Teucrium Commodity Trust

In-Depth Review of Teucrium Commodity Trust’s 10-K Filing

Introduction

Teucrium Commodity Trust (TCT) is a unique investment vehicle that offers several series focused on specific agriculture-related commodities such as corn, sugar, soybeans, and wheat. In addition, the Trust has a series called TAGS which is designed to track the combined performance of the individual agricultural funds. This blog post provides an in-depth analysis of the Trust’s 10-K filing, examining its business operations, financial performance, risk factors, and strategic approaches, and offers an overall investment score.

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Business Overview and Structure

Business Model and Fund Structure

Teucrium Commodity Trust, managed by Teucrium Trading, LLC, was established as a Delaware statutory trust. It operates multiple series – the Teucrium Corn Fund (CORN), Teucrium Sugar Fund (CANE), Teucrium Soybean Fund (SOYB), and Teucrium Wheat Fund (WEAT) – and a composite fund, Teucrium Agricultural Fund (TAGS), which tracks weighted exposures to the other individual funds. Each fund is a commodity pool that invests in futures contracts on the Chicago Board of Trade (CBOT) or the Intercontinental Exchange (ICE) to closely track the commodity’s benchmark index. For example, CORN uses a weighted mix of futures contracts (35% second-to-expire, 30% third-to-expire, and 35% of the December contract following the third expiration) to mirror the movements of the Teucrium Corn Index (TCORN).

Management and Sponsor Role

The Sponsor, Teucrium Trading, LLC (and its subsidiary Teucrium Investment Advisors, LLC), is solely responsible for the management and operations of the Trust and each series. They oversee issues ranging from the purchase and sale of shares by authorized purchasers to the management of positions in the futures markets. A distinct aspect of the Trust is its reliance on an external service provider (Align) for IT services and cybersecurity. The strong focus on cybersecurity—highlighted by compliance with NIST standards and real‐time monitoring—speaks to the Trust’s diligence in protecting sensitive and critical operational data.

Financial Performance & Results of Operations

Performance Data and Net Results

Analyzing the financial statements, one notes that the funds have faced significant volatility. For instance, performance data from the Corn Fund indicates a decrease in total net assets over consecutive years. As an example, the Corn Fund’s net loss for the year ended December 31, 2024, was approximately –$10.16 million, compared to better performance in 2023 and 2022. The net asset value (NAV) per share also declined from a higher level in previous years (for example, from $21.61 in 2023 to $18.76 in 2024).

A similar picture emerges with other funds in the Trust. The Soybean Fund also reported a net loss—driven by both unrealized losses on futures positions and reductions in overall asset values. In contrast to mutual funds or diversified equity investments, these funds are highly sensitive to fluctuations in commodity prices, which can be erratic due to weather, production cycles, and geopolitical events. Overall, the Trust’s aggregated performance shows that many of the funds are operating at a loss, thereby reflecting a challenging market environment.

Income Generation & Expense Structure

The Trust aims to generate income through interest on cash equivalents and other short-term investments. However, due to lower asset bases and lower interest rate environments, the net interest yield remains modest. Fee structures are a significant expense for these funds. A management fee of 1% per annum (except TAGS, which does not bear a management fee) is applied and additional costs such as brokerage commissions (charged on a per-trade basis), custodial fees, and other administrative charges further reduce net returns. While certain expenses have been waived by the Sponsor in past periods, these waivers may not be sustainable over prolonged periods of market stress.

Risk Factors and Challenges

Market Volatility and Commodity Price Fluctuations

A dominant theme in the 10-K is the inherent volatility of commodity markets. Corn, soybeans, sugar, and wheat are subject to a multitude of external pressures including weather conditions (droughts, floods, frost), crop disease, shifts in government policy, and global demand-supply imbalances. For example, corn prices can be highly seasonal. Prices dip during the harvest season and peak during the winter/spring periods. This seasonality can lead to significant tracking error if the Fund’s roll strategies (the process used to replace expiring futures contracts with new ones) do not perfectly mirror the underlying spot market movements.

