures Contracts are, in whole or part, Sugar Futures Contracts expiring in the late spring or early summer.
- Position limits and daily price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of Shares to substantially vary from the Benchmark and prevent you from being able to effectively use the Fund as a way to hedge against sugar-related losses or as a way to indirectly invest in sugar.
| o | U.S. designated contract markets such as the ICE Futures and the NYMEX have established position limits and accountability levels on the maximum net long or net short Sugar Futures Contracts that any person or group of persons under common trading control may hold, own or control. For example, the current ICE Futures-established position limit level for investments in Sugar No. 11 Futures Contracts for the spot month, which is defined as on and after the second business day following the expiration of the regular option contract traded on the expiring futures contract, is 5,000, the accountability level for investments in ICE Sugar No. 11 Futures Contracts for any one month is 10,000, and the accountability level for all combined months is 15,000. While accountability levels are not fixed ceilings, they are thresholds above which the exchange may exercise greater scrutiny and control over an investor, including limiting an investor to holding no more Sugar No. 11 Futures Contracts than the amount established by the accountability level. ICE Cleared Sugar Swaps are subject to a level of 10,000 swap positions for any single month and all months combined. This limit is currently measured separately from the accountability levels on Sugar No. 11 Futures Contracts. The Fund does not intend to invest in Sugar Futures Contracts or Cleared Sugar Swaps in excess of any applicable accountability levels. |
| o | Position limits generally impose a fixed ceiling on aggregate holdings in futures contracts relating to a particular commodity, and may also impose separate ceilings on contracts expiring in any one month, contracts expiring in the spot month, and/or contracts in certain specified final days of trading. The CFTC has not currently set position limits for Sugar Futures Contracts, and the ICE Futures and the NYMEX have established position limits only on spot month Sugar No. 11 Futures Contracts. For example, the ICE Futures’ position limit for Sugar No. 11 Futures Contracts is 5,000 spot month contracts, whereas the NYMEX Sugar No. 11 Futures limit is 1,000 contracts, generally applicable only during the last month before expiration and limits on 9,000 contracts for a single month or cumulative amount. All Sugar Futures Contracts held under the control of the Sponsor, including those held by any future series of the Trust, will be aggregated in determining the application of these position limits. However, because spot month contracts are not Benchmark Component Futures Contracts and the Fund’s roll strategy calls for the sale of all spot month Sugar No.11 Futures Contracts prior to the time the position limits would become applicable, it is unlikely that position limits on Sugar Futures Contracts will come into play. |
| o | In addition to accountability levels and position limits, exchanges may establish daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of futures contracts may vary either up or down from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit. Currently, the ICE Futures and the NYMEX have not imposed maximum daily price fluctuation limits on Sugar Futures Contracts. |
| o | All of these limits may potentially cause a tracking error between the price of the Shares and the Benchmark. This may in turn prevent you from being able to effectively use the Fund as a way to hedge against sugar-related losses or as a way to indirectly invest in sugar. |
| o | If the Fund encounters accountability levels, position limits, or price fluctuation limits for Sugar Futures Contracts and/or Cleared Sugar Swaps on ICE Futures, it may then, if permitted under applicable regulatory requirements, purchase Other Sugar Interests and/or Sugar Futures Contracts listed on the NYMEX or foreign exchanges. However, the Sugar Futures Contracts available on such foreign exchanges may have different underlying sizes, deliveries, and prices. In addition, the Sugar Futures Contracts available on these exchanges may be subject to their own position limits and accountability levels. In any case, notwithstanding the potential availability of these instruments in certain circumstances, position limits could force the Fund to limit the number of Creation Baskets that it sells. |
Risks Specific to the Teucrium Wheat Fund
- Investors may choose to use the Fund as a means of investing indirectly in wheat, and there are risks involved in such investments. The risks and hazards that are inherent in wheat production may cause the price of wheat to fluctuate widely. Price movements for wheat are influenced by, among other things: weather conditions, crop failure, production decisions, governmental policies, changing demand, the wheat harvest cycle, and various economic and monetary events. Wheat production is also subject to U.S. federal, state and local regulations that materially affect operations.
