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DBA > SEC Filings for DBA > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for POWERSHARES DB AGRICULTURE FUND

Form 10-Q for POWERSHARES DB AGRICULTURE FUND


6-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This information should be read in conjunction with the financial statements and notes included in Item 1 of Part I of this Quarterly Report (the "Report"). The discussion and analysis which follows may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") which reflect our current views with respect to future events and financial results. Words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "outlook" and "estimate," as well as similar words and phrases, signify forward-looking statements. PowerShares DB Agriculture Fund's (the "Fund") forward-looking statements are not guarantees of future results and conditions and important factors, risks and uncertainties may cause our actual results to differ materially from those expressed in our forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, DB Commodity Services LLC (the "Managing Owner"), undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Overview/Introduction

The Fund seeks to track changes, whether positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess ReturnTM (the "Index") over time, plus the excess, if any, of the Fund's interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund. The Index is intended to reflect the change in market value of the agricultural sector. The commodities comprising the Index are Corn, Soybeans, Wheat, Kansas City Wheat, Sugar, Cocoa, Coffee, Cotton, Live Cattle, Feeder Cattle and Lean Hogs (each an "Index Commodity", and collectively, the "Index Commodities").

The Fund pursues its investment objective by investing in a portfolio of exchange traded futures contracts that expire in a specific month and trade on a specific exchange in the commodities comprising the Index. The Fund also holds United States Treasury Obligations on deposit with the Fund's Commodity Broker as margin.

As of the date of this Report, each of Deutsche Bank Securities Inc., Merrill Lynch Professional Clearing Corp., Newedge USA LLC, Virtu Financial Capital Markets LLC, Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Credit Suisse Securities (USA) LLC, Virtu Financial BD LLC, Knight Capital Americas LLC, Timber Hill LLC, Morgan Stanley & Co. LLC, Jefferies LLC, Nomura Securities International Inc., RBC Capital Markets, LLC, UBS Securities LLC, Cantor Fitzgerald & Co., BNP Paribas Securities Corp., Goldman, Sachs & Co. and Goldman Sachs Execution & Clearing, L.P. has executed a Participant Agreement and are the only Authorized Participants.

The Commodity Futures Trading Commission (the "CFTC") and/or commodity exchanges, as applicable, impose position limits on market participants trading in all eleven commodities included in the Index. If the Managing Owner determines in its commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Fund to gain full or partial exposure to any Index Commodity by investing in a specific Index Contract, the Fund may invest in a futures contract referencing the particular Index Commodity other than the Index Contract or, in the alternative, invest in other futures contracts not based on the particular Index Commodity if, in the commercially reasonable judgment of the Managing Owner, such futures contracts tend to exhibit trading prices that correlate with such Index Commodity. Because the Fund is approaching or has reached position limits with respect to certain futures contracts comprising the Index, the Fund has commenced investing in other futures contracts based on commodities that comprise the Fund's Index and in futures contracts based on commodities other than commodities that comprise the Fund's Index. Please see http://www.dbxus.com with respect to the most recently available weighted composition of the Fund and the composition of the Fund's index on the Base Date.

DBLCI™, DBIQ™ and Deutsche Bank Liquid Commodity Index™ are trademarks of Deutsche Bank AG London (the "Index Sponsor"). Trademark applications in the United States are pending with respect to the Trust, the Fund and aspects of the Index. Any use of these trademarks must be with the consent of or under license from the Index Sponsor. The Trust, the Fund and the Managing Owner have been licensed by the Index Sponsor to use the above noted trademarks. The Index Sponsor is an affiliate of the Trust, the Fund and the Managing Owner.

The notional amount of each Index Commodity included in the Index is intended to reflect the changes in market value of each such Index Commodity within the Index. The closing level of the Index is calculated on each business day by the Index Sponsor based on the closing price of the futures contracts for each of the underlying Index Commodities and the notional amounts of such Index Commodities.


