Source: Bridge Commodity Research Bureau, Chicago, ILCRB Commodity Index Report, weekly (copyright).

http://www.crbindex.comThe Spot Market Price Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to beamong the first to be influenced by changes in economic conditions. As such, it serves as one early indication of impending changes inbusiness activity.

The commodities used are in most cases either raw materials or products close to the initial production stage which, as a result of dailytrading in fairly large volume of standardization qualities, are particularly sensitive to factors affecting current and future economic forcesand conditions. Highly fabricated commodities are not included for two reasons: (1) they embody relatively large fixed costs which factcauses them to react less quickly to changes in market conditions; and (2) they are less important as price determinants than the morebasic commodities which are used throughout the producing economy.

A spot price is a price at which a commodity is selling for immediate delivery. In the absence of a spot price, a bid or and asked price maybe used. Some of the prices used are nominal prices in that they are not actual transaction prices. Often they are exchange prices - aprice for a completely standard commodity which eliminates the effect of minor quality changes on actual transaction prices? . Tradepublications may use this type of price for commodities such as cocoa beans, coffee, and wool tops. The price for print cloth is an averageof the spot price and price for the most distant forward contract because it was determined that a large part of the sales of print cloth aremade on a contract basis.

The 22 commodities are combined into an "All Commodities" grouping, with two major subdivisions: Raw Industrials, and Foodstuffs. RawIndustrials include burlap, copper scrap, cotton, hides, lead scrap, print cloth, rosin, rubber, steel scrap, tallow, tin, wool tops, and zinc.Foodstuffs include butter, cocoa beans, corn, cottonseed oil, hogs, lard, steers, sugar, and wheat.

The items upon which the index is based are classified further into four smaller groups: Metals, Textiles and Fibers, Livestock andProducts, and Fats and Oils. However, some of the 22 commodities do not fall into one of these four groupings. For example, sugar is notincluded in any special group. Furthermore, the groupings are not mutually exclusive. Lard, for instance, is in both the Livestock andProducts Index and in the Fats and Oils Index.

*Data Sources and Collection Methods

The prices used in the index are obtained from trade publications or from other government agencies. Prices for cocoa beans, corn, steers,sugar, wheat, burlap, copper scrap, cotton, lead scrap, print cloth (spot), rubber, steel scrap, wool tops, and zinc, are of the samespecification and market source as those used in the comprehensive monthly Wholesale Price Index. Prices for butter, hides, hogs, lard,rosin, tallow, and tin are either differently specified spot prices or from different markets.

Exchanges which issue spot prices have committees to make a determination of the spot for the standard commodity.

Selection of Products

The criteria for the selection of commodities were (1) wide use for further processing (basic), (2) freely traded in an open market, (3)sensitive to changing conditions significant in those markets, and (4) sufficiently homogeneous or standardized so that uniform andrepresentative price quotations can be obtained over a period of time.

Subject to these restrictions, efforts were made to include representative sensitive commodities from as large a segment of the economyas possible. Also, the influence of international markets upon the economy was taken into account by the inclusion of some keycommodities (such as crude rubber and tin) which are important in international trade. Both in the sample and in the index structure, anattempt was made to prevent price movements of agricultural products from dominating the movement of the index.

Estimating Procedures

The Spot Market Index is an unweighted geometric mean of the individual commodity price relatives, i.e., of the ratios of the current pricesto the base period prices. The use of the geometric mean has the advantage that the index is not dominated by extreme price movementsof individual commodities. Since extremely large movements may be atypical, it was deemed better to minimize their effects, even at theexpense of losing the effect of large representative changes. However, the fact that each of the commodities is unweighted in the indexmeans that a price change for rosin, a comparatively unimportant commodity such as wheat, cotton, or steel scrap.

The computation procedure involves obtaining for each commodity the ratio of its price in any given period to its price in the base periodand taking the 22nd root of the product of these ratios. This product is then multiplied by 100 to obtain the index number for each period.The calculation is made by means of logarithms. The formula reduces to:

Log I k = Log P k - log P o + 44 / 22

where: I k = Index for a given day P k = Price for a given day P o = Average (geometric) price in base period 44 = Logarithmic constant which when divided by 22 equals log of 100.

Monthly average indexes are obtained according to the previous procedure, except that P k = the geometric average of the Tuesday prices(daily prices prior to 1969) over the month. In maintaining the index over time, it may be necessary by a statistical linking procedure so thatonly actual price movements are reflected in the index.

The geometric mean of n figures is the nth root of their product. Thus, the geometric mean of the numbers 1.5,2.0,and 9.0 is 3.0(1.5*2*9=27. 3 27=3). The arithmetic mean, is 4.2.

Analysis and Presentation

Tuesday spot market indexes and prices are published each week, on the Friday following the day of reference. A summary of weeklyindexes and the average for each month are published with the first weekly release of the following month. Beginning with 1950, historicalindexes are shown for Tuesday of each week together with monthly averages; from July 1946 through 1949 indexes are listed for Tuesdayof each week only. In addition, indexes are published for selected earlier dates: August 15, 1939, December 6, 1941, August 17, 1945, andJune 28, 1946.

Uses and Limitations

A survey of users in 1964 showed that the Index is frequently used as a general economic indicator, for gauging the direction of basisprices, for forecasting general price movements, and for current prices of specific commodities. Other uses, frequently mentioned, are formarket research and for comparing price trends with the users selling or buying prices.

The Tuesday Index of Spot Market Prices differs from the Wholesale Price Index in method of construction and weighting, as well as in thesample of items for which prices are included. While it is independent of the monthly comprehensive index, changes in the Tuesday Indexor its components may foreshadow turns in Wholesale Price Indexes. However, the Tuesday Index is not a good indicator of current pricetrends for the whole economy. For this purpose, the comprehensive Wholesale Price Index should be used. The Tuesday Spot MarketIndex is, by design, very sensitive to price changes in basic commodities but, because of its unweighted structure, the magnitude ofchanges in any of the index groups cannot be used as a reliable measure of the general price change of all commodities within the groups.

For many of the 22 items, the commodity exchange prices are based upon transactions which cover as little as 25 percent of the total soldin all markets. In some cases, the price is set by a committee of experts from the commodity exchange for a standardized commodity.Also, when there are not enough transactions from which to obtain an actual market price, a "nominal" spot price is set. From this, it isapparent that the exchange prices may not always be representative of the large volume of private transactions occurring outside theorganized market. However, it is believed that the reported exchange prices generally are used as a basis for private negotiations.Composition of Grouping Indexes

Metals: Copper scrap, lead scrap, steel scrap, tin, and zinc. Textiles and Fibers: Burlap, cotton, print cloth, and wool tops. Livestock and Products: Hides, hogs, lard, steers, and tallow. Fats and Oils: Butter, cottonseed oil, lard, and tallow. Raw Industrials: Hides, tallow, copper scrap, lead scrap, steel scrap, zinc, tin, burlap, cotton, print cloth, wool tops, rosin, andrubber. Foodstuffs: Hogs, steers, lard, butter, soybean oil, cocoa, corn, Kansas City wheat, Minneapolis wheat, and sugar.

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