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Grain futures pools

09/10/2012 @ 10:56am

One of the new players in the grain-futures market caught a lot of attention this  summer, helping to fuel what was already a red-hot drought-driven market.

That new player is Teucrium, a family of investment products that has bundled pools of wheat, corn and soybean futures. These unleveraged, highly-transparent pools have made it easier for investors and speculators outside the agriculture industry to buy direct exposure to the grains.

The most popular, by far, is the corn-futures pool, which trades on the New York Stock Exchange electronic market under the trading symbol CORN. Assets in the pool, called an Exchange-Traded Product (ETP), shot from about $50 million in early June to about $110 million when corn prices peaked later in the summer. Even after corn backtracked a little in August, assets in CORN remained around $100 million.

In contrast, two other Teucrium pools of grain futures have attracted less interest so far. A wheat fund called WEAT stood around $3.1 million in late summer, and a soybean pool named SOYB held about $12 million.

Still, it was an active summer for Teucrium. "The drought effectively doubled our assets under management," said chief investment officer Sal Gilbertie.

He is hoping to attract even more assets due to the unique nature of his ETPs. Gilbertie, a former Cargill energy trader who's been active in the ethanol sector, calls his products "next-generation" ETPs, because they have been modified from some earlier approaches by other commodity-ETP suppliers.

Most notably, the earlier commodity ETPs focused on holding futures mostly from the front months. But Gilbertie argues that there are too many problems with front months, such as contango, backwardation, position limits and deliveries.

So Teucrium spreads its assets across two nearby months and a deferred "anchor" month. "For corn, the anchor month is always December. That's the month that reflects each year's harvest," says Gilbertie.

For WEAT (which holds only Chicago soft wheat futures) the anchor month is December. For SOYB, it's November.

Using CORN as an example, the fund will always hold its anchor month, December. When the nearby December contract is also the second or third month, CORN will hold two Decembers -- the nearby and the deferred. For example, if Dec 2012 is the second month listed on the futures board, CORN is required to hold 35 percent of assets in Dec 2012, 30 percent in March 2013 as the third listed month, and 35 percent in Dec 2013 as the "anchor" month.

Then, during futures-trading hours when old-crop contracts can diverge from new-crop contracts, Teucrium will constantly buy and sell futures to maintain the 35-30-35 mix.

This happens during traditional open-outcry futures-trading hours, which are about two hours shorter than CORN trading hours. CORN starts trading in New York about an hour before futures begin, and CORN continues trading about an hour longer than pit futures. That's important because if corn futures are not trading, investors and speculators anywhere in the world can still put in an order for CORN in New York. And they don't need a futures/margin account to do it, nor do they need a lot of money.

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