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The Index is rebalanced annually in November to ensure that each of the Index Commodities is weighted in the same proportion that such Index Commodities were weighted on January 18, 1989 (the "Base Date"). The following table reflects the index base weights (the "Index Base Weights") of each Index Commodity on the Base Date:

               Index Commodity               Index Base Weight (%)
               Corn                                           12.50
               Soybeans                                       12.50
               Wheat                                           6.25
               Kansas City Wheat                               6.25
               Sugar                                          12.50
               Cocoa                                          11.11
               Coffee                                         11.11
               Cotton                                          2.78
               Live Cattle                                    12.50
               Feeder Cattle                                   4.17
               Lean Hogs                                       8.33

               Closing Level on Base Date:                   100.00

The following table reflects the Fund weights of each Index Commodity as of June 30, 2014:

              Index Commodity                       Fund Weight (%)
              Corn                                             10.24
              Soybeans                                         11.25
              Wheat                                             4.88
              Kansas City Wheat                                 5.46
              Sugar                                            10.98
              Cocoa                                            11.61
              Coffee                                           15.74
              Cotton                                            2.55
              Live Cattle                                      13.37
              Feeder Cattle                                     4.77
              Lean Hogs                                         9.15

              Closing Level as of June 30, 2014:              100.00

The composition of the Index may be adjusted in the event that the Index Sponsor is not able to calculate the closing prices of the Index Commodities.

The Index includes provisions for the replacement of futures contracts as they approach maturity. This replacement takes place over a period of time in order to lessen the impact on the market for the futures contracts being replaced. With respect to each Index Commodity, the Fund employs a rule-based approach when it "rolls" from one futures contract to another. The Index is comprised of OY Single Commodity Indexes and non-OY Single Commodity Indexes. The Index Commodities that underlie the OY Single Commodity Index are Corn, Soybeans, Wheat, Kansas City Wheat and Sugar (each, an "OY Index Commodity," collectively, the "OY Index Commodities"). The Index Commodities that underlie the non-OY Single Commodity Indexes are Cocoa, Coffee, Cotton, Live Cattle, Feeder Cattle and Lean Hogs. The OY Single Commodity Indexes are rolled to the futures contract which generates the best possible "implied roll yield." The futures contract with a delivery month within the next thirteen months which generates the best possible implied roll yield will be included in each OY Single Commodity Index. As a result, the Fund is able to potentially maximize the roll benefits in backwardated markets and minimize the losses from rolling in contangoed markets.

Rather than select a new futures contract based on a predetermined schedule (e.g., monthly), each OY Index Commodity rolls to the futures contract which generates the best possible "implied roll yield". The futures contract with a delivery month within the next thirteen months which generates the best possible implied roll yield will be included in the Index. As a result, each OY Index Commodity is able to potentially maximize the roll benefits in backwardated markets and minimize the losses from rolling in contangoed markets.

Each of the futures contracts with respect to the Non-OY Index Commodities rolls only to the next to expire futures contract as provided below under "Contract Selection (Non-OY Index Commodities only)".


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In general, as a futures contract approaches its expiration date, its price will move towards the spot price in a contangoed market. Assuming the spot price does not change, this would result in the futures contract price decreasing and a negative implied roll yield. The opposite is true in a backwardated market. Rolling in a contangoed market will tend to cause a drag on an Index Commodity's contribution to the Fund's return while rolling in a backwardated market will tend to cause a push on an Index Commodity's contribution to the Fund's return.

The DBIQ Diversified Agriculture Index™ is calculated in USD on both an excess return (unfunded) and total return (funded) basis.

The futures contract price for each Index Commodity will be the exchange closing price for such Index Commodity on each weekday when banks in New York, New York are open (the "Index Business Days"). If a weekday is not an Exchange Business Day (as defined in the following sentence) but is an Index Business Day, the exchange closing price from the previous Index Business Day will be used for each Index Commodity. "Exchange Business Day" means, in respect of an Index Commodity, a day that is a trading day for such Index Commodity on the relevant exchange (unless either an Index disruption event or force majeure event has occurred).

