UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

S Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2012.

OR

£ 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

 
 

 

TEUCRIUM COMMODITY TRUST

 

Table of Contents

 

    Page
Part I. FINANCIAL INFORMATION   3
     
Item 1. Financial Statements.   3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   135
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk.   163
     
Item 4. Controls and Procedures.   168
     
Part II. OTHER INFORMATION   170
     
Item 1. Legal Proceedings.   170
     
Item 1A. Risk Factors.   170
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.   196
     
Item 3. Defaults Upon Senior Securities.   199
     
Item 4. Mine Safety Disclosures.   199
     
Item 5. Other Information.   199
     
Item 6. Exhibits.   199

 

2
 

 

Part I. FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

Index to Financial Statements

 

Documents   Page
TEUCRIUM COMMODITY TRUST    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   6
     
Schedule of Investments at September 30, 2012 (Unaudited) and December 31, 2011   7
     
Statements of Operations (Unaudited) for the three and nine months ended September 30, 2012 and 2011   11
     
Statements of Changes in Net Assets (Unaudited) for the nine months ended September 30, 2012 and  2011   12
     
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and  2011   13
     
Notes to Financial Statements   14
     
TEUCRIUM CORN FUND    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   25
     
Schedule of Investments at September 30, 2012 (Unaudited) and December 31, 2011   26
     
Statements of Operations (Unaudited) for the three and nine months ended September 30, 2012 and 2011   28
     
Statements of Changes in Net Assets (Unaudited) for the nine months ended September 30, 2012 and 2011   29
     
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and 2011   30
     
Notes to Financial Statements   31
     
TEUCRIUM NATURAL GAS FUND    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   42
     
Schedule of Investments at September 30, 2012 (Unaudited) and December 31, 2011   43
     
Statements of Operations (Unaudited) for the three months ended September 30, 2012 and 2011 and for the nine months ended September 30, 2012 and from commencement of operations (February 1, 2011) through September 30, 2011   45
     
Statements of Changes in Net Assets (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (February 1, 2011) through September 30, 2011   46
     
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (February 1, 2011) through September 30, 2011   47
     
Notes to Financial Statements   48

 

3
 

 

TEUCRIUM WTI CRUDE OIL FUND    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   58
     
Schedule of Investments at September 30, 2012 (Unaudited) and December 31, 2011   59
     
Statements of Operations for the three months ended September 30, 2012 and 2011 and for the nine months ended September 30, 2012 and from commencement of operations (February 23, 2011) through September 30, 2011   61
     
Statements of Changes in Net Assets (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (February 23, 2011) through September 30, 2011   62
     
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (February 23, 2011) through September 30, 2011   63
     
Notes to Financial Statements   64
     
TEUCRIUM SOYBEAN FUND    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   75
     
Schedule of Investments at September 30, 2012 (Unaudited) and December 31, 2011   76
     
Statements of Operations (Unaudited) for the three months ended September 30, 2012 and for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   78
     
Statements of Changes in Net Assets (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   79
     
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   80
     
Notes to Financial Statements   81
     
TEUCRIUM SUGAR FUND    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   91
     
Schedule of Investments at September 30, 2012 (Unaudited) and December 31, 2011   92
     
Statements of Operations (Unaudited) for the three months ended September 30, 2012 and for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   94
     
Statements of Changes in Net Assets (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   95
     
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   96
     
Notes to Financial Statements   97
4
 

 

TEUCRIUM WHEAT FUND    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   107
     
Schedule of Investments at September 30, 2012 (Unaudited) and December 31, 2011   108
     
Statements of Operations (Unaudited) for the three months ended September 30, 2012 and for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   110
     
Statements of Changes in Net Assets (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   111
     
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and from commencement of operations (September 19, 2011) through September 30, 2011   112
     
Notes to Financial Statements   113

 

 

TEUCRIUM AGRICULTURAL FUND    
     
Statements of Assets and Liabilities at September 30, 2012 (Unaudited) and December 31, 2011   123
     
Schedule of Investments (Unaudited) at September 30, 2012   124
     
Statements of Operations (Unaudited) for three months ended September 30, 2012 and from commencement of operations (March 28, 2012) through September 30, 2012   125
     
Statement of Changes in Net Assets (Unaudited) from commencement of operations (March 28, 2012) through September 30, 2012   126
     
Statement of Cash Flows (Unaudited) from commencement of operations (March 28, 2012) through September 30, 2012   127
     
Notes to Financial Statements   128

 

5
 

 

TEUCRIUM COMMODITY TRUST

STATEMENTS OF ASSETS AND LIABILITIES

 

    September 30, 2012   December 31, 2011
    (Unaudited)    
Assets                
                 
Equity in BNY Mellon trading accounts:                
Cash and cash equivalents   $ 78,138,159     $ 80,567,901  
Commodity futures contracts     1,285,801       2,125,714  
Collateral, due from broker     9,820,455       8,747,339  
Receivable for investments sold     25,882       -  
Interest receivable     4,635       2,609  
Other assets     626,024       404,199  
Total assets     89,900,956       91,847,762  
                 
Liabilities                
                 
Payable for shares redeemed     9,121,871       4,147,011  
Commodity futures contracts     1,124,996       3,758,460  
Management fee payable to Sponsor     79,647       74,629  
Payable for investments purchased     16,178       -  
Other liabilities     100,168       44,094  
Total liabilities     10,442,860       8,024,194  
                 
Net assets   $ 79,458,096     $ 83,823,568  

 

The accompanying notes are an integral part of these financial statements.

 

6
 

 

TEUCRIUM COMMODITY TRUST

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

 

        Percentage of   Principal
Description: Assets   Fair Value   Net Assets   Amount
                         
Cash equivalents                        
United States Treasury obligations                        
U.S. Treasury bills, 0.080%, due October 18, 2012   $ 9,999,700       12.58 %   $ 10,000,000  
U.S. Treasury bills, 0.070%, due November 15, 2012     9,999,130       12.58       10,000,000  
Total U.S. Treasury obligations     19,998,830       25.16       20,000,000  
                         
Money market funds                        
Dreyfus Cash Management Plus     57,484,197       72.35          
                         
Total cash equivalents   $ 77,483,027       97.51 %        

 

            Notional
            Amount
Commodity futures contracts                        
United States corn futures contracts                        
CBOT corn futures (635 contracts, settlement date December 13, 2013)   $ 792,738       1.00 %   $ 20,018,375  
                         
United States natural gas futures contracts                        
   NYMEX natural gas futures (25 contracts, settlement date February 26, 2013)     42,368       0.05       938,000  
   NYMEX natural gas futures (26 contracts, settlement date March 26, 2013)     65,780       0.08       969,800  
   NYMEX natural gas futures (24 contracts, settlement date September 26, 2013)     103,080       0.13       931,200  
   NYMEX natural gas futures (23 contracts, settlement date October 29, 2013)     18,560       0.02       915,170  
                         
United States WTI crude oil futures contracts                        
   WTI crude oil futures (8 contracts, settlement date November 20, 2013)     34,686       0.04       746,800  
                         
United States soybean futures contracts                        
CBOT soybean futures (56 contracts, settlement date November 14, 2013)     98,350       0.12       3,747,100  
                         
United States sugar futures contracts                        
    ICE sugar futures (24 contracts, settlement date June 28, 2013)     538       0.00       550,771  
                         
United States wheat futures contracts                        
CBOT wheat futures (24 contracts, settlement date March 14, 2013)     15,113       0.02       1,094,700  
CBOT wheat futures (25 contracts, settlement date December 13, 2013)     114,588       0.14       1,093,438  
Total commodity futures contracts   $ 1,285,801       1.60 %   $ 31,005,354  

 

The accompanying notes are an integral part of these financial statements.

 

7
 

 

TEUCRIUM COMMODITY TRUST

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

 

        Percentage of   Notional
Description: Liabilities   Fair Value   Net Assets   Amount
                     
Commodity futures contracts                    
United States corn futures contracts                    
CBOT corn futures (540 contracts, settlement date March 14, 2013)   $ 24,700       0.03 %   $ 20,506,500
CBOT corn futures (465 contracts, settlement date May 14, 2013)     572,363       0.72     17,588,625
                       
United States WTI crude oil futures contracts                      
WTI crude oil futures (8 contracts, settlement date November 16, 2012)     27,029       0.03     740,480
WTI crude oil futures (6 contracts, settlement date May 21, 2013)     58,930       0.07     564,720
                       
United States soybean futures contracts                      
   CBOT soybean futures (46 contracts, settlement date January 14, 2013)     76,950       0.10       3,686,325
   CBOT soybean futures (41 contracts, settlement date March 14, 2013)     278,400       0.35       3,206,713
                       
United States sugar futures contracts                      
ICE sugar futures (29 contracts, settlement date April 30, 2013)     33,029       0.04     664,541
ICE sugar futures (27 contracts, settlement date February 28, 2014)     27,832       0.04     642,298
                     
United States wheat futures contracts                    
CBOT wheat futures contracts (20 contracts, settlement date May 14, 2013)     25,763       0.03     906,250
Total commodity futures contracts   $ 1,124,996       1.41 %   $ 48,506,452

 

            Shares
Exchange-traded funds                        
Teucrium Corn Fund   $ 679,249       0.85 %     14,033  
Teucrium Soybean Fund     652,770       0.82       24,556  
Teucrium Sugar Fund     650,073       0.82       35,024  
Teucrium Wheat Fund     666,268       0.84       27,137  
Total exchange-traded funds (cost $2,682,915) owned by Teucrium Agricultural Fund   $ 2,648,360       3.33 %     100,750  
                         

 

 

The accompanying notes are an integral part of these financial statements.

 

8
 

 

TEUCRIUM COMMODITY TRUST

SCHEDULE OF INVESTMENTS

December 31, 2011

 

        Percentage of   Principal
Description: Assets   Fair Value   Net Assets   Amount
Cash equivalents                        
United States Treasury obligations                        
U.S. Treasury bills, 0.010%, due January 19, 2012   $ 9,999,950       11.93 %   $ 10,000,000  
U.S. Treasury bills, 0.000%, due February 16, 2012     9,999,880       11.93       10,000,000  
Total U.S. Treasury obligations     19,999,830       23.86       20,000,000  
                         
Money market funds                        
Dreyfus Cash Management Plus     60,567,971       72.26          
                         
Total cash equivalents   $ 80,567,801       96.12 %        

 

                  Notional
                    Amount
Commodity futures contracts                      
United States corn futures contracts                      
CBOT corn futures (648 contracts, settlement date July 13, 2012)     $ 1,928,408       2.30 $ 21,424,500
                       
United States WTI crude oil futures contracts                      
WTI crude oil futures (14 contracts, settlement date November 16, 2012)       15,839       0.02   1,373,540
WTI crude oil futures (16 contracts, settlement date November 20, 2013)       100,303       0.12   1,516,160
                       
United States soybean futures contracts                      
CBOT Soybean futures (11 contracts, settlement date May 14, 2012)       9,994       0.01   669,625
                       
United States wheat futures contracts                      
CBOT Wheat futures (20 contracts, settlement date July 13, 2012)       71,170       0.08   686,250
Total commodity futures contracts     $ 2,125,714       2.53 $ 25,670,075

 

The accompanying notes are an integral part of these financial statements.