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- As discussed in more detail above, price movements for wheat are influenced by, among other things, weather conditions, crop disease, transportation difficulties, various planting, growing and harvesting problems, governmental policies, changing demand, and seasonal fluctuations in supply. More generally, commodity prices may be influenced by economic and monetary events such as changes in interest rates, changes in balances of payments and trade, U.S. and international inflation rates, currency valuations and devaluations, U.S. and international economic events, and changes in the philosophies and emotions of market participants. Because the Fund invests primarily in interests in a single commodity, it is not a diversified investment vehicle, and therefore may be subject to greater volatility than a diversified portfolio of stocks or bonds or a more diversified commodity pool.
- The Fund is subject to the risks and hazards of the wheat market because it invests in Wheat Interests. The risks and hazards that are inherent in the wheat market may cause the price of wheat to fluctuate widely. If the changes in percentage terms of the Fund’s Shares accurately track the percentage changes in the Benchmark or the spot price of wheat, then the price of its Shares will fluctuate accordingly.
| o | The price and availability of wheat is influenced by economic and industry conditions, including but not limited to supply and demand factors such as: crop disease; weed control; water availability; various planting, growing, or harvesting problems; severe weather conditions such as drought, floods, or frost that are difficult to anticipate and which cannot be controlled. Demand for food products made from wheat flour is affected by changes in consumer tastes, national, regional and local economic conditions, and demographic trends. More specifically, demand for such food products in the United States is relatively unaffected by changes in wheat prices or disposable income, but is closely tied to tastes and preferences. For example, in recent years the increase in the popularity of low-carbohydrate diets caused the consumption of wheat flour to decrease rapidly before rebounding somewhat after 2005. Export demand for wheat fluctuates yearly, based largely on crop yields in the importing countries. |
| o | Wheat production is subject to United States federal, state and local policies and regulations that materially affect operations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, acreage control, and import and export restrictions on agricultural commodities and commodity products, can influence the planting of certain crops, the location and size of crop production, the volume and types of imports and exports, the availability and competitiveness of feedstocks as raw materials, and industry profitability. Additionally, wheat production is affected by laws and regulations relating to, but not limited to, the sourcing, transporting, storing and processing of agricultural raw materials as well as the transporting, storing and distributing of related agricultural products. U.S. wheat producers also must comply with various environmental laws and regulations, such as those regulating the use of certain pesticides, and local laws that regulate the production of genetically modified crops. In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. |
| o | Seasonal fluctuations in the price of wheat may cause risk to an investor because of the possibility that Share prices will be depressed because of the wheat harvest cycle. In the United States, the market for winter wheat, the type of wheat upon which CBOT Wheat Futures Contracts are based, is at its lowest point, and wheat prices are lowest, shortly before and during the harvest (in the spring or early summer), due to the high supply of wheat in the market. Conversely, winter wheat prices are generally highest in the fall or early winter, when the wheat harvested that year has largely been sold and used. In the futures market, these seasonal fluctuations are typically reflected in contracts expiring in the relevant season (e.g., contracts expiring during the harvest season are typically priced lower than contracts expiring in the fall and early winter). Thus, seasonal fluctuations could result in an investor incurring losses upon the sale of Fund Shares, particularly if the investor needs to sell Shares when the Benchmark Component Futures Contracts are, in whole or part, Wheat Futures Contracts expiring in the spring. |
- Position limits and daily price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of Shares to substantially vary from the Benchmark and prevent you from being able to effectively use the Fund as a way to hedge against wheat-related losses or as a way to indirectly invest in wheat.
- The CFTC and U.S. designated contract markets such as the CBOT may establish position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which an investment by the Fund is not) may hold, own or control. For example, the current position limit for investments at any one time in CBOT Wheat Futures Contracts are 600 spot month contracts, 12,000 contracts expiring in any other single month and 12,000 contracts total for all months. Cleared Wheat Swaps (i.e., Wheat Calendar Swaps as offered on the CBOT) are subject to position limits that are currently measured separately from the limits on Wheat Futures Contracts. The position limits for Cleared Wheat Swaps are 5,000 contracts expiring in any single month and 6,500 contracts total for all months. These position limits are fixed ceilings that the Fund would not be able to exceed without specific CFTC authorization. Additionally, the Fund’s ability to rely on these Cleared Wheat Swaps may be further limited when the position limit rules discussed below under “Impact of Position Limits, Accountability Levels, and Price Fluctuations,” become effective.