Contract Selection (OY Index Commodity only)

On the first New York business day (the "Verification Date") of each month, each OY Index Commodity futures contract will be tested in order to determine whether to continue including it in the Index. If the OY Index Commodity futures contract requires delivery of the underlying commodity in the next month, known as the Delivery Month, a new OY Index Commodity futures contract will be selected for inclusion in the Index. For example, if the first New York business day is October 1, 2014, and the Delivery Month of the OY Index Commodity futures contract currently in such Index is November 2014, a new OY Index Commodity futures contract with a later Delivery Month will be selected.

For each underlying OY Index Commodity of the Index, the new OY Index Commodity futures contract selected will be the OY Index Commodity futures contract with the best possible "implied roll yield" based on the closing price for each eligible OY Index Commodity futures contract. Eligible OY Index Commodity futures contracts are any OY Index Commodity futures contracts having a Delivery Month (i) no sooner than the month after the Delivery Month of the OY Index Commodity futures contract currently in such Index, and (ii) no later than the 13th month after the Verification Date. For example, if the first New York business day is October 1, 2014 and the Delivery Month of an OY Index Commodity futures contract currently in the Index is November 2014, the Delivery Month of an eligible new OY Index Commodity futures contract must be between December 2014 and October 2015. The implied roll yield is then calculated and the futures contract on the OY Index Commodity with the best possible implied roll yield is then selected. If two futures contracts have the same implied roll yield, the futures contract with the minimum number of months prior to the Delivery Month is selected.

After selection of the replacement futures contract, each OY Index Commodity futures contract will be rolled as provided in the sub-paragraph "Monthly Index Roll Period with respect to both OY Index Commodities and Non-OY Index Commodities."

Contract Selection (the Non-OY Commodities only)

On the first Index Business Day of each month, a new Non-OY Commodity futures
contract will be selected to replace the old Non-OY Commodity futures contract.
The new Non-OY Commodity futures contract selected is as provided in the
following schedule:



                    Exchange
   Contract         (Symbol)     Jan   Feb   Mar   Apr   May   Jun   Jul   Aug   Sep   Oct   Nov   Dec
   Cocoa           ICE-US (CC)    H     K     K     N     N     U     U     Z     Z     Z     H     H
   Coffee          ICE-US (KC)    H     K     K     N     N     U     U     Z     Z     Z     H     H
   Cotton          ICE-US (CT)    H     K     K     N     N     Z     Z     Z     Z     Z     H     H
   Live Cattle     CME (LC)       J     J     M     M     Q     Q     V     V     Z     Z     G     G
   Feeder Cattle   CME (FC)       H     J     K     Q     Q     Q     U     V     X     F     F     H
   Lean Hogs       CME (LH)       J     J     M     M     N     Q     V     V     Z     Z     G     G




                               Month Letter Codes
                             Month       Letter Code
                             January          F
                             February         G
                             March            H
                             April            J
                             May              K
                             June             M
                             July             N
                             August           Q
                             September        U
                             October          V
                             November         X
                             December         Z


Table of Contents

After selection of the replacement futures contract, each Non-OY Index Commodity futures contract will be rolled as provided in the sub-paragraph "Monthly Index Roll Period with respect to both OY Index Commodities and Non-OY Index Commodities."

Monthly Index Roll Period with respect to both the OY Index Commodities and the Non-OY Index Commodities

After the futures contract selection with respect to both the OY Index Commodities and the Non-OY Index Commodities, the monthly roll for each Index Commodity subject to a roll in that particular month unwinds the old futures contract and enters a position in the new futures contract. This takes place between the 2nd and 6th Index Business Day of the month.

On each day during the roll period, new notional holdings are calculated. The calculations for the futures contracts on the old Index Commodities that are leaving the Index and the futures contracts on the new Index Commodities are then calculated.

On all days that are not monthly index roll days, the notional holdings of each Index Commodity future remains constant.

The Index is re-weighted on an annual basis on the 6th Index Business Day of each November.

The calculation of the Index is expressed as the weighted average return of the Index Commodities.

The CFTC and commodity exchanges impose position limits on market participants trading in all eleven commodities included in the Index.