 

9
 

 

TEUCRIUM COMMODITY TRUST

SCHEDULE OF INVESTMENTS

December 31, 2011

 

        Percentage of   Notional
Description: Liabilities   Fair Value   Net Assets   Amount
Commodity futures contracts                        
United States corn futures contracts                        
CBOT corn futures (763 contracts, settlement date May 14, 2012)   $ 2,478,427       2.96 %   $ 24,978,713  
CBOT corn futures (849 contracts, settlement date December 14, 2012)     233,096       0.28       24,886,312  
                         
United States natural gas futures contracts                        
NYMEX natural gas futures (11 contracts, settlement date February 27, 2012)     217,844       0.26       331,760  
NYMEX natural gas futures (11 contracts, settlement date March  28, 2012)     161,614       0.19       338,690  
NYMEX natural gas futures (11 contracts, settlement date September 26, 2012)     120,352       0.14       365,420  
NYMEX natural gas futures (10 contracts, settlement date October 29, 2012)     102,630       0.12       347,900  
                         
United States WTI crude oil futures contracts                        
WTI crude oil futures (16 contracts, settlement date May 22, 2012)     168       0.00       1,591,680  
                         
United States soybean futures contracts                        
CBOT soybean futures (12 contracts, settlement date March 14, 2012)     81,898       0.10       724,650  
CBOT soybean futures (13 contracts, settlement date November 14, 2012)     82,765       0.10       782,763  
                         
United States sugar futures contracts                        
ICE sugar futures (32 contracts, settlement date April 30, 2012)     82,593       0.10       822,528  
ICE sugar futures (27 contracts, settlement date June 29, 2012)     37,908       0.05       682,215  
ICE sugar futures (31 contracts, settlement date February 28, 2013)     17,697       0.02       811,059  
                         
United States wheat futures contracts                        
CBOT wheat futures (23 contracts, settlement date May 14,  2012)     66,580       0.08       771,938  
CBOT wheat futures (22 contracts, settlement date December 14, 2012)     74,888       0.09       792,000  
Total commodity futures contracts   $ 3,758,460       4.49 %   $ 58,227,628  

 

The accompanying notes are an integral part of these financial statements.

 

10
 

 

TEUCRIUM COMMODITY TRUST

STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three months ended   Three months ended   Nine months ended   Nine months ended
    September 30, 2012   September 30, 2011   September 30, 2012   September 30, 2011
Income                                
Realized and unrealized gain (loss) on trading of commodity futures contracts:                                
Realized gain on commodity futures contracts   $ 17,680,107     $ 9,853,860     $ 11,781,196     $ 15,385,612  
Net change in unrealized appreciation or depreciation on commodity futures contracts     (3,737,364     (10,012,182 )     1,793,551       (20,496,972 )
Interest income     25,096       8,947       53,101       50,185  
Total income (loss)     13,967,839       (149,375 )     13,627,848       (5,061,175 )
                                 
Expenses                                
Management fees     267,296       328,413       644,954       788,567  
Professional fees     (107,429     176,355       506,490       536,143  
Distribution and marketing fees     751,082       187,910       1,712,641       484,014  
Custodian fees and expenses     42,082       76,886       367,816       239,354  
Business permits and licenses fees     30,850       5,659       47,323       17,009  
General and administrative expenses     127,799       3,576       270,888       9,714  
Brokerage commissions     25,674       29,212       51,333       60,399  
Other expenses     29,931       6,544       72,085       19,535  
Total expenses     1,167,285       814,555       3,673,530       2,154,735  
Net income (loss)   $ 12,800,554     $ (963,930 )   $ 9,954,318     $ (7,215,910 )

 

The accompanying notes are an integral part of these financial statements. 

 

11
 

 

TEUCRIUM COMMODITY TRUST

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

    Nine months ended   Nine months ended
    September 30, 2012   September 30, 2011
Operations                
Net income (loss)   $ 9,954,318     $ (7,215,910 )
                 
Capital transactions                
Issuance of Shares     93,826,552       111,123,203  
Cost of shares of the Underlying Funds acquired by Teucrium Agricultural Fund     (2,682,915 )     -  
Realized loss on shares of the Underlying Funds sold by Teucrium Agricultural Fund     (615,762 )     -  
Redemption of Shares     (104,847,665 )     (29,119,867 )
Total capital transactions     (14,319,790 )     82,003,336  
Net change in net assets     (4,365,472 )     74,787,426  
                 
Net assets, beginning of period     83,823,568       42,964,439  
                 
Net assets, end of period   $ 79,458,096     $ 117,751,865  

 

The accompanying notes are an integral part of these financial statements.

 

12
 

 

TEUCRIUM COMMODITY TRUST

STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine months 
ended
  Nine months ended
    September 30, 2012   September 30, 2011
Cash flows from operating activities:                
Net income (loss)   $ 9,954,318     $ (7,215,910 )
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     (1,793,551 )     20,496,972  
Realized loss on shares of the Underlying Funds sold by Teucrium Agricultural                
  Fund excluded from net income (loss)     (615,762 )     -  
Changes in operating assets and liabilities:                
Purchase of Underlying Funds acquired by Teucrium Agricultural Fund     (2,682,915 )     -  
Collateral, due from broker     (1,073,116     (18,776,599 )
Receivable for investments sold     (25,882 )     -  
Interest receivable     (2,026     4,416  
Other assets     (221,825 )     (612,698 )
Collateral, due to broker     -       (1,496,045 )
Management fee payable to Sponsor     5,018       68,129  
Payable for investments purchased     16,178       -  
Other liabilities     56,074       182,078  
Net cash provided by (used in) operating activities     3,616,511       (7,349,657 )
                 
Cash flows from financing activities:                
Proceeds from sale of Shares     93,826,552       111,123,203  
Redemption of Shares, net of change in payable for shares redeemed     (99,872,805 )     (29,119,867 )
Net cash (used in) provided by financing activities     (6,046,253 )     82,003,336  
                 
Net change in cash and cash equivalents     (2,429,742 )     74,653,679  
Cash and cash equivalents, beginning of period     80,567,901       39,311,038  
Cash and cash equivalents, end of period   $ 78,138,159     $ 113,964,717  

 

The accompanying notes are an integral part of these financial statements.

 

13
 

 

NOTES TO FINANCIAL STATEMENTS

September 30, 2012

(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 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 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 and Form 10-K/A, as applicable. The operating results from January 1, 2012 through September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

14
 

 

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 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. 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.

 

In accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 740-10-25-6, “Accounting for Uncertainty in Income Taxes,” 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, 2012 and December 31, 2011.  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, 2012 and 2011 and December 31, 2011.

 

15
 

 

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 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

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

 

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 $57,484,197 and $60,567,971 in money market funds at September 30, 2012 and December 31, 2011, 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 $19,998,830 and $19,999,830 on both September 30, 2012 and December 31, 2011.

 

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

 

16
 

 

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 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 Securities Transactions

 

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.

 

Shares of the Underlying Funds Held by the Teucrium Agricultural Fund (TAGS)

 

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.

 

17
 

 

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.

 

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 Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may

 

18
 

 

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, 2012 and December 31, 2011, 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 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

 

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 implementation of ASU No. 2011-11 will not be adopted prior to January 1, 2013, and we are evaluating the impact on the financial statement disclosures for the Trust or the Funds.

 

19
 

 

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, 2012 and December 31, 2011:

 

September 30, 2012

 

                Balance as of
Assets:   Level 1   Level 2   Level 3   September 30, 2012
Cash equivalents   $ 77,483,027     $ -     $ -     $ 77,483,027  
Commodity futures contracts                                
Corn futures contracts     792,738       -       -       792,738  
Natural gas futures contracts     229,788       -       -       229,788  
WTI crude oil futures contracts     34,686       -       -       34,686  
Soybean futures contracts     98,350       -       -       98,350  
Sugar futures contracts     538       -       -       538  
Wheat futures contracts     129,701       -       -       129,701  
Total   $ 78,768,828     $ -     $ -     $ 78,768,828  

 

                Balance as of
Liabilities:   Level 1   Level 2   Level 3   September 30, 2012
Commodity futures contracts       -     -      
Corn futures contracts   $ 597,063     $ -     $ -     $ 597,063  
WTI crude oil futures contracts     85,959       -       -       85,959  
Soybean futures contracts     355,350       -       -       355,350  
Sugar futures contracts     60,861       -       -       60,861  
Wheat futures contracts     25,763       -       -       25,763  
Total   $ 1,124,996     $ -     $ -     $ 1,124,996  

 

December 31, 2011

 

                Balance as of
Assets:   Level 1   Level 2   Level 3   December 31, 2011
Cash equivalents   $ 80,567,801       -       -     $ 80,567,801  
Commodity futures contracts                                
Corn futures contracts     1,928,408       -       -       1,928,408  
WTI crude oil futures contracts     116,142       -       -       116,142  
Soybean futures contracts     9,994                       9,994  
Wheat futures contracts     71,170       -       -       71,170  
Total   $ 82,693,515     $ -     $ -     $ 82,693,515  

 

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                Balance as of
    Level 1   Level 2   Level 3   December 31, 2011
Liabilities:                                
Commodity futures contracts                                
Corn futures contracts   $ 2,711,523     $ -     $ -     $ 2,711,523  
Natural gas futures contracts     602,440       -       -       602,440  
WTI crude oil futures contracts     168       -       -       168  
Soybean futures contracts     164,663       -       -       164,663  
Sugar futures contracts     138,198       -       -       138,198  
Wheat futures contracts     141,468       -       -       141,468  
Total   $ 3,758,460     $ -     $ -     $ 3,758,460  

 

There were no transfers into and out of each level of the fair value hierarchy for the commodity futures contracts valued using alternative verifiable sources due to a "limit-down" or “limit-up” conditions for the period January 1, 2012 through September 30, 2012.

 

Transfers into and out of each level of the fair value hierarchy for the corn futures contracts valued using alternative verifiable sources due to a "limit-down" condition for the period January 1, 2011 through September 30, 2011 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  
Assets (at fair value)                                                
Derivative contracts                                                
Corn future contracts   $      -     $ 9,140,288     $ 9,140,288     $      -     $      -     $      -  

 

    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   $      -     $ 5,938,713     $ 5,938,713     $      -     $      -     $      -  

 

 

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, 2012 and 2011, the Funds invested 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 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.  