- In addition to position limits, the exchanges set daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of futures contracts may vary either up or down from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.
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- For example, the CBOT imposes a $3,000 per contract price fluctuation limit for Wheat Futures Contracts. This limit is initially based off of the previous trading day’s settlement price. If two or more Wheat Futures Contract months within the first five listed non-spot contracts close at the limit, the daily price limit increases to $4,500 per contract for the next business day and to $6,750 per contract the next business day if the limit is met again.
- All of these limits may potentially cause a tracking error between the price of the Shares and the Benchmark. This may in turn prevent you from being able to effectively use the Fund as a way to hedge against wheat-related losses or as a way to indirectly invest in wheat.
- If the Fund encounters position limits, accountability levels, or price fluctuation limits for Wheat Futures Contracts and/or Cleared Wheat Swaps on the CBOT, it may then, if permitted under applicable regulatory requirements, purchase Other Wheat Interests and/or Wheat Futures Contracts listed on foreign exchanges. However, the Wheat Futures Contracts available on such foreign exchanges may have different underlying sizes, deliveries, and prices. In addition, the Wheat Futures Contracts available on these exchanges may be subject to their own position limits and accountability levels. In any case, notwithstanding the potential availability of these instruments in certain circumstances, position limits could force the Fund to limit the number of Creation Baskets that it sells.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | On July 31, 2010, for all Funds listed below except the Teucrium Agricultural Fund for which the contribution was made on April 1, 2011, the Sponsor made the following capital contributions and received the following shares for that contribution prior to each Fund’s commencement of operations; such shares were sold in private offerings exempt from registration under Section 4(2) of the Securities Act of 1933, as amended: |
| 1. | a $100 capital contribution to the Teucrium WTI Crude Oil Fund, a separate series of the Trust, in exchange for two shares of such fund; |
| 2. | a $100 capital contribution to the Teucrium Natural Gas Fund, another series of the Trust, in exchange for four shares of such fund; |
| 3. | a $100 capital contribution to the Teucrium Soybean Fund, another series of the Trust, in exchange for four shares of such fund; |
| 4. | a $100 capital contribution to the Teucrium Sugar Fund, another series of the Trust, in exchange for four shares of such fund; and |
| 5. | a $100 capital contribution to the Teucrium Wheat Fund, another series of the Trust, in exchange for four shares of such fund. |
| 6. | a $100 capital contribution to the Teucrium Agricultural Fund, another series of the Trust, in exchange for two shares of such fund. |
| (b) | The original registration statement on Form S-1 registering 30,000,000 common units, or “Shares,” of the Teucrium Corn Fund (File No. 333-162033) was declared effective on June 7, 2010. A second registration statement on Form S-1 (File No. 333-187463) which replaced the original registration statement was declared effective on April 30, 2013. From June 9, 2010 (the commencement of operations) through September 30, 2013, 5,850,000 Shares of the Fund were sold at an aggregate offering price of $236,324,336. The Fund paid fees to Foreside Fund Services, LLC for its services to the Fund from June 9, 2010 (the commencement of operations) through September 30, 2013 in an amount equal to $395,615, resulting in net offering proceeds of $235,928,721. The offering proceeds were invested in corn futures contracts and cash and cash equivalents in accordance with the Fund’s investment objective stated in the prospectus. |
The registration statement on Form S-1 registering 40,000,000 common units, or “Shares,” of Teucrium Natural Gas Fund (File No. 333-167593) was declared effective on October 22, 2010. A second registration statement on Form S-1 (File No. 333-187434) which replaced the original registration statement was declared effective on April 30, 2013. From February 1, 2011 (the commencement of the offering) through September 30, 2013, 400,000 Shares of the Fund were sold at an aggregate offering price of $7,420,546. The Fund paid fees to Foreside Fund Services, LLC for its services to the Fund through September 30, 2013 in an amount equal to $41,683, resulting in net offering proceeds of $7,378,863. The offering proceeds were invested in natural gas futures contracts and cash and cash equivalents in accordance with the Fund’s investment objective stated in the prospectus.