Under the Fourth Amended and Restated Declaration of Trust and Trust Agreement of the Trust (the "Trust Agreement"), Wilmington Trust Company, the Trustee of the Trust, has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust and the Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.

The Index Sponsor obtains information for inclusion in, or for use in the calculation of, the Index from sources the Index Sponsor considers reliable. None of the Index Sponsor, the Managing Owner, the Trust, the Fund or any of their respective affiliates accepts responsibility for or guarantees the accuracy and/or completeness of the Index or any data included in the Index.

The Shares are intended to provide investment results that generally correspond to the changes, positive or negative, in the levels of the Index over time. The value of the Shares is expected to fluctuate in relation to changes in the value of the Fund's portfolio. The market price of the Shares may not be identical to the net asset value per Share, but these two valuations are expected to be very close.

Margin Calls

Like other futures and derivatives traders, the Fund will be subject to margin calls from time-to-time. The term "margin" has a different meaning in the context of futures contracts and other derivatives than it does in the context of securities. In particular, "margin" on a futures position does not constitute a borrowing of money or the collateralization of a loan. The Fund does not borrow money.

To establish a position in an exchange-traded futures contract, the Fund makes a deposit of "initial margin." The amount of initial margin required to be deposited in order to establish a position in an exchange-traded futures contract varies from instrument to instrument depending, generally, on the historical volatility of the futures contract in question. Determination of the amount of the required initial margin deposit in respect of a particular contract is made by the exchange on which the contract is listed. To establish a long position in an over-the-counter instrument, the counterparty may require an analogous deposit of collateral, depending upon the anticipated volatility of the instrument and the creditworthiness of the person seeking to establish the position. The deposit of initial margin provides assurance to futures commission merchants and clearing brokers involved in the settlement process that sufficient resources are likely to be on deposit to enable a client's position to be closed by recourse to the initial margin deposit should the client fail to meet a demand for variation margin, even if changes in the value of the contract in question, which are marked to market from day to day, continue to reflect the contract's historical volatility. Collateral deposited in support of an over-the-counter instrument serves a similar purpose.


Table of Contents

Once a position has been established on a futures exchange, "variation margin" generally is credited or assessed at least daily to reflect changes in the value of the position, except in certain instances where midday variation margin calls are made. In contrast to "initial margin," "variation margin" represents a system of marking to market the futures contract's value. Thus, traders in exchange-traded futures contracts are assessed daily in an amount equal to that day's accumulated losses in respect of any open position (or are credited daily with accumulated gains in respect of such position). Collateral may move between the parties to an over-the-counter instrument in a similar manner as gains or losses accumulate in the instrument. As with initial margin, variation margin serves to secure the obligations of the investor under the contract and to protect those involved in the settlement process against the possibility that a client will have insufficient resources to meet its contractual obligations. Collateral deposited in support of an over-the-counter instrument serves a similar purpose. Like initial margin (or an equivalent deposit of collateral), variation margin (or an equivalent deposit of collateral) does not constitute a borrowing of money, is not considered to be part of the contract purchase price and is returned upon the contract's termination unless it is used to cover a loss in the contract position. United States Treasury Obligations are used routinely to collateralize OTC derivative positions, and are deposited routinely as margin to collateralize futures positions. The Fund may liquidate United States Treasury Obligations to meet an initial or variation margin requirement.

Position Limits and/or Accountability Levels

The Fund reached its position limits with respect to its futures contracts for Lean Hogs prior to January 2, 2013 and remained subject to such limits through January 8, 2013. The Fund was also subject to these position limits for the periods from February 5, 2013 through February 8, 2013 and February 20, 2013 through March 7, 2013. During each of these periods, the Fund established positions in the next to expire futures contracts for Lean Hogs as proxies and in lieu of the positions as provided by the Index during the corresponding time periods.

Performance Summary

This Report covers the three months ended June 30, 2014 and 2013 (hereinafter referred to as the "Three Months Ended June 30, 2014" and the "Three Months Ended June 30, 2013", respectively) and the six months ended June 30, 2014 and 2013 (hereinafter referred to as the "Six Months Ended June 30, 2014" and the "Six Months Ended June 30, 2013", respectively). The Fund commenced trading on the American Stock Exchange (which became the NYSE Alternext US LLC (the "NYSE Alternext")) on January 5, 2007, and, as of November 25, 2008, is listed on the NYSE Arca, Inc. (the "NYSE Arca").

