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Derivative Instruments and Hedging Activities (Teucrium Commodity Trust [Member])
 12 Months Ended
Dec. 31, 2012
Teucrium Commodity Trust [Member]
  
Derivative Instruments and Hedging Activities

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 years ended December 31, 2012 and 2011, and from the commencement of operations (June 6, 2010) through December 31, 2010, 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 not necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract.

 

Futures Contracts

 

The Funds are subject to commodity price risk in the normal course of pursuing their investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.

 

The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant ("FCM"). Subsequent payments (variation margin) are made or received by each Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by each Fund. Futures contracts may reduce the Funds' exposure to counterparty risk since futures contracts are exchange-traded; and the exchange's clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.

 

The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM's segregation requirements. In the event of an FCM's insolvency, recovery may be limited to each Fund's pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.

 

The following 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 December 31, 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 years ended December 31, 2012 and 2011, and from the commencement of operations (June 9, 2010) through December 31, 2010.

 

At December 31, 2012, the fair value of derivative instruments was as follows:

 

Primary Underlying Risk   Asset Derivatives   Liability Derivatives   Net Derivatives
Commodity price                        
Corn futures contracts   $ -     $ (2,213,775 )   $ (2,213,775 )
Natural gas futures contracts     9,550       (233,919 )     (224,369 )
WTI crude oil futures contracts     44,872       (58,090 )     (13,218 )
Soybean futures contracts     63,200       (284,575 )     (221,375 )
Sugar futures contracts     -       (78,378 )     (78,378 )
Wheat futures contracts     15,762       (206,850 )     (191,088 )
Total commodity futures contracts   $ 133,384     $ (3,075,587 )   $ (2,942,203 )

 

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 )

 

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

 

For the year ended December 31, 2012

 

    Realized Gain (Loss) on   Net Change in Unrealized (Loss)
Primary Underlying Risk   Derivative Instruments   Gain on Derivative Instruments
Commodity price                
Corn futures contracts   $ 11,440,433     $ (1,430,660 )
Natural gas futures contracts     (828,012 )     378,071  
WTI crude oil futures contracts     (8,348 )     (129,192 )
Soybean futures contracts     26,281       (66,706 )
Sugar futures contracts     (727,394 )     59,820  
Wheat futures contracts     23,740       (120,790 )
Total commodity futures contracts   $ 9,926,700     $ (1,309,457 )

 

For the year ended December 31, 2011

 

    Realized Gain (loss) on   Net Change in Unrealized (loss)
Primary Underlying Risk   Derivative Instruments   Gain on Derivative Instruments
Commodity price                
Corn futures contracts   $ 7,937,425     $ (5,961,334 )
Natural gas futures contracts     (541,020 )     (602,440 )
WTI crude oil futures contracts     (162,359 )     115,974  
Soybean futures contracts     (140,281 )     (154,669 )
Sugar futures contracts     (35,874 )     (138,198 )
Wheat futures contracts     (174,860 )     (70,298 )
Total commodity futures contracts   $ 6,883,031     $ (6,810,965 )

 

For the period from the commencement of operations (June 9, 2010) to December 31, 2010

 

    Realized Gain on   Net Change in Unrealized Gain  
Primary Underlying Risk   Derivative Instruments   on Derivative Instruments  
Commodity price                
Corn futures contracts   $ 3,693,752     $ 5,178,219  

 

Volume of Derivative Activities

 

At December 31, 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   $ 37,724,525       1,142  
Natural gas futures contracts     4,623,670       131  
WTI crude oil futures contracts     2,041,180       22  
Soybean futures contracts     6,629,575       97  
Sugar futures contracts     2,215,270       99  
Wheat futures contracts     3,724,237       93  
Total commodity futures contracts   $ 56,958,457       1,584  

 

 

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