 

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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 tables identify the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk, at September 30, 2012 and December 31, 2011.  Balances are presented on a gross basis, prior to the application of the impact of counterparty and collateral netting.  Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of master netting arrangements and have been reduced by the application of cash collateral receivables and payables with its counterparties. The following tables also 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, for the nine months ended September 30, 2012 and 2011 and for the three months ended September 30, 2012 and 2011.

 

At September 30, 2012, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives   Liability Derivatives   Net Derivatives
Commodity price                        
Corn futures contracts   $ 792,738     $ (597,063   195,675  
Natural gas futures contracts     229,788       -       229,788  
WTI crude oil futures contracts     34,686       (85,959 )     (51,273 )
Soybean futures contracts     98,350       (355,350     (257,000
Sugar futures contracts     538       (60,861 )     (60,323 )
Wheat futures contracts     129,701       (25,763     103,938  
Total commodity futures contracts   $ 1,285,801     $ (1,124,996 )   160,805  

 

At December 31, 2011, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives   Liability Derivatives   Net Derivatives
Commodity price                        
Corn futures contracts   $ 1,928,408     $ (2,711,523 )    $ (783,115 )
Natural gas futures contracts     -       (602,440 )     (602,440 )
WTI crude oil futures contracts     116,142       (168 )     115,974  
Soybean futures contracts     9,994       (164,663 )     (154,669 )
Sugar futures contracts     -       (138,198 )     (138,198 )
Wheat futures contracts     71,170       (141,468 )     (70,298 )
Total commodity futures contracts   $ 2,125,714     $ (3,758,460 )   (1,632,746 )

 

22
 

 

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

 

For the period from July 1, 2012 to 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

 

For the period January 1, 2012 to 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  

 

For the period July 1, 2011 to September 30, 2011

 

    Realized Gain (loss) on   Net Change in Unrealized Loss
Primary Underlying Risk   Derivative Instruments   on Derivative Instruments
Commodity price                
Corn futures contracts   $ 10,147,450     (8,334,377 )
Natural gas futures contracts     (213,080 )     (112,162 )
WTI crude oil futures contracts     (45,320 )     (954,906 )
Soybean futures contracts     148       (308,748 )
Sugar futures contracts     (35,682 )     (46,750 )
Wheat futures contracts     344       (255,239 )
Total commodity futures contracts   $ 9,853,860     $ (10,012,182 )

 

For the period January 1, 2011 to September 30, 2011

 

    Realized Gain (loss) on   Net Change in Unrealized Loss
Primary Underlying Risk   Derivative Instruments   on Derivative Instruments
Commodity price                
Corn futures contracts   $ 15,823,273     $ (18,596,820 )
Natural gas futures contracts     (541,020 )     (169,170 )
WTI crude oil futures contracts     138,549       (1,120,245 )
Soybean futures contracts     148       (308,748 )
Sugar futures contracts     (35,682 )     (46,750 )
Wheat futures contracts     344       (255,239 )
Total commodity futures contracts   $ 15,385,612     $ (20,496,972 )

 

23
 

 

Volume of Derivative Activities

 

At September 30, 2012, the notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

    Long Exposure
    Notional   Number
Primary Underlying Risk   Amounts   of contracts
Commodity price                
Corn futures contracts   $ 58,113,500       1,640  
Natural gas futures contracts     3,754,170       98  
WTI crude oil futures contracts     2,052,000       22  
Soybean futures contracts     10,640,138       143  
Sugar futures contracts     1,857,610       80  
Wheat futures contracts     3,094,388       69  
Total commodity futures contracts   $ 79,511,806       2,052  

 

At December 31, 2011, the notional amounts and number of contracts, categorized by primary underlying risk, are as follows:

 

    Long Exposure
    Notional   Number
Primary Underlying Risk   Amounts   of Contracts
Commodity price                
Corn futures contracts   $ 71,289,525       2,260  
Natural gas futures contracts     1,383,770       43  
WTI crude oil futures contracts     4,481,380       46  
Soybean futures contracts     2,177,038       36  
Sugar futures contracts     2,315,802       90  
Wheat futures contracts     2,250,188       65  
Total commodity futures contracts   $ 83,897,703       2,540  

 

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, 2012 through November 9, 2012, 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: On October 31, 2012 the SEC declared effective Post-Effective Amendment No. 2 to the Registration Statement on Form S-1 for the Fund.

 

24
 

 

TEUCRIUM CORN FUND

STATEMENTS OF ASSETS AND LIABILITIES

 

    September 30, 2012   December 31, 2011
    (Unaudited)    
Assets                
                 
Equity in BNY Mellon trading accounts:                
Cash and cash equivalents   $ 58,070,561     $ 69,022,336  
Commodity futures contracts     792,738       1,928,408  
Collateral, due from broker     7,961,740       6,910,552  
Interest receivable     3,249       2,086  
Other assets     445,997       342,859  
Total assets     67,274,285       78,206,241  
                 
Liabilities                
                 
Payable for shares redeemed     8,470,653       4,147,011  
Commodity futures contracts     597,063       2,711,523  
Management fee payable to Sponsor     62,246       64,423  
Other liabilities     59,672       14,763  
Total liabilities     9,189,634       6,937,720  
                 
Net assets   $ 58,084,651     $ 71,268,521  
                 
Shares outstanding     1,200,004       1,700,004  
                 
Net asset value per share   $ 48.40     $ 41.92  
                 
Market value per share   $ 48.42     $ 41.98  

 

The accompanying notes are an integral part of these financial statements.

 

25
 

 

TEUCRIUM CORN FUND

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

 

        Percentage of   Principal
Description: Assets   Fair Value   Net Assets   Amount
                         
Cash equivalents                        
United States Treasury obligations                        
U.S. Treasury bills, 0.080%, due October 18, 2012   $ 9,999,700       17.22 %   $ 10,000,000  
U.S. Treasury bills, 0.070%, due November 15, 2012     9,999,130       17.21       10,000,000  
Total U.S. Treasury obligations     19,998,830       34.43       20,000,000  
                         
Money market funds                        
Dreyfus Cash Management Plus     38,071,731       65.55          
                         
Total cash equivalents   $ 58,070,561       99.98 %        

 

            Notional Amount  
Commodity futures contracts                        
United States corn futures contracts                        
CBOT corn futures (635 contracts, settlement date December 13, 2013)   $ 792,738       1.36 %   $ 20,018,375  

 

 

        Percentage of     Notional  
Description: Liabilities   Fair Value   Net Assets   Amount  
                         
Commodity futures contracts                        
United States corn futures contracts                        
   CBOT corn futures (540 contracts, settlement date March 14, 2013)   $ 24,700       0.04 %   $ 20,506,500  
   CBOT corn futures (465 contracts, settlement date May 14, 2013)     572,363       0.99       17,588,625  
Total commodity futures contracts   $ 597,063       1.03 %   $ 38,095,125  

  

The accompanying notes are an integral part of these financial statements.

 

26
 

 

TEUCRIUM CORN FUND

SCHEDULE OF INVESTMENTS

December 31, 2011

 

        Percentage of   Principal
Description: Assets   Fair Value   Net Assets   Amount
             
Cash equivalents                        
United States Treasury obligations                        
U.S. Treasury bills, 0.010%, due January 19, 2012   $ 9,999,950       14.03 %   $ 10,000,000  
U.S. Treasury bills, 0.000%, due February 16, 2012     9,999,880       14.03       10,000,000  
Total U.S. Treasury obligations     19,999,830       28.06       20,000,000  
                         
Money market funds                        
Dreyfus Cash Management Plus     49,022,506       68.79          
                         
Total cash equivalents   $ 69,022,336       96.85 %        

 

            Notional
            Amount
Commodity futures contracts                        
United States corn futures contracts                        
CBOT corn futures (648 contracts, settlement date July 13, 2012)   $ 1,928,408       2.71 %   $ 21,424,500  

 

        Percentage of   Notional
Description: Liabilities   Fair Value   Net Assets   Amount
             
Commodity futures contracts                        
United States corn futures contracts                        
CBOT corn futures (763 contracts, settlement date May 14, 2012)   $ 2,478,427       3.48 %   $ 24,978,713  
CBOT corn futures (849 contracts, settlement date December 14, 2012)     233,096       0.33       24,886,312  
    $ 2,711,523       3.81 %   $ 49,865,025  

 

The accompanying notes are an integral part of these financial statements.

 

27
 

 

TEUCRIUM CORN FUND

STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three months ended   Three months ended  
Nine months ended
 
Nine months ended
    September 30, 2012   September 30, 2011   September 30, 2012   September 30, 2011
Income                                
Realized and unrealized gain (loss) on trading of commodity futures contracts:                                
Realized gain on commodity futures contracts   $ 16,718,359     $ 10,147,450     $ 12,326,540     $ 15,823,273  
Net change in unrealized appreciation or depreciation on commodity futures contracts     (3,740,286     (8,334,377 )     978,790       (18,596,820 )
Interest income     20,303       8,677       42,393       47,397  
Total income (loss)     12,998,376       1,821,750       13,347,723       (2,726,150 )
                                 
Expenses                                
Management fees     221,902       315,409       534,153       753,877  
Professional fees     (87,700     113,571       343,462       334,960  
Distribution and marketing fees     615,400       146,541       1,343,730       352,968  
Custodian fees and expenses     32,564       32,564       96,985       96,631  
Business permits and licenses fees     13,120       3,003       24,416       8,490  
General and administrative expenses     92,120       2,248       202,440       5,459  
Brokerage commissions     21,329       27,901       40,123       58,319  
Other expenses     20,561       3,731       55,806       11,015  
Total expenses     929,296       644,968       2,641,115       1,621,719  
Net income (loss)   $ 12,069,080     $ 1,176,782     $ 10,706,608     $ (4,347,869 )
                                 
Net income (loss) per share   $ 6.38     $ (0.28 )   $ 6.48     $ 1.05  
Net income (loss) per weighted average share   $ 6.79     $ 0.43     $ 6.45     $ (1.92 )
Weighted average shares outstanding     1,776,906       2,718,482       1,659,311       2,259,345  

 

The accompanying notes are an integral part of these financial statements.

 

28
 

 

TEUCRIUM CORN FUND

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

    Nine months ended   Nine months ended
    September 30, 2012   September 30, 2011
Operations                
Net income (loss)   $ 10,706,608     $ (4,347,869 )
Capital transactions                
Issuance of  Shares     48,186,703       92,546,004  
Redemption of  Shares     (72,077,181 )     (26,880,459 )
Total capital transactions     (23,890,478 )     65,665,545  
Net change in net assets     (13,183,870 )     61,317,676  
                 
Net assets, beginning of period     71,268,521       42,963,939  
                 
Net assets, end of period   $ 58,084,651     $ 104,281,615  
                 
Net asset value per share at beginning of period   $ 41.92     $ 39.06  
                 
At end of period   $ 48.40     $ 40.11  

 

The accompanying notes are an integral part of these financial statements.

