Case Study: Gro Drought Index Presents Signals for Profitable Trades

Gro has produced a new report detailing the strong linear relationship between the Gro Drought Index (GDI) and the prices of agricultural commodities. The report highlights two case studies where the GDI, a proprietary, fully automated index of drought conditions worldwide, presented signals for profitable trades: US hard red winter (HRW) wheat and US cotton. This same analysis can be applied to Gro Intelligence’s offering across more than 40 commodities and all regions worldwide. 

Drought has a significant impact on global agricultural production, from abandoned acres (the amount of land that is unable to be harvested) to final yields. These factors can lead to increased volatility in commodity prices. As extreme weather continues worldwide, monitoring and accurately quantifying hot and dry conditions can help quantitative teams, including systematic and fundamental equity investors, to stay ahead of major commodity market movements.

In the first case study, Gro looked at the relationship between average monthly GDI and the average monthly price of HRW wheat and found a significant linear relationship between the two variables with an R² of 0.74. This is important for investors, as it suggests a strong likelihood that GDI represents a meaningful indicator for fundamentally and systematically investing in the underlying commodity.  

In the report’s second case study, Gro analyzed the correlation between GDI versus both abandoned acres and final yield for US cotton. In July, for example, GDI and abandoned acres in cotton-growing regions in Texas (where approximately 50% of US production comes from) had an R² of 0.74. With respect to final yield, GDI had an R² of 0.61, again indicating a strong linear relationship. 

Every year, the USDA National Agricultural Statistics Service (NASS) releases its projected harvest acres for US cotton starting in August. As early as March, however, the Gro Drought Index can provide an early assessment of the potential for abandoned acres in a growing region, down to the county level. 

Download the full report to learn more about how Gro’s offering can serve as a high-signal indicator to be used as the basis for a new trading system or as an enhancement to an existing one. 

Contact the Gro team to learn more about how your team can leverage Gro’s data and analytics.