Benchmark index sees massive overhaul

It’s a bit of a shock when a familiar, old friend undergoes an extreme makeover, but that’s exactly what’s happened to the Reuters Commodity Research Bureau Futures Price Index, or the CRB index for short.

Effective June 20, the CRB Index, one of the world’s best-known and most-cited benchmarks of the commodity futures market, was completely redesigned and renamed the Reuters/Jefferies CRB Index.

The updated name reflects a new collaboration between Reuters, the global information company, and Jefferies Financial Products, a provider of commodity-related products for institutional investors and a subsidiary of Jefferies Group, a New York-based merchant bank and securities firm.

Real-time data for the Reuters/Jefferies CRB has been available since June 20 under the same CRB trading symbols as before.

Futures contracts on the redesigned CRB Index will begin trading in the New York Board of Trade index marketplace on July 11, with the first listed month of September 2005.

Effective with this introduction, the Reuters/Jefferies CRB futures will list four months on a quarterly cycle: March, June, September and December.

Options on the new CRB Index will begin trading on July 12.

The Reuters/Jefferies CRB contract will also feature a multiplier of US$200 times the index, down from US$500 in the old Reuters CRB contract.

While this was the tenth revision to the CRB Index since its inception in 1957, in the words of the Commodity Research Bureau, this latest change is the “most significant revision in its near fifty-year history.”

Originally, the CRB Index was weighted heavily toward agricultural commodities and comprised 28 components: barley, cocoa, coffee “B”, copper, cotton, spot cotton, cottonseed oil, eggs, flaxseed, grease wool, hides, lard, lead, oats, onions, potatoes, rubber, rye, soybeans, soybean meal, soybean oil, sugar #4, sugar #6, wheat, spot wheat, wool tops, and zinc.

However, as the years passed, the index was broadened again and again to include more commodities, especially energy.

Skipping forward to earlier this year, the CRB index had 17 components, all with equal weighting (i.e. 5.88%): cocoa, coffee “C”, copper, corn, cotton, crude oil, gold, heating oil, live cattle, live hogs, natural gas, orange juice, platinum, silver, soybeans, sugar #11, and wheat.

The new Reuters/Jefferies CRB Index adds three new commodities (aluminum, nickel and unleaded gas) and drops off one (platinum) for a total of 19 commodities.

What makes the change so drastic is that the new CRB index no longer weights the components equally. Rather, the initial weightings are as follows, in descending order: WTI crude oil (23%); heating oil (5%); unleaded gas (5%); natural gas (6%) corn (6%); soybeans (6%); live cattle (6%); gold (6%); aluminum (6%); copper (6%); sugar (5%); cotton (5%); cocoa (5%); coffee (5%); nickel (1%); wheat (1%); lean hogs (1%); orange juice (1%); and silver (1%).

Moreover, the weightings will be adjusted monthly based on a commodity’s “significance” and trading liquidity.

Obviously, this begs the question, Who determines the weightings and what agendas will they have in their decision?

We’ve already seen how the U.S. government has spun such benchmarks as the Consumer Price Index (CPI), the Producer Price Index (PPI), and unemployment statistics in order to smoothe away any cause for alarm amid the general public.

Who can confidently predict that the caretakers of the new CRB index won’t come under similar pressure to hide soaring commodity prices that will result from a sinking greenback or other major currency?

The Commodity Research Bureau has commented in the past about the virtues of the old CRB Index: “from a pricing point of view, equal weighting is attractive because no single month or commodity has undue impact on the Index. This makes it harder to manipulate the Index (our emphasis) and means that the Index is less subject to the discontinuities associated with temporary supply and demand imbalances in any one month or commodity.”

Old-school CRB fans need not despair too much, though: the Reuters CRB Index has been renamed the “Continuous Commodity Index” and made available for trading since June 20 under the symbol “CI.”

All outstanding open positions in the old index were rolled into the new CCI product and now trade under the symbol “CR.” The exchange will continue to list new months for the Continuous Commodity Index for the foreseeable future.

In the coming years, it will pay to keep an eye on the Continuous Commodity Index and compare it with the performance of the Reuters/Jefferies CRB Index. If they start to diverge significantly, with the new index lagging the old, it could be a signal that the new CRB Index is being fiddled with by those who want to dampen signs of commodity price strength.