 

29
 

 

TEUCRIUM CORN FUND

STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine months ended   Nine months ended
    September 30, 2012   September 30, 2011
Cash flows from operating activities:                
Net income (loss)   $ 10,706,608     $ (4,347,869 )
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     (978,790 )     18,596,820  
Changes in operating assets and liabilities:                
Collateral, due from broker     (1,051,188     (16,184,201 )
Interest receivable     (1,163     4,489  
Other assets     (103,138 )     (300,746 )
Collateral, due to broker     -       (1,496,045 )
Management fee payable to Sponsor     (2,177 )     63,346  
Other liabilities     44,909       22,100  
Net cash provided by (used in) operating activities     8,615,061       (3,642,106
                 
Cash flows from financing activities:                
Proceeds from sale of Shares     48,186,703       92,546,004  
Redemption of Shares, net of change in payable for shares redeemed     (67,753,539 )     (26,880,459 )
Net cash (used in) provided by financing activities     (19,566,836 )     65,665,545  
                 
Net change in cash and cash equivalents     (10,951,775 )     62,023,439  
Cash and cash equivalents, beginning of period     69,022,336       39,310,538  
Cash and cash equivalents, end of period   $ 58,070,561     $ 101,333,977  

 

The accompanying notes are an integral part of these financial statements.

 

30
 

 

NOTES TO FINANCIAL STATEMENTS

September 30, 2012

(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 and Form 10-K/A, as well as the most recent amendment to Form S-1, dated May 1, 2012, as applicable. The operating results from January 1, 2012 through September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

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.

 

31
 

 

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.

 

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.

 

In accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic (“ASC”) 740-10-25-6, “Accounting for Uncertainty in Income Taxes,” 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, 2012 and December 31, 2011. 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, 2012 and 2011 and December 31, 2011.

 

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.

 

32
 

 

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 Amendment to the Form S-1 dated May 1, 2012, 50,000 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 $38,071,731 and $49,022,506 in money market funds at September 30, 2012 and December 31, 2011, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities. The Fund held $19,998,830 in United States Treasury Bills with a maturity date of three months or less at both September 30, 2012 and December 31, 2011; 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 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

 

33
 

 

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,

 

  Subtracting any liabilities, and

 

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 (typically 3:00 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 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 period July 1, 2012 through September 30, 2012, the Fund recorded $221,902 in management fees to the Sponsor. For the period July 1, 2011 through September 30, 2011, the Fund recorded $315,409 in management fees to the Sponsor. For the period January 1, 2012 through September 30, 2012, the Fund recorded $534,153 in management fees to the Sponsor. For the period January 1, 2011 through September 30, 2011, the Fund recorded $753,877 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

 

34
 

 

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. 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

 

35
 

 

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, 2012 and December 31, 2011, 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.

 

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

 

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 implementation of ASU No. 2011-11 will not be adopted prior to January 1, 2013, and we are evaluating the impact on the financial statement disclosures for the Fund.

 

36
 

 

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, 2012 and December 31, 2011:

 

                   
September 30, 2012                  
                Balance as of  
Assets:   Level 1   Level 2   Level 3   September 30, 2012  
Cash equivalents   $ 58,070,561     $ -     $ -     $ 58,070,561  
Commodity futures contracts     792,738       -       -       792,738  
Total   $ 58,863,299     $ -     $ -     $ 58,863,299  

 

                Balance as of  
Liabilities:   Level 1   Level 2   Level 3   September 30, 2012  
Commodity futures contracts   $ 597,063     $ -     $ -     $ 597,063  
                                 

 

                   
December 31, 2011                  
                Balance as of  
Assets:   Level 1   Level 2   Level 3   December 31, 2011  
Cash equivalents   $ 69,022,336     $ -     $ -     $ 69,022,336  
Commodity futures contracts     1,928,408       -       -       1,928,408  
Total   $ 70,950,744     $ -     $ -     $ 70,950,744  

 

                Balance as of  
Liabilities:   Level 1   Level 2   Level 3   December 31, 2011  
Commodity futures contracts   $ 2,711,523     $ -     $ -     $ 2,711,523  
                                 

 

There were no transfers into and out of each level of the fair value hierarchy for the commodity futures contracts valued using alternative verifiable sources due to a "limit-down" condition for the period January 1, 2012 through September 30, 2012.

 

37
 

 

Transfers into and out of each level of the fair value hierarchy for the corn futures contracts valued using alternative verifiable sources due to a "limit-down" or “limit-up” condition for the period January 1, 2011 through September 30, 2011 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  
Assets (at fair value)                                                
Derivative contracts                                                
Commodity future contracts   $      -     $ 9,140,288     $ 9,140,288     $      -     $      -     $      -  

 

 

    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                                                
Commodity future contracts   $      -     $ 5,938,713     $ 5,938,713     $      -     $      -     $      -  

 

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, 2012 and 2011, the Fund invested only in commodity futures contracts and Cleared Corn Swaps specifically related to the Fund. 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 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.

 

38
 

 

The following tables identify the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk, at September 30, 2012 and December 31, 2011.  Balances are presented on a gross basis, prior to the application of the impact of counterparty and collateral netting.  The following tables also 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, for the nine months ended September 30, 2012 and 2011 and for the three months ended September 30, 2012 and 2011.

 

At September 30, 2012, the fair value of derivative instruments was as follows: 

 

Primary Underlying Risk   Asset Derivatives   Liability 
Derivatives
  Net Derivatives  
Commodity price                        
Commodity futures contracts   $ 792,738     $ (597,063 )   $ 195,675  

 

 

At December 31, 2011, the fair value of derivative instruments was as follows: 

 

 

Primary Underlying Risk   Asset Derivatives   Liability Derivatives   Net Derivatives
Commodity Price                        
Commodity futures contracts   $ 1,928,408     $ (2,711,523 )   $ (783,115 )

 

The following is a summary of realized and unrealized gains and losses of the derivative instruments utilized by the Corn Fund:

 

For the period from July 1, 2012 to 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)  

 

For the period from January 1, 2012 to 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  

 

 

For the period from July 1, 2011 to September 30, 2011

 

    Realized Gain on     Net Change in Unrealized Loss  
Primary Underlying Risk   Derivative Instruments     on Derivative Instruments  
Commodity Price                
Commodity futures contracts   $ 10,147,450     $ (8,334,377

  

 

39
 

 

For the period from January 1, 2011 to September 30, 2011

 

    Realized Gain on     Net Change in Unrealized Loss  
Primary Underlying Risk   Derivative Instruments     on Derivative Instruments  
Commodity Price                
Commodity futures contracts   $ 15,823,273     $ (18,596,820

 

 

Volume of Derivative Activities

 

The notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

At September 30, 2012, the fair value of derivative instruments was as follows:

 

    Long Exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 58,113,500       1,640  

 

At December 31, 2011, the fair value of derivative instruments was as follows:

 

    Long Exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 71,289,525       2,260  

 

40
 

 

Note 5 - Financial Highlights

 

The following tables present per unit performance data and other supplemental financial data for the periods from January 1, 2012 through September 30, 2012 and January 1, 2011 through September 30, 2011. This information has been derived from information presented in the financial statements.

 

Per Share Operation Performance for January 1, 2012 through 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 end of period   $ 48.40  
Total Return     15.46 %
Ratios to Average Net Assets (Annualized)        
Total expense     4.95 %
Net investment loss     (4.87 )%

 

Per Share Operation Performance for January 1, 2011 through September 30, 2011        
Net asset value at beginning of period   $ 39.06  
Income from investment operations:        
Investment income     0.02  
Net realized and unrealized gain on commodity futures contracts     1.75  
Total expenses     (0.72 )
Net increase in net asset value     1.05  
Net asset value end of period   $ 40.11  
Total Return     2.69 %
Ratios to Average Net Assets (Annualized)        
Total expense     2.15 %
Net investment loss     (2.09 )%

 

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, 2012 through November 9, 2012, there was nothing to report.

 

41
 

 

TEUCRIUM NATURAL GAS FUND

STATEMENTS OF ASSETS AND LIABILITIES

 

    September 30, 2012   December 31, 2011
    (Unaudited)    
Assets                
                 
Equity in BNY Mellon trading accounts:                
Cash and cash equivalents   $ 3,510,851     $ 1,277,159  
Commodity futures contracts     229,788       -  
Collateral, due from broker     24,392       700,573  
Interest receivable     209       57  
Other assets     15,378       12,808  
Total assets     3,780,618       1,990,597  
                 
Liabilities                
                 
Commodity futures contracts     -       602,440  
Management fee payable to Sponsor     2,867       -  
Other liabilities     898       6,790  
Total liabilities     3,765       609,230  
                 
Net assets   $ 3,776,853     $ 1,381,367  
                 
Shares outstanding     300,004       100,004  
                 
Net asset value per share   $ 12.59     $ 13.81  
                 
Market value per share   $ 12.50     $ 13.88  

 

The accompanying notes are an integral part of these financial statements.

 

42
 

 

TEUCRIUM NATURAL GAS FUND

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

 

        Percentage of  
Description: Assets   Fair Value   Net Assets  
                   
Cash equivalents                  
Money market funds                  
Dreyfus Cash Management Plus   $ 3,510,851       92.96 %  
            Notional
Amount
 
Commodity futures contracts                        
United States natural gas futures contracts                        
NYMEX natural gas futures (25 contracts, settlement date February 26, 2013)   $ 42,368       1.12 %   $ 938,000  
NYMEX natural gas futures (26 contracts, settlement date March 26, 2013)     65,780       1.74       969,800  
NYMEX natural gas futures (24 contracts, settlement date September 26, 2013)     103,080       2.73       931,200  
NYMEX natural gas futures (23 contracts, settlement date October 29, 2013)     18,560       0.49       915,170  
 Total commodity futures contracts   $ 229,788       6.08 %   $ 3,754,170  
                                 

 

The accompanying notes are an integral part of these financial statements.