Performance of the Fund and the exchange traded Shares are detailed below in "Results of Operations". Past performance of the Fund and the exchange traded Shares are not necessarily indicative of future performance.

The Index is intended to reflect the change in market value of the Index Commodities. In turn, the Index is intended to reflect the agriculture sector. The DBIQ Diversified Agriculture Index Total Return™ (the "DBIQ Diversified Agriculture TR™") consists of the Index plus 3-month United States Treasury Obligations returns. Past Index results are not necessarily indicative of future changes, positive or negative, in the Index closing levels.

The section "Summary of DBIQ Diversified Agriculture TR™ and Underlying Index Commodity Returns for the Three Months Ended June 30, 2014 and the Six Months Ended June 30, 2014 and the Three Months Ended June 30, 2013 and the Six Months Ended June 30, 2013" below provides an overview of the changes in the closing levels of the DBIQ Diversified Agriculture TR™ by disclosing the change in market value of each underlying component Index Commodity through a "surrogate" (and analogous) index plus 3-month United States Treasury Obligations returns. Please note also that the Fund's objective is to track the Index and the Fund does not attempt to outperform or underperform the Index. The Index employs the optimum yield roll method (only with respect to the OY Index Commodities) with the objective of mitigating the negative effects of contango, the condition in which distant delivery prices for futures exceed spot prices, and maximizing the positive effects of backwardation, a condition opposite of contango.

Summary of DBIQ Diversified Agriculture TR™ and Underlying Index Commodity

Returns for the Three Months Ended June 30, 2014 and the Six Months Ended June 30, 2014

and the Three Months Ended June 30, 2013 and the Six Months Ended June 30, 2013

                                                           AGGREGATE RETURNS FOR INDICES IN THE
                                                             DBIQ DIVERSIFIED AGRICULTURE TR™
                                       Three Months          Three Months           Six Months           Six Months
                                          Ended                  Ended                Ended                Ended
                                         June 30,              June 30,             June  30,            June  30,
Underlying Index                           2014                  2013                  2014                 2013
DB Corn Indices                               (14.65 )%              (5.09 )%             (5.54 )%            (14.77 )%
DB Soybean Indices                             (2.52 )%               0.05 %               1.98 %              (3.86 )%
DB Wheat Indices                              (17.57 )%              (6.23 )%             (6.24 )%            (18.35 )%


Table of Contents
                                                        AGGREGATE RETURNS FOR INDICES IN THE
                                                          DBIQ DIVERSIFIED AGRICULTURE TR™
                                     Three Months          Three Months          Six Months          Six Months
                                        Ended                 Ended                Ended               Ended
                                       June 30,              June 30,            June  30,           June  30,
Underlying Index                         2014                  2013                 2014                2013
DB Kansas City Wheat Indices                (10.55 )%              (5.88 )%             6.39 %            (18.66 )%
DB Sugar Indices                             (4.45 )%              (6.29 )%             3.56 %            (15.96 )%
DB Cocoa Indices                              5.28 %               (1.30 )%            14.20 %             (4.24 )%
DB Coffee Indices                            (4.11 )%             (15.14 )%            51.76 %            (20.78 )%
DB Cotton Indices                           (13.84 )%              (7.28 )%            (5.40 )%             8.09 %
DB Live Cattle Indices                        9.45 %               (1.96 )%            17.92 %             (7.03 )%
DB Feeder Cattle Indices                     18.54 %               (1.60 )%            24.87 %            (11.11 )%
DB Lean Hogs Indices                         (0.54 )%               8.26 %             31.21 %             (1.79 )%

AGGREGATE RETURNS                            (2.82 )%              (3.71 )%            13.41 %            (10.49 )%

If the Fund's interest income from its holdings of fixed income securities were to exceed the Fund's fees and expenses, the aggregate return on an investment in . . .

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