Regulatory and Operational Risks

The Trust is exposed to a considerable degree of regulatory risk. The 10-K describes how the CFTC and other regulatory bodies impose position limits, margin requirements, and aggregation rules that can affect trading strategies. Position limits on futures contracts (for example, the Corn Fund is subject to limits of 1,200 contracts for spot months and around 57,800 for other months) may force the Funds to change their strategies on short notice. The possibility of sudden regulatory changes or the imposition of stricter margin requirements can force unwanted liquidations, thereby increasing losses.

Additionally, the Trust structure itself is not like a traditional mutual fund. It is organized as a series trust, and its operations, including redemption and creation procedures for fund shares, are complex. This complexity presents liquidity risks especially in times of market stress. There is also a potential disconnect between the NAV and the market price of the Shares traded on NYSE Arca, driven by investor sentiment and market inefficiencies.

Counterparty and Liquidity Concerns

Futures trading involves the risk of counterparty default. Although the Trust employs reputable clearing brokers (Marex Capital Markets, Inc. and StoneX Financial Inc.), any failure on the part of an FCM to honor its obligations could lead to significant financial distress for the Funds. Moreover, over-the-counter (OTC) derivatives, such as swaps and forwards that the Funds might utilize, carry additional counterparty credit risks and may be less liquid than exchange-traded futures. Such factors can lead to delays in settlement and even forced liquidations at unfavorable prices. In extreme cases, assets held by the Funds may have to be liquidated rapidly, causing the net asset value to fall dramatically.

Cybersecurity and Operational Resilience

On a more positive note, the 10-K provides a detailed description of the cybersecurity measures that the Trust and its Sponsor have employed. Through a dedicated cybersecurity program and continuous monitoring provided by a third-party vendor (Align), the Trust aims to safeguard its systems against unauthorized access, data breaches, and cyber-attacks. Regular reviews, employee training programs, and robust support protocols add a layer of security, which is critical given the complexity of the Trust’s trading and operational infrastructure. Despite this, the dependence on technology and third-party service providers always leaves room for potential operational disruptions.

Tax and Structural Complications

The Trust is treated as a partnership for federal income tax purposes, meaning that income, gains, and losses are passed through to individual investors. However, this tax transparency also introduces uncertainties. Discrepancies between an investor’s economic gains/losses and their tax allocations might result in unexpected tax liabilities. Moreover, the Trust’s ability to meet certain tax tests (such as the requirement that 90% of income must be qualifying income) has been assumed but is subject to regulatory scrutiny and potential future reclassifications by the IRS.

Market Outlook and Investment Strategy

The Trust employs a quantitative, neutral trading strategy aimed at closely tracking benchmark indices rather than speculating on commodity price movements. In theory, this minimizes directional risk; however, the strategy’s success depends heavily on the smooth functioning of rollover strategies, tight tracking of benchmark futures contracts, and the ability to operate efficiently under regulatory constraints. If markets are in backwardation, the Fund’s roll process might favorably impact returns by allowing the sale of more expensive expiring contracts and the purchase of cheaper ones. Conversely, in conditions of contango, the reverse might negatively impact returns. These dynamics make the investment performance highly sensitive to prevailing market conditions.