 

43
 

 

TEUCRIUM NATURAL GAS FUND

SCHEDULE OF INVESTMENTS

December 31, 2011

 

        Percentage of        
Description: Assets   Fair Value   Net Assets        
                         
Cash equivalents                        
Money market funds                        
Dreyfus Cash Management Plus   $ 1,277,159       92.46 %        

 

        Percentage of   Notional
Description: Liabilities   Fair Value   Net Assets   Amount
                         
Commodity futures contracts                        
United States natural gas futures contracts                        
NYMEX natural gas futures (11 contracts, settlement date February 27, 2012)   $ 217,844       15.77 %   $ 331,760  
NYMEX natural gas futures (11 contracts, settlement date March 28, 2012)     161,614       11.70       338,690  
NYMEX natural gas futures (11 contracts, settlement date September 26, 2012)     120,352       8.71       365,420  
NYMEX natural gas futures (10 contracts, settlement date October 29, 2012)     102,630       7.43       347,900  
    $ 602,440       43.61 %   $ 1,383,770  

 

The accompanying notes are an integral part of these financial statements.

 

44
 

 

TEUCRIUM NATURAL GAS FUND

STATEMENTS OF OPERATIONS

(Unaudited)

 

                From commencement of
    Three months ended   Three months ended   Nine months ended   operations (February 1, 2011)
    September 30, 2012   September 30, 2011   September 30, 2012   through September 30, 2011
Income                                
Realized and unrealized (loss) gain on trading of commodity futures contracts:            

 

 

                 
Realized loss on commodity futures contracts   $ (263,121 )   $ (213,080 )   $ (831,009 )   $ (541,020 )
Net change in unrealized appreciation or depreciation on commodity futures contracts     502,151       (112,162 )     832,228       (169,170 )
Interest income     863       68       1,544       1,168  
Total income (loss)     239,893       (325,174 )     2,763       (709,022 )
                                 
Expenses                                
Management fees     5,833       456       5,833       4,084  
Professional fees     655       17,124       2,728       91,744  
Distribution and marketing fees     3,458       11,691       10,046       60,078  
Custodian fees and expenses     1,179       11,758       3,533       64,852  
Business permits and licenses fees     224       743       142       3,895  
General and administrative expenses     1,229       373       4,448       1,945  
Brokerage commissions     213       74       705       532  
Other expenses     294       741       388       3,895  
Total expenses     13,085       42,960       27,823       231,025  
                                 
Net income (loss)   $ 226,808     $ (368,134 )   $ (25,060 )   $ (940,047 )
                                 
Net income (loss) per share   $ 0.76     $ (3.68 )   $ (1.22 )   $ (6.79 )
Net income (loss) per weighted average share   $ 0.76     $ (3.68 )   $ (0.12 )   $ (8.44 )
Weighted average shares outstanding     300,004       100,004       213,143       111,368  

 

The accompanying notes are an integral part of these financial statements.

 

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TEUCRIUM NATURAL GAS FUND

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

        From commencement of
    Nine months ended   operations (February 1, 2011)
    September 30, 2012   through September 30, 2011
Operations                
Net loss   $ (25,060 )   $ (940,047 )
Capital transactions                
Issuance of Shares     2,420,546       5,000,000  
Redemption of Shares     -       (2,239,408 )
Total capital transactions     2,420,546       2,760,592  
Net change in net assets     2,395,486       1,820,545  
                 
Net assets, beginning of period     1,381,367       100  
                 
Net assets, end of period   $ 3,776,853     $ 1,820,645  
Net asset value per share at beginning of period   $ 13.81     $ 25.00  
                 
At end of period   $ 12.59     $ 18.21  

 

The accompanying notes are an integral part of these financial statements.

 

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TEUCRIUM NATURAL GAS FUND

STATEMENTS OF CASH FLOWS

(Unaudited)

 

        From commencement of
    Nine months ended   operations (February 1, 2011)
    September 30, 2012   through September 30, 2011
Cash flows from operating activities:                
Net loss   $ (25,060 )   $ (940,047 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Net change in unrealized appreciation or depreciation on commodity futures contracts     (832,228 )     169,170  
Changes in operating assets and liabilities:                
Collateral, due from broker     676,181       (263,013 )
Interest receivable     (152 )     (14 )
Other assets     (2,570     (142,936 )
Management fee payable to Sponsor     2,867       456  
Other liabilities     (5,892 )     64,236  
Net cash used in operating activities     (186,854 )     (1,112,148 )
                 
Cash flows from financing activities:                
Proceeds from sale of Shares     2,420,546       5,000,000  
Redemption of Shares     -       (2,239,408 )
Net cash provided by financing activities     2,420,546       2,760,592  
                 
Net change in cash and cash equivalents     2,233,692       1,648,444  
Cash and cash equivalents, beginning of period     1,277,159       100  
Cash and cash equivalents, end of period   $ 3,510,851     $ 1,648,544  

 

The accompanying notes are an integral part of these financial statements.

 

47
 

 

NOTES TO FINANCIAL STATEMENTS

September 30, 2012

(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 and Form 10-K/A, as well as the most recent amendment to Form S-1, dated May 1, 2012, as applicable. The operating results from January 1, 2012 through September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

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.

 

48
 

 

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.

 

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.

 

In accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic (“ASC”) 740-10-25-6, “Accounting for Uncertainty in Income Taxes,” 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, 2012 and December 31, 2011.  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, 2012 and 2011 and December 31, 2011.

 

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.

 

49
 

 

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 most recent Amendment to the Form S-1 dated May 1, 2012, 100,000 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 $3,510,851 and $1,277,159 in money market funds on September 30, 2012 and December 31, 2011, 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 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.

 

50
 

 

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,

 

  Subtracting any liabilities, and

 

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 (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 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.

 

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 had waived effective August 1, 2011, for a period to be instituted again at the Sponsor’s discretion, the management fee for this Fund. For the quarter ended September 30, 2012, the Fund recorded a management fee expense of $5,833. As there had been no management fee recorded to date for 2012 prior to the quarter ended September 30, 2012, this represents the nine month expense also. 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. For the period from the commencement of operations (February 1, 2011) through September 30, 2011, the Fund recorded $4,084 in management fees to the Sponsor.

 

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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 $1,700 reduction in expenses for the Fund for the three month and $9,800 for the nine month period ending September 30, 2012. 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

 

52
 

 

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.

 

On September 30, 2012 and December 31, 2011 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.

 

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 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

 

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 implementation of ASU No. 2011-11 will not be adopted prior to January 1, 2013, and we are evaluating the impact on the financial statement disclosures for the Fund.

 

53
 

 

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, 2012 and December 31, 2011:

 

September 30, 2012                
                Balance as of
Assets:   Level 1   Level 2   Level 3   September 30, 2012
Cash equivalents   $ 3,510,851     $ -     $ -     $ 3,510,851  
Commodity futures contracts     229,788       -       -       229,788  
Total   $ 3,740,639     $ -     $ -     $ 3,740,639  

 

December 31, 2011                
                Balance as of
Assets:   Level 1   Level 2   Level 3   December 31, 2011
Cash equivalents   $ 1,277,159     $ -     $ -     $ 1,277,159  
                                 

 

                Balance as of  
Liabilities:   Level 1   Level 2   Level 3   December 31, 2011  
Commodity futures contracts   $ 602,440     $ -     $ -     $ 602,440  
                                 

 

During the period ended September 30, 2012 and from the commencement of operations (February 1, 2011) through September 30, 2011, 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 periods ended September 30, 2012 and from the commencement of operations (February 1, 2011) through September 30, 2011, the Fund had invested only in natural gas 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.

 

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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 tables identify the fair value amounts of derivative instruments included in the statement of assets and liabilities as derivative contracts, categorized by primary underlying risk, at September 30, 2012 and December 31, 2011.  Balances are presented on a gross basis, prior to the application of the impact of counterparty and collateral netting.  Total derivative assets and liabilities are adjusted on an aggregate basis to take into consideration the effects of master netting arrangements and have been reduced by the application of cash collateral receivables and payables with its counterparties. The following tables also identify the net gain and loss amounts included in the statements of operations as realized and unrealized gain on trading of commodity futures contracts, categorized by primary underlying risk, for the nine months ended September 30, 2012, for the three months ended September 30, 2012 and 2011, and for the period from commencement of operations (February 1, 2011) to September 30, 2011.

 

At September 30, 2012, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives     Liability Derivatives     Net Derivatives  
Commodity price                        
Commodity futures contracts   $ 229,788     $ -     $ 229,788  

 

At December 31, 2011, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives     Liability Derivatives     Net Derivatives  
Commodity price                        
Commodity futures contracts   $         -     $ (602,440 )   $ (602,440 )

 

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

 

For the period July 1, 2012 to 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  

 

For the period January 1, 2012 to 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  

 

For the period July 1, 2011 to September 30, 2011

 

    Realized Loss on     Net Change in Unrealized Loss  
Primary Underlying Risk   Derivative Instruments     on Derivative Instruments  
Commodity price                
Commodity futures contracts   $ (213,080 )   $ (112,162

 

55
 

 

For the period from commencement of operations (February 1, 2011) to September 30, 2011

 

    Realized Loss on     Net Change in Unrealized Loss  
Primary Underlying Risk   Derivative Instruments     on Derivative Instruments  
Commodity price                
Commodity futures contracts   $ (541,020 )   $ (169,170

 

 

Volume of Derivative Activities

 

At September 30, 2012, the notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

    Long Exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 3,754,170       98  

 

 

At December 31, 2011, the notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

    Long exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 1,383,770       43  

 

Note 5Financial Highlights

 

The following table presents per unit performance data and other supplemental financial data for the period January 1, 2012 through September 30, 2012 and from commencement of operations (February 1, 2011) through September 30, 2011. This information has been derived from information presented in the financial statements.

 

Per Share Operation Performance for January 1, 2012 through September 30, 2012        
Net asset value at beginning of period   $ 13.81  
Income (loss) 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 (Annualized)        
Total expense     1.50 %
Net investment loss     (1.41 )%

  

56
 

 

Per Share Operation Performance from commencement of operations (February 1, 2011) through September 30, 2011        
Net asset value at beginning of period   $ 25.00  
Income (loss) from investment operations:        
Investment income     0.01  
Net realized and unrealized loss on commodity futures contracts     (4.73 )
Total expenses     (2.07 )
Net decrease in net asset value     (6.79 )
Net asset value at end of period   $ 18.21  
Total Return     (27.16 )%
Ratios to Average Net Assets (Annualized)        
Total expense     14.14 %
Net investment loss     (14.07 )%

 

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 $9,800 reduction in expenses to the Fund for the period January 1, 2012 through September 30, 2012. The Sponsor has waived, for a period to be instituted again at the Sponsor’s discretion, the management fee for this Fund. The Fund did record management fees in the quarter ending September 30, 2012. This waiving of the management fee resulted in an approximate $12,800 reduction in expenses for the Fund for the nine month period 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, 2012 through November 9, 2012, there was nothing to report.

