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Derivative Instruments and Hedging Activities (Trust) (Teucrium Commodity Trust [Member])
 9 Months Ended
Sep. 30, 2014
Teucrium Commodity Trust [Member]
  
Derivative Instruments and Hedging Activities

Note 5 – 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 three months ended September 30, 2014 and 2013, the Funds invested only in commodity futures contracts specifically related to each Fund. 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 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 and held by the FCM, currently Newedge USA LLC, as of September 30, 2014 and December 31, 2013.
 

Offsetting of Financial Assets and Derivative Assets as of September 30, 2014

    (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     Futures Contracts      Collateral, Due      
Description    Assets     Liabilities     Liabilities     Available for Offset     to Broker     Net Amount
Commodity price                                              
   Natural gas futures contracts   $ 430     $ -     $ 430     $ 430     $ -     $ -
   WTI crude oil futures contracts     3,030       -       3,030       3,030       -       -

 

 

Offseting of Financial Liabilities and Derivative Liabilities as of September 30, 2014

    (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     Futures Contracts      Collateral, Due        
Description    Liabilities     Liabilities     Liabilities     Available for Offset     from Broker     Net Amount  
Commodity price                                                
   Corn futures contracts   $ 16,589,737     $ -     $ 16,589,737     $ -     $ 23,455,087     $ 6,865,350  
   Natural gas futures contracts     42,730       -       42,730       430       84248       41,948  
WTI crude oil futures contracts     30,550               30,550       3,030       22,655       4,865  
   Soybean futures contracts     727,350       -       727,350       -       938,888       211,538  
   Sugar futures contracts     217,235       -       217,235       -       306,170       88,935  
Wheat futures contracts     4,439,663       -       4,439,663       -       5,783,936       1,344,273  

 

Offsetting of Financial Assets and Derivative Assets as of December 31, 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     Futures Contracts      Collateral, Due        
Description    Assets     Liabilities     Liabilities     Available for Offset     to Broker     Net Amount  
Commodity price                                                
   Natural gas futures contracts   $ 84,050     $ -     $ 84,050     $ -     $ 74,157     $ 9,893  
   WTI crude oil futures contracts     87,530       -       87,530       5,080       23,445       59,005  

 

Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 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     Futures Contracts      Collateral, Due        
Description    Liabilities     Liabilities     Liabilities     Available for Offset     from Broker     Net Amount  
Commodity price                                                
   Corn futures contracts   $ 4,884,788     $ -     $ 4,884,788     $ -     $ 9,852,213     $ 4,967,425  
   WTI crude oil futures contracts     5,080       -       5,080       5,080       -       -  
   Soybean futures contracts     188,863       -       188,863       -       400,752       211,889  
   Sugar futures contracts     183,400       -       183,400       -       261,687       78,287  
   Wheat futures contracts     698,675       -       698,675       -       1,253,668       554,993  

 

The following is a summary of realized and unrealized gains (losses) of the derivative instruments utilized by the Trust:

 

Three months ended September 30, 2014

    Realized (Loss) Gain on     Net Change in Unrealized Loss  
Primary Underlying Risk   Derivative Instruments     on Derivative Instruments  
Commodity price                
Corn futures contracts   $ (16,012,787 )   $ (6,859,262 )
Natural gas futures contracts     4,960       (109,020 )
WTI crude oil futures contracts     -       (223,730 )
Soybean futures contracts     (392,525)       (553,150 )
Sugar futures contracts     (134,792)       (222,499 )
Wheat futures contracts     (2,915,100       (2,260,751 )
Total commodity futures contracts   $ (19,450,244)     $ (10,588,412 )

 

 

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 )

 

Nine months ended September 30, 2014

    Realized (Loss) Gain on     Net Change in Unrealized Loss  
Primary Underlying Risk   Derivative Instruments     on Derivative Instruments  
Commodity price                
Corn futures contracts   $ (12,120,329)     $ (11,704,949 )
Natural gas futures contracts     288,110       (126,350 )
WTI crude oil futures contracts     93,280       (109,970)  
Soybean futures contracts     (149,950)       (538,487)  
Sugar futures contracts     (131,409)       (33,835)  
Wheat futures contracts     (2,329,112)       (3,740,988)  
Total commodity futures contracts   $ (14,349,410)     $ (16,254,579)

 


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 )

 

Volume of Derivative Activities

 

The average notional market value categorized by primary underlying risk for all futures contracts held was 132.8 million and 124.2 million for the three and nine months ended September 30, 2014, respectively; and 64.9 million and 62.8 million for the same periods in 2013.