The registration statement on Form S-1 registering 15,000,000 common units, or “Shares,” of Teucrium WTI Crude Oil Fund (File No. 333-167594) was declared effective on October 22, 2010. A second registration statement on Form S-1 (File No. 333-187435) which replaced the original registration statement was declared effective on April 30, 2013. From February 23, 2011 (the commencement of the offering) through September 30, 2013, 125,000 Shares of the Fund were sold at an aggregate offering price of $6,077,099. The Fund paid fees to Foreside Fund Services, LLC for its services to the Fund through September 30, 2013 in an amount equal to $66,221, resulting in net offering proceeds of $6,010,878. The offering proceeds were invested in crude oil futures contracts and cash and cash equivalents in accordance with the Fund’s investment objective stated in the prospectus.
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The registration statement on Form S-1 registering 10,000,000 common units, or “Shares,” of Teucrium Soybean Fund (File No. 333-167590) was declared effective on June 17, 2011. From September 19, 2011 (the commencement of the offering) through September 30, 2013, 850,000 Shares of the Fund were sold at an aggregate offering price of $21,186,252. The Fund paid fees to Foreside Fund Services, LLC for its services to the Fund through September 30, 2013 in an amount equal to $26,855, resulting in net offering proceeds of $21,159,397. The offering proceeds were invested in soybean futures contracts and cash and cash equivalents in accordance with the Fund’s investment objective stated in the prospectus.
The registration statement on Form S-1 registering 10,000,000 common units, or “Shares,” of Teucrium Sugar Fund (File No. 333-167585) was declared effective on June 17, 2011. From September 19, 2011 (the commencement of the offering) through September 30, 2013, 400,000 Shares of the Fund were sold at an aggregate offering price of $8,609,407. The Fund paid fees to Foreside Fund Services, LLC for its services to the Fund through September 30, 2013 in an amount equal to $8,788, resulting in net offering proceeds of $8,600,619. The offering proceeds were invested in sugar futures contracts and cash and cash equivalents in accordance with the Fund’s investment objective stated in the prospectus.
The registration statement on Form S-1 registering 10,000,000 common units, or “Shares,” of Teucrium Wheat Fund (File No. 333-167591) was declared effective on June 17, 2011. From September 19, 2011 (the commencement of the offering) through September 30, 2013, 725,000 Shares of the Fund were sold at an aggregate offering price of $15,306,959. The Fund paid fees to Foreside Fund Services, LLC for its services to the Fund through September 30, 2013 in an amount equal to $21,009, resulting in net offering proceeds of $15,285,950. The offering proceeds were invested in wheat futures contracts and cash and cash equivalents in accordance with the Fund’s investment objective stated in the prospectus.
The registration statement on Form S-1 registering 5,000,000 common units, or “Shares,” of Teucrium Agricultural Fund (File No. 333-173691) was declared effective on February 10, 2012. From March 28, 2012 (the commencement of the offering) through September 30, 2013, 350,000 Shares of the Fund were sold at an aggregate offering price of $17,706,578. The Fund paid fees to Foreside Fund Services, LLC for its services to the Fund through September 30, 2013 in an amount equal to $2,935, resulting in net offering proceeds of $17,703,643. The offering proceeds were invested in Shares of the Underlying Funds and cash and cash equivalents in accordance with the Fund’s investment objective stated in the prospectus.