 

57
 

 

TEUCRIUM WTI CRUDE OIL FUND

STATEMENTS OF ASSETS AND LIABILITIES

 

    September 30, 2012   December 31, 2011
    (Unaudited)    
Assets                
                 
Equity in BNY Mellon trading accounts:                
Cash and cash equivalents   $ 1,879,950     $ 4,139,910  
Commodity futures contracts     34,686       116,142  
Collateral, due from broker     171,453       157,791  
Interest receivable     127       215  
Other assets     28,366       48,532  
Total assets     2,114,582       4,462,590  
                 
Liabilities                
                 
Commodity futures contracts     85,959       168  
Management fee payable to Sponsor     1,694       4,658  
Other liabilities     10,341       12,751  
Total liabilities     97,994       17,577  
                 
Net assets   $ 2,016,588     $ 4,445,013  
                 
Shares outstanding     50,002       100,002  
                 
Net asset value per share   $ 40.33     $ 44.45  
                 
Market value per share   $ 40.22     $ 44.58  

 

The accompanying notes are an integral part of these financial statements.

 

58
 

 

TEUCRIUM WTI CRUDE OIL FUND

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

 

        Percentage of    
Description: Assets   Fair Value   Net Assets    
                       
Cash equivalents                      
Money market funds                      
Dreyfus Cash Management Plus   $ 1,879,950       93.22 %     Notional Amount
                       
Commodity futures contracts                      
United States WTI crude oil futures contracts                      
   WTI crude oil futures (8 contracts, settlement date November 20, 2013)   $ 34,686       1.72 %   $ 746,800

 

 

 

             
Description: Liabilities   Fair Value   Percentage of
Net Assets
  Notional
Amount
                         
Commodity futures contracts                        
United States WTI crude oil futures contracts                        
WTI crude oil futures (8 contracts, settlement date November 16, 2012)   $ 27,029       1.34 %   $ 740,480  
WTI crude oil futures (6 contracts, settlement date May 21, 2013)     58,930       2.92       564,720  
Total commodity futures contracts   $ 85,959       4.26 %   $ 1,305,200  

 

 

The accompanying notes are an integral part of these financial statements.

 

59
 

 

TEUCRIUM WTI CRUDE OIL FUND

SCHEDULE OF INVESTMENTS

December 31, 2011

 

        Percentage of    
Description: Assets   Fair Value   Net Assets    
                         
Cash equivalents                        
Money market funds                        
Dreyfus Cash Management Plus   $ 4,139,910       93.14 %     Notional Amount  
                         
Commodity futures contracts                        
United States WTI crude oil futures contracts                        
WTI crude oil futures (14 contracts, settlement date November 16, 2012)   $ 15,839       0.35 %   $ 1,373,540  
WTI crude oil futures (16 contracts, settlement date November 20, 2013)     100,303       2.26       1,516,160  
Total commodity futures contracts   $ 116,142       2.61 %   $ 2,889,700  

 

             
Description: Liabilities   Fair Value   Percentage of
Net Assets
  Notional
Amount
                         
Commodity futures contracts                        
United States WTI crude oil futures contracts                        
WTI crude oil futures (16 contracts, settlement date May 22, 2012)   $ 168       0.00 %   $ 1,591,680  

 

 

The accompanying notes are an integral part of these financial statements.

 

60
 

 

TEUCRIUM WTI CRUDE OIL FUND

STATEMENTS OF OPERATIONS

(Unaudited)

 

                From commencement of
    Three months ended   Three months ended   Nine months ended   operations (February 23, 2011)
    September 30, 2012   September 30, 2011   September 30, 2012   through September 30, 2011
Income                                
Realized and unrealized (loss) gain on trading of commodity futures contracts:                                
Realized (loss) gain on commodity futures contracts   $ -     $ (45,320   $ 43,347     $ 138,549  
Net change in unrealized appreciation or depreciation on commodity futures contracts     119,260       (954,906 )     (167,247 )     (1,120,245 )
Interest income     494       183       1,839       1,601  
Total income (loss)     119,754       (1,000,043 )     (122,061 )     (980,095
                                 
Expenses                                
Management fees     5,097       12,548       21,769       30,606  
Professional fees     (5,168     45,660       10,325       109,439  
Distribution and marketing fees     30,423       29,678       59,611       70,968  
Custodian fees and expenses     (3,947     32,564       60,474       77,871  
Business permits and licenses fees     790       1,913       790       4,624  
General and administrative expenses     4,068       955       4,068       2,310  
Brokerage commissions     207       137       506       448  
Other expenses     102       2,072       352       4,625  
Total expenses     31,572       125,527       157,895       300,891  
                                 
Net income (loss)   $ 88,182     $ (1,125,570 )   $ (279,956 )   $ (1,280,986 )
                                 
Net income (loss) per share   $ 1.76     $ (10.08 )   $ (4.12 )   $ (11.63 )
Net income (loss) per weighted average share   $ 1.76     $ (10.05 )   $ (4.21 )   $ (12.20 )
Weighted average shares outstanding     50,002       111,959       66,425       105,002  

 

The accompanying notes are an integral part of these financial statements.

 

61
 

 

TEUCRIUM WTI CRUDE OIL FUND

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

        From commencement of
    Nine months ended   operations (February 23, 2011)
    September 30, 2012   through September 30, 2011
Operations                
Net loss   $ (279,956 )   $ (1,280,986 )
Capital transactions                
Issuance of Shares     -       6,077,099  
Redemption of Shares     (2,148,469 )     -  
Total capital transactions     (2,148,469 )     6,077,099  
Net change in net assets     (2,428,425 )     4,796,113  
                 
Net assets, beginning of period     4,445,013       100  
                 
Net assets, end of period   $ 2,016,588     $ 4,796,213  
Net asset value per share at beginning of period   $ 44.45     $ 50.00  
                 
At end of period   $ 40.33     $ 38.37  

 

The accompanying notes are an integral part of these financial statements.

 

62
 

 

TEUCRIUM WTI CRUDE OIL FUND

STATEMENTS OF CASH FLOWS

(Unaudited)

 

        From commencement of
    Nine months ended   operations (February 23, 2011)
    September 30, 2012   through September 30, 2011
Cash flows from operating activities:                
Net loss   $ (279,956 )   $ (1,280,986 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Net change in unrealized appreciation or depreciation on commodity futures contracts     167,247       1,120,245  
Changes in operating assets and liabilities:                
Collateral, due from broker     (13,662 )     (1,377,247 )
Interest receivable     88       (39 )
Other assets     20,166       (169,016 )
Management fee payable to Sponsor     (2,964 )     4,327  
Other liabilities     (2,410     95,742  
Net cash used in operating activities     (111,491 )     (1,606,974 )
                 
Cash flows from financing activities:                
Proceeds from sale of Shares     -       6,077,099  
Redemption of Shares     (2,148,469 )     -  
Net cash (used in) provided by financing activities     (2,148,469 )     6,077,099  
                 
Net change in cash and cash equivalents     (2,259,960 )     4,470,125  
Cash and cash equivalents, beginning of period     4,139,910       100  
Cash and cash equivalents, end of period   $ 1,879,950     $ 4,470,225  

 

The accompanying notes are an integral part of these financial statements.

 

63
 

 

NOTES TO FINANCIAL STATEMENTS

September 30, 2012

(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 and Form 10-K/A, as well as the most recent amendment to Form S-1, dated May 1, 2012, as applicable. The operating results from January 1, 2012 through September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

64
 

 

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.

 

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.

 

In accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic (“ASC”) 740-10-25-6, “Accounting for Uncertainty in Income Taxes,” 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, 2012 and December 31, 2011.  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, 2012 and 2011 and December 31, 2011.

 

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.

 

65
 

 

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 most recent Amendment to the Form S-1 dated May 1, 2012, 50,000 represents two Redemption Baskets for the Fund and a minimum level of shares. As of May 18, 2012, the Fund had a minimum number of baskets and 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.

 

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 $1,879,950 and $4,139,910 in money market funds at September 30, 2012 and December 31, 2011, 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 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

 

66
 

 

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,

 

  Subtracting any liabilities, and

 

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. For the period July 1, 2012 through September 30, 2012, the Fund recorded $5,097 in management fees to the Sponsor. For the period July 1, 2011 through September 30, 2011, the Fund recorded $12,548 in management fees to the Sponsor. For the period January 1, 2012 through September 30, 2012, the Fund recorded $21,769 in management fees to the Sponsor. For the period from the commencement of operations (February 23, 2011) through September 30, 2011, the Fund recorded $30,606 in management fees to the Sponsor.

 

67
 

 

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 period July 1, 2012 to September 30, 2012, the expenses paid by the Fund were reduced by approximately $13,500. For the prior period January 1, 2012 through September 30, 2012, the expenses paid by the Fund were reduced by approximately $28,000 and no expenses were paid by the Sponsor for the period from the commencement of operations (February 23, 2011) through September 30, 2011.

 

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.

 

68
 

 

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, 2012 and December 31, 2011, 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 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

 

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 implementation of ASU No. 2011-11 will not be adopted prior to January 1, 2013, and we are evaluating the impact on the financial statement disclosures for the Fund.

 

69
 

 

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, 2012 and December 31, 2011:

 

September 30, 2012

                Balance as of
Assets:   Level 1   Level 2   Level 3   September 30, 2012
Cash equivalents   $ 1,879,950     $ -     $ -     $ 1,879,950  
Commodity futures contracts     34,686       -       -       34,686  
Total   $ 1,914,636     $ -     $ -     $ 1,914,636  
                                 

 

                Balance as of
Liabilities:   Level 1   Level 2   Level 3   September 30, 2012
Commodity futures contracts   85,959     -     $ -     85,959  
                                 

 

December 31, 2011  

                Balance as of
Assets:   Level 1   Level 2   Level 3   December 31, 2011
Cash equivalents   $ 4,139,910     $ -     $ -     $ 4,139,910  
Commodity futures contracts     116,142       -       -       116,142  
Total   $ 4,256,052     $ -     $ -     $ 4,256,052  

 

 

 

                Balance as of
Liabilities:   Level 1   Level 2   Level 3   December 31, 2011
Commodity futures contracts   $ 168     $ -     $ -     $ 168  
                                 

 

During the period ended September 30, 2012 and from the commencement of operations (February 23, 2011) through September 30, 2011, 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, 2012 and for the period from commencement of operations (February 23, 2011) through September 30, 2011, the Fund had invested only in crude oil commodity futures contracts.

 

70
 

 

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 tables identify the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk, at September 30, 2012 and December 31, 2011.  Balances are presented on a gross basis, prior to the application of the impact of counterparty and collateral netting.  The following tables also 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, for the nine months ended September 30, 2012, for the three months ended September 30, 2012 and 2011, and for the period from commencement of operations (February 23, 2011) through September 30, 2011.