Detailed Analysis of Key Challenges

1. Volatility and Tracking Error: The fundamental nature of commodity markets leads to significant price volatility. The Trust’s funds are designed to track benchmark indices using combinations of futures contracts, yet even small mismatches in the roll process can lead to tracking errors. Over time, these errors can compound, resulting in a divergence between the actual performance of the Shares and the underlying commodity spot prices.
2. Regulatory Environment: With the evolving landscape of futures and commodity regulations, there is uncertainty about future policy changes. The Trust is vulnerable to changes in position limits, forced liquidation requirements, and tighter margin constraints, any of which could lead to increased trading costs or forced sales at inopportune times.
3. Liquidity Risk: While the Shares trade on NYSE Arca, there is no guarantee of a liquid market at all times. The creation and redemption mechanisms are limited to authorized participants, meaning that in periods of volatile outflows or when minimum basket levels are reached, investors might find it difficult to exit their positions at fair value.
4. Operational and Counterparty Risk: The reliance on clearing brokers and OTC counterparties introduces credit risk. In a worst-case scenario, a failure by a major clearing broker or counterparty could force the Trust into a situation where it must rapidly liquidate positions, potentially at a loss.
5. Cybersecurity and Technology Risk: Although robust cybersecurity measures are in place, the technological backbone supporting these operations is complex. System failures or cyber-attacks could disrupt trading operations, cause delays in order processing, or even lead to data breaches affecting sensitive financial information.
6. Tax Implications: The partnership tax structure exposes investors to certain tax inefficiencies. Without regular cash distributions, investors might face tax liabilities on income passed through even if they do not receive cash distributions, potentially impacting the total return on investment.

Net Profit or Loss Insight

An important takeaway from the 10-K is that several funds, including the Corn and Soybean funds, have recorded significant net losses in the latest reporting period. For example, the Corn Fund reported a net loss of approximately $10.16 million, and the Soybean Fund also showed a net loss in its operations for the year ended December 31, 2024. These losses, while partly a product of the inherent commodity volatility and market downturns, indicate that even the objective strategies employed by the Trust have not been able to generate positive net returns over the period analyzed.

Investor Considerations

Investors should approach an investment in Teucrium Commodity Trust with caution. The Trust is structured to offer exposure to low-diversified, single-commodity futures markets. This design inherently carries high risks and the potential for significant swings in NAV and market prices compared to more diversified portfolios. The numerous risk factors highlighted by the Trust – from regulatory changes to market volatility, liquidity issues, counterparty risks, and technical challenges – suggest that only investors with a high risk tolerance and a deep understanding of commodity markets should consider an investment in these funds.

Furthermore, while the Trust has implemented robust cybersecurity measures and has a framework for compliance with applicable regulatory requirements, the overall market dynamics and external economic conditions can have a dramatic impact on performance. The potential for changes in benchmark composition, inadequate hedging for adverse market movements, and the reliance on a limited number of key personnel further add to the investment’s complexity.

Conclusion

In summary, Teucrium Commodity Trust represents a niche, high-risk investment vehicle that offers direct exposure to agricultural commodities via futures contracts. The detailed 10-K filing underscores the structural, regulatory, and operational risks inherent in such targeted investments. With significant net losses noted for some funds, declining net assets, and a range of market, liquidity, and technology risks, the Trust is best suited for sophisticated investors who can tolerate considerable volatility and understand the nuances of futures trading and commodity markets.

Given all these factors, from an investment consultant’s perspective, Teucrium Commodity Trust scores around a 4 out of 10 on the investment potential scale. The Trust’s high-risk proposition, volatility, complex structure, and challenging operating environment mean that while there is potential for significant returns in favorable market conditions, the likelihood of consistent, positive returns remains low, and investors are exposed to substantial risk.

Final Thoughts

This 10-K analysis makes it clear that the Trust’s approach is not for the average investor. It is a highly specialized instrument that requires ongoing monitoring and a strong tolerance for risk including, but not limited to, losses arising from rapid changes in commodity prices, regulatory interventions that could force unwanted adjustments in trading strategies, and the combined effects of operational and counterparty risk. Regulatory environments may shift unexpectedly, and market conditions – driven by anything from weather patterns to geopolitical events – can have an outsized impact on performance.

Ultimately, for those with a deep interest in commodity investments and the expertise to assess these risks, the Trust may offer some diversification benefits and the potential for outsized gains under the right conditions. However, from the perspective of risk management and predictability, the investment potential is limited, and caution should be exercised. Investors are advised to consult with their financial and legal advisors to fully understand the implications of an investment in this Trust before committing capital.