| (c) | The following chart shows the number of Shares redeemed by Authorized Participants for the three months ended September 30, 2013: |
Issuer Purchases of CORN Shares:
| Maximum Number (or | ||||||||||||||||||||
| Total Number of | Approximate Dollar | |||||||||||||||||||
| Average | Shares Purchased | Value) of Shares that | ||||||||||||||||||
| Total Number of | Price | as Part of Publicly | May Yet Be Purchased | |||||||||||||||||
| Shares | Paid per | Announced Plans | Under the Plans or | |||||||||||||||||
| Period | Purchased | Share | or Programs | Programs | ||||||||||||||||
| July 1, 2013 to July 31, 2013 | - | $ | - | N/A | N/A | |||||||||||||||
| August 1, 2013 to August 31, 2013 | 175,000 | $ | 35.97 | N/A | N/A | |||||||||||||||
| September 1, 2013 to September 30, 2013 | - | $ | - | N/A | N/A | |||||||||||||||
| Total | 175,000 | $ | 35.97 | |||||||||||||||||
Issuer Purchases of WEAT Shares: Nothing to Report
Issuer Purchases of SOYB Shares: Nothing to Report
Issuer Purchases of NAGS Shares: Nothing to Report
Issuer Purchases of TAGS Shares: Nothing to Report
Issuer Purchases of CRUD Shares: Nothing to Report
Issuer Purchases of CANE Shares: Nothing to Report
Item 3. Defaults Upon Senior Securities
None.
| 164 |
Item 4. Mine Safety Disclosures
None.
(a) None.
(b) Not Applicable.
The following exhibits are filed as part of this report as required under Item 601 of Regulation S-K:
| 3.1 | Second Amended and Restated Declaration of Trust and Trust Agreement of the Registrant. (1) | |
| 3.2 | Certificate of Trust of the Registrant. (2) | |
| 3.3 | Instrument Establishing the Fund. (3) | |
| 10.1 | Form of Authorized Purchaser Agreement. (6) | |
| 10.2 | Distribution Services Agreement. (1) | |
| 10.3 | Amended and Restated Distribution Services Agreement. (4) | |
| 10.4 | Amendment to Amended and Restated Distribution Services Agreement. (4) | |
| 10.5 | Second Amendment to Amended and Restated Distribution Services Agreement (4) | |
| 10.6 | Third Amendment to Amended and Restated Distribution Services Agreement (7) | |
| 10.7 | Global Custody Agreement. (5) | |
| 10.8 | Services Agreement. (5) | |
| 10.9 | Transfer Agency and Service Agreement. (5) | |
| 31.1 |
Certification by the Principal Executive Officer of the Registrant pursuant to Rules 13a-14 and 15d-14 of the Exchange Act. (8)
| |
| 31.2 | Certification by the Principal Financial Officer of the Registrant pursuant to Rules 13a-14 and 15d-14 of the Exchange Act. (8) | |
| 32.1 | Certification by the Principal Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8) | |
| 32.2 | Certification by the Principal Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (8) | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| (1) | Previously filed as like-numbered exhibit to Post-Effective Amendment No. 1 to Registration Statement No. 333-162033, filed on October 22, 2010 and incorporated by reference herein. |
| (2) | Previously filed as like-numbered exhibit to Registration Statement No. 333-162033, filed on September 21, 2009 and incorporated by reference herein. |
| 165 |
| (3) | Previously filed as like-numbered exhibit to Post-Effective Amendment No. 1 to Registration Statement No. 333-167590, filed on March 9, 2011 and incorporated by reference herein. |
| (4) | Previously filed as like-numbered exhibit to Registrant’s Current Report on Form 8-K for the Teucrium Corn Fund, filed on October 31, 2011 and incorporated by reference herein. |
| (5) | Previously filed as like-numbered exhibit to Pre-Effective Amendment No. 3 to Registration Statement No. 333-162033, filed on March 29, 2010 and incorporated by reference herein. | |
| (6) | Previously filed as like-numbered exhibit to Pre-Effective Amendment No. 1 to Registration Statement No. 333-173691, filed on December 5, 2011. |
| (7) | Previously filed as like-numbered exhibit to Pre-Effective Amendment No.1 to Registration Statement No. 333-187463, filed on April 30, 2013 | |
| (8) | Filed herewith. |
| 166 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Teucrium Commodity Trust (Registrant) | ||
| By: | Teucrium Trading, LLC | |
| its Sponsor | ||
| By: | /s/ Barbara Riker | |
| Name: | Barbara Riker | |
| Chief Financial Officer | ||
| Date: November 11, 2013 | ||