 

At September 30, 2012, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives     Liability Derivatives     Net Derivatives  
Commodity price                  
Commodity futures contracts   $ 34,686     $ (85,959   $ (51,273
                         

 

At December 31, 2011, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives     Liability Derivatives     Net Derivatives  
Commodity price                  
Commodity futures contracts   $ 116,142     $ (168 )   $ 115,974  
                         

 

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

 

For the period July 1, 2012 to September 30, 2012

 

    Realized Loss on   Net Change in Unrealized Gain
Primary Underlying Risk   Derivative Instruments   on Derivative Instruments
Commodity price            
Commodity futures contracts   $ -   $ 119,260

 

For the period January 1, 2012 to 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)

 

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For the period from July 1, 2011 to September 30, 2011

 

    Realized Loss on   Net Change in Unrealized Loss
Primary Underlying Risk   Derivative Instruments   on Derivative Instruments
Commodity price            
Commodity futures contracts   $ (45,320 $ (954,906)

 

For the period from commencement of operations (February 23, 2011) to September 30, 2011

 

    Realized Gain on   Net Change in Unrealized Loss
Primary Underlying Risk   Derivative Instruments   on Derivative Instruments
Commodity price            
Commodity futures contracts   $ 138,549   $ (1,120,245)

 

 

Volume of Derivative Activities

 

At September 30, 2012, the notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

    Long Exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 2,052,000       22  

 

 

At December 31, 2011, the notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

    Long Exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 4,481,380       46  

 

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Note 5Financial Highlights

 

The following table presents per unit performance data and other, supplemental financial data for the period January 1, 2012 through September 30, 2012 and for the period from commencement of operations (February 23, 2011) through September 30, 2011. This information has been derived from information presented in the financial statements.

 

Per Share Operation Performance for January 1, 2012 through September 30, 2012        
Net asset value at beginning of period   $ 44.45  
Income (loss) 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 )%

  

 

Per Share Operation Performance from commencement of operations (February 23, 2011) through September 30, 2011        
Net asset value at beginning of period   $ 50.00  
Income (loss) from investment operations:        
Investment income     0.02  
Net realized and unrealized loss on commodity futures contracts     (8.78
Total expenses     (2.87 )
Net decrease in net asset value     (11.63 )
Net asset value at end of period   $ 38.37  
Total Return     (23.26 )%
Ratios to Average Net Assets (Annualized)        
Total expense     9.84 %
Net investment loss     (9.79 )%

  

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.

 

The Sponsor may, at its discretion, pay certain expenses on behalf of the Fund. For the period January 1, 2012 to September 30, 2012, the expenses paid by Fund were reduced by approximately $28,000. No expenses were paid by the Sponsor for the period from the commencement of operations (February 23, 2011) through September 30, 2011.

 

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.

 

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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, 2012 through November 9, 2012, there was nothing to report.

 

74
 

 

TEUCRIUM SOYBEAN FUND

STATEMENTS OF ASSETS AND LIABILITIES

 

    September 30, 2012   December 31, 2011
    (Unaudited)    
Assets                
                 
Equity in BNY Mellon trading accounts:                
Cash and cash equivalents   $ 10,312,750     $ 2,055,369  
Commodity futures contracts     98,350       9,994  
Collateral, due from broker     1,199,600       290,694  
Interest receivable     765       84  
Other assets     55,487       -  
Total assets     11,666,952       2,356,141  
                 
Liabilities                
                 
Payable for shares redeemed     651,218       -  
Commodity futures contracts     355,350       164,663  
Management fee payable to Sponsor     10,342       1,782  
Other liabilities     16,759       3,266  
Total liabilities     1,033,669       169,711  
                 
Net assets   $ 10,633,283     $ 2,186,430  
                 
Shares outstanding     400,004       100,004  
                 
Net asset value per share   $ 26.58     $ 21.86  
                 
Market value per share   $ 26.58     $ 22.06  

 

The accompanying notes are an integral part of these financial statements.

 

75
 

 

TEUCRIUM SOYBEAN FUND

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

 

        Percentage of    
Description: Assets   Fair Value   Net Assets    
                       
Cash equivalents                      
Money market funds                      
Dreyfus Cash Management Plus   $ 9,657,618       90.82 %      
                      Notional Amount
Commodity futures contracts                      
United States soybean futures contracts                      
   CBOT Soybean futures (56 contracts, settlement date November 14, 2013)   $ 98,350       0.92 %   $ 3,747,100

 

 

 

           
Description: Liabilities   Fair Value   Percentage of
Net Assets
  Notional
Amount
                         
Commodity futures contracts                        
United States soybean futures contracts                        
 CBOT Soybean futures (46 contracts, settlement date January 14, 2013)   $ 76,950       0.72 %   $ 3,686,325  
 CBOT Soybean futures (41 contracts, settlement date March 14, 2013)     278,400       2.62       3,206,713  
Total commodity futures contracts   $ 355,350       3.34 %   $ 6,893,038  

 

The accompanying notes are an integral part of these financial statements.

 

 

76
 

 

TEUCRIUM SOYBEAN FUND

SCHEDULE OF INVESTMENTS

December 31, 2011

 

        Percentage of    
Description: Assets   Fair Value   Net Assets    
                         
Cash equivalents                        
Money market funds                        
Dreyfus Cash Management Plus   $ 2,055,369       94.01 %     Notional Amount  
                         
Commodity futures contracts                        
United States soybean futures contracts                        
CBOT Soybean futures (11 contracts, settlement date May 14, 2012)   $ 9,994       0.46 %   $ 669,625  

 

           
Description: Liabilities   Fair Value   Percentage of
Net Assets
  Notional
Amount
                         
Commodity futures contracts                        
United States soybean futures contracts                        
CBOT Soybean futures (12 contracts, settlement date March 14, 2012)   $ 81,898       3.75 %   $ 724,650  
CBOT Soybean futures (13 contracts, settlement date November 14, 2012)     82,765       3.78       782,763  
    $ 164,663       7.53 %   $ 1,507,413  

 

The accompanying notes are an integral part of these financial statements.

 

77
 

 

TEUCRIUM SOYBEAN FUND

STATEMENTS OF OPERATIONS

(Unaudited)

 

            From commencement of
    Three months ended   Nine months ended   operations (September 19, 2011)
    September 30, 2012   September 30, 2012   through September 30, 2011
Income                        
Realized and unrealized gain (loss) on trading of commodity futures contracts:                        
Realized gain on commodity futures contracts   $ 719,250     $ 797,231     $ 148  
Net change in unrealized appreciation or depreciation on commodity futures contracts     (405,038 )     (102,331 )     (308,748 )
Interest income     2,248       3,680       6  
Total income (loss)     316,460       698,580       (308,594
                         
Expenses                        
Management fees     26,362       44,140       -  
Professional fees     (3,351     51,800       -  
Distribution and marketing fees     53,450       115,335       -  
Custodian fees and expenses     10,620       75,041       -  
Business permits and licenses fees     8,560       10,384       -  
General and administrative expenses     14,760       24,042       -  
Brokerage commissions     1,504       2,500       148  
Other expenses     4,830       6,981       -  
Total expenses     116,735       330,223       148  
                         
Net income (loss)   $ 199,725     $ 368,357     $ (308,742 )
                         
Net income (loss) per share   $ 2.18     $ 4.72     $ (3.09 )
Net income (loss) per weighted average share   $ 0.51     $ 1.59     $ (3.09 )
Weighted average shares outstanding     389,950       232,303       100,004  

 

 

The accompanying notes are an integral part of these financial statements.

 

 

78
 

 

TEUCRIUM SOYBEAN FUND

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

        From commencement of
    Nine months ended   operations (September 19, 2011)
    September 30, 2012   through September 30, 2011
Operations                
Net income (loss)   $ 368,357     $ (308,742 )
Capital transactions                
Issuance of Shares     16,116,224       2,500,000  
Redemption of Shares     (8,037,728 )     -  
Total capital transactions     8,078,496       2,500,000  
Net change in net assets     8,446,853       2,191,258  
                 
Net assets, beginning of period     2,186,430       100  
                 
Net assets, end of period   $ 10,633,283     $ 2,191,358  
                 
Net asset value per share at beginning of period   $ 21.86     $ 25.00  
                 
At end of period   $ 26.58     $ 21.91  

 

  

The accompanying notes are an integral part of these financial statements.

 

79
 

 

TEUCRIUM SOYBEAN FUND

STATEMENTS OF CASH FLOWS

(Unaudited)

 

        From commencement of
    Nine months ended   operations (September 19, 2011)
    September 30, 2012   through September 30, 2011
Cash flows from operating activities:                
Net income (loss)   $ 368,357     $ (308,742 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:                
Net change in unrealized appreciation or depreciation on commodity futures contracts     102,331       308,748  
Changes in operating assets and liabilities:                
Collateral, due from broker     (908,906 )     (342,410 )
Interest receivable     (681     (7 )
Other assets     (55,487     -  
Management fee payable to Sponsor     8,560       -  
Other liabilities     13,493       -  
Net cash used in operating activities     (472,333 )     (342,411 )
                 
Cash flows from financing activities:                
Proceeds from sale of Shares     16,116,224       2,500,000  
Redemption of Shares, net of change in payable for shares redeemed     (7,386,510 )     -  
Net cash provided by financing activities     8,729,714       2,500,000  
                 
Net change in cash and cash equivalents     8,257,381       2,157,589  
Cash and cash equivalents, beginning of period     2,055,369       100  
Cash and cash equivalents, end of period   $ 10,312,750     $ 2,157,689  

 

 

The accompanying notes are an integral part of these financial statements.

 

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NOTES TO FINANCIAL STATEMENTS

September 30, 2012

(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 initial 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 and Form 10-K/A, as well as the most recent amendment to Form S-1, dated July 6, 2012, as applicable. The operating results from January 1, 2012 through September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.

 

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.

 

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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.

 

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. In accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic (“ASC”) 740-10-25-6, “Accounting for Uncertainty in Income Taxes,” 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, 2012 and December 31, 2011.  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 period ended September 30, 2012 and December 31, 2011.

 

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.

 

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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 Amendment to the Form S-1 dated July 6, 2012, 50,000 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 $9,657,618 and $2,055,369 in money market funds at September 30, 2012 and December 31, 2011, 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 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

 

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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,

 

  Subtracting any liabilities, and

 

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 (typically 3:00 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 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 period July 1, 2012 to September 30, 2012, the Fund recorded $26,362 in management fees to the Sponsor. For the period from January 1, 2012 through September 30, 2012, the Fund recorded $44,140 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. For an initial period, the Sponsor waived the payment by the Fund of certain expenses. This election was subject to change by the Sponsor, at its discretion. For the period July 1, 2012 to September 30, 2012, this resulted in a reduction of fees to the Fund of approximately $7,500. For the period January 1, 2012 to September 30, 2012, this resulted in a reduction of fees to

 

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the Fund of approximately $11,700. 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

 

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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, 2012 and December 31, 2011, 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.

 

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

 

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 implementation of ASU No. 2011-11 will not be adopted prior to January 1, 2013, and we are evaluating the impact on the financial statement disclosures for the Fund.

 

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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, 2012 and December 31, 2011:

 

September 30, 2012                
                Balance as of
Assets:   Level 1   Level 2   Level 3   September 30, 2012
Cash equivalents   $ 9,657,618     $ -     $ -     $ 9,657,618  
Commodity futures contracts     98,350       -       -       98,350  
Total   $ 9,755,968     $ -     $ -     $ 9,755,968  

 

 

 

              Balance as of
Liabilities:   Level 1   Level 2   Level 3   September 30, 2012
Commodity futures contracts   $ 355,350     $ -     $ -     $ 355,350  
                                 
December 31, 2011                
                Balance as of
Assets:   Level 1   Level 2   Level 3   December 31, 2011
Cash equivalents   $ 2,055,369     $ -     $ -     $ 2,055,369  
Commodity futures contracts     9,994       -       -       9,994  
Total   $ 2,065,363     $ -     $ -     $ 2,065,363  

 

 

 

              Balance as of
Liabilities:   Level 1   Level 2   Level 3   December 31, 2011
Commodity futures contracts   $ 164,663     $ -     $ -     $ 164,663  
                                 

 

During the period 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 period ended September 30 2012, the Fund had invested only in soybean 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 tables identify the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk, at September 30, 2012 and December 31, 2011.  Balances are presented on a gross basis, prior to the application of the impact of counterparty and collateral netting.  The following tables also 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, for the nine months ended September 30, 2012, for the three months ended September 30, 2012, and for the period from commencement of operations (September 19, 2011) through September 30, 2011.

 

At September 30, 2012, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives     Liability Derivatives     Net Derivatives  
Commodity price                  
Commodity futures contracts   $ 98,350     $ (355,350   $ (257,000)  
                         

 

At December 31, 2011, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives     Liability Derivatives     Net Derivatives  
Commodity price                  
Commodity futures contracts   $ 9,994     $ (164,663 )   $ (154,669 )
                         

 

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

 

For the period from July 1, 2012 to 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)  

 

For the period from January 1, 2012 to 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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For the commencement of operations (September 19, 2011) through September 30, 2011

    Realized Gain on     Net Change in Unrealized Loss   
Primary Underlying Risk   Derivative Instruments     on Derivative Instruments  
Commodity price                
Commodity futures contracts   $ 148     $ (308,748

 

 

Volume of Derivative Activities

 

At September 30, 2012, the notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

    Long Exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 10,640,138       143  

 

At December 31, 2011, the notional amounts and number of contracts, categorized by primary underlying risk, were as follows:

 

    Long Exposure  
    Notional     Number  
Primary Underlying Risk   Amounts     of Contracts  
Commodity price                
Commodity futures contracts   $ 2,177,038       36  

 

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Note 5Financial Highlights

 

The following table presents per unit performance data and other supplemental financial data for the period January 1, 2012 through September 30, 2012 and for the period from commencement of operations (September 19, 2011) through September 30, 2011. This information has been derived from information presented in the financial statements.

 

Per Share Operation Performance for January 1, 2012 through 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 (Annualized)        
Total expense     7.47 %
Net investment loss     (7.38 )%

 

Per Share Operation Performance for commencement of operations (September 19, 2011) through September 30, 2011        
Net asset value at beginning of period   $ 25.00  
Income (loss) from investment operations:        
Investment income     -  
Net realized and unrealized loss on commodity futures contracts     (3.09 )
Total expenses     -  
Net decrease in net asset value     (3.09
Net asset value at end of period   $ 21.91  
Total Return     (12.36 )%
Ratios to Average Net Assets (Annualized)        
Total expense     0.16 %
Net investment loss     (0.15 )%

 

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.

 

For an initial period, the Sponsor waived the payment by the Fund of certain expenses. This election was subject to change by the Sponsor, at its discretion. For the period January 1, 2012 to September 30, 2012, this resulted in a reduction of fees to the Fund of approximately $11,700.

 

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, 2012 through November 9, 2012 there was nothing to report.

 

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TEUCRIUM SUGAR FUND

STATEMENTS OF ASSETS AND LIABILITIES

 

    September 30, 2012   December 31, 2011
    (Unaudited)    
Assets                
                 
Equity in BNY Mellon trading accounts:                
Cash and cash equivalents   $ 1,694,285     $ 2,051,003  
Commodity futures contracts     538       -  
Collateral, due from broker     187,245       398,593  
Interest receivable     105       86  
Other assets     35,957       -  
Total assets     1,918,130       2,449,682  
                 
Liabilities                
                 
Commodity futures contracts     60,861       138,198  
Management fee payable to Sponsor     -       1,973  
Other liabilities     1,106       3,262  
Total liabilities     61,967       143,433  
                 
Net assets   $ 1,856,163     $ 2,306,249  
                 
Shares outstanding     100,004       100,004  
                 
Net asset value per share   $ 18.56     $ 23.06  
                 
Market value per share   $ 18.41     $ 22.93  

 

The accompanying notes are an integral part of these financial statements.

 

91
 

 

TEUCRIUM SUGAR FUND

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

        Percentage of    
Description: Assets   Fair Value   Net Assets    
                       
Cash equivalents                      
Money market funds                      
Dreyfus Cash Management Plus   $ 1,694,285       91.28 %      
                       
Commodity futures contracts                     Notional Amount
United States sugar futures contracts                      
   ICE sugar futures (24 contracts, settlement date June 28, 2013)   $ 538       0.03 %   $ 550,771

 

         
Description: Liabilities   Fair Value   Percentage of
Net Assets
  Notional
Amount
                       
Commodity futures contracts                      
United States soybean futures contracts                      
 ICE sugar futures (29 contracts, settlement date April 30, 2013)   $ 33,029       1.78 %   $ 664,541
 ICE sugar futures (27 contracts, settlement date February 28, 2014)     27,832       1.50       642,298
Total sugar futures contracts   $ 60,861       3.28 %   $ 1,306,839
                       

 

 

The accompanying notes are an integral part of these financial statements.

 

92
 

 

TEUCRIUM SUGAR FUND

SCHEDULE OF INVESTMENTS

December 31, 2011

 

        Percentage of          
Description: Assets   Fair Value   Net Assets          
                         
Cash equivalents                        
Money market funds                        
Dreyfus Cash Management Plus   $ 2,051,003       88.93 %        

 

        Percentage of   Notional
Description: Liabilities   Fair Value   Net Assets   Amount
                         
Commodity futures contracts                        
United States sugar futures contracts                        
ICE sugar futures (32 contracts, settlement date April 30, 2012)   $ 82,593       3.58 %   $ 822,528  
ICE sugar futures (27 contracts, settlement date June 29, 2012)     37,908       1.64       682,215  
ICE sugar futures (31 contracts, settlement date February 28, 2013)     17,697       0.77       811,059  
    $ 138,198       5.99 %   $ 2,315,802  

 

The accompanying notes are an integral part of these financial statements.

 

93
 

 

TEUCRIUM SUGAR FUND

STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three months ended
September 30, 2012
  Nine months ended
September 30, 2012
  From commencement of operations (September 19, 2011)
through September 30, 2011
Income                        
Realized and unrealized (loss) gain on trading of commodity futures contracts:                        
Realized loss on commodity futures contracts   $ (80,068   $ (676,378 )   $ (35,682
Net change in unrealized appreciation or depreciation on commodity futures contracts     661       77,875       (46,750 )
Interest income     392       1,541       6  
Total loss     (79,015 )     (596,962 )     (82,426
                         
Expenses                        
Management fees     -       14,055       -  
Professional fees     (7,864     47,286       -  
Business permits and licenses fees     3,369       5,193       -  
Distribution and marketing fees     12,135       74,019       -  
Custodian fees and expenses     (4,000     60,421       -  
General and administrative expenses     5,107       14,389       -  
Brokerage commissions     1,053       3,072       608  
Other expenses     1,455       3,605       -  
Total expenses     11,255       222,040       608  
                         
Net loss   $ (90,270 )   $ (819,002 )   $ (83,034 )
                         
Net loss per share   $ (0.74 )   $ (4.50 )   $ (0.83 )
Net loss per weighted average share   $ (1.12 )   $ (7.37 )   $ (0.83 )
Weighted average shares outstanding     80,711       111,135       100,004  

 

 

The accompanying notes are an integral part of these financial statements.

 

94
 

 

TEUCRIUM SUGAR FUND

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

        From commencement of
    Nine months ended   operations (September 19, 2011)
    September 30, 2012   through September 30, 2011
Operations                
Net loss   $ (819,002 )   $ (83,034 )
Capital transactions                
Issuance of Shares     4,438,390       2,500,000  
Redemption of Shares     (4,069,474 )     -  
Total capital transactions     368,916       2,500,000  
Net change in net assets     (450,086 )     2,416,966  
                 
Net assets, beginning of period     2,306,249       100  
                 
Net assets, end of period   $ 1,856,163     $ 2,417,066  
                 
Net asset value per share at beginning of period   $ 23.06     $ 25.00  
                 
At end of period   $ 18.56     $ 24.17  
                   

 

 

The accompanying notes are an integral part of these financial statements.

 

95
 

 

TEUCRIUM SUGAR FUND

STATEMENTS OF CASH FLOWS

(Unaudited)

 

        From commencement of  
    Nine months ended   operations (September 19, 2011)  
    September 30, 2012   through September 30, 2011  
Cash flows from operating activities:                
Net loss   $ (819,002 )   $ (83,034 )  
Adjustments to reconcile net loss to net cash used in operating activities:                  
Net change in unrealized appreciation or depreciation on commodity futures contracts     (77,875     46,750    
Changes in operating assets and liabilities:                  
Collateral, due from broker     211,348       (260,664 )  
Interest receivable     (19     (6 )  
Other assets     (35,957     -    
Management fee payable to Sponsor     (1,973 )     -    
Other liabilities     (2,156     -    
Net cash used in operating activities     (725,634 )     (296,954 )  
                   
Cash flows from financing activities:                  
Proceeds from sale of Shares     4,438,390       2,500,000    
Redemption of Shares     (4,069,474 )     -    
Net cash provided by financing activities     368,916       2,500,000    
                   
Net change in cash and cash equivalents     (356,718 )     2,203,046    
Cash and cash equivalents, beginning of period     2,051,003       100    
Cash and cash equivalents, end of period &