Grain prices seen extending gains on U.S. drought

LONDON (Reuters) - UK-based asset manager Cardwell has been betting on rising grain prices in recent weeks and plans to stick with that position as long as its computer models signal that prices have further to climb as a U.S. drought hurts crop forecasts.

Although agricultural commodities had been been out of favour with investors for a year, adverse weather conditions over the past month in major grain-growing countries such as the United States and Russia have lifted prices in the wheat and corn markets.

"We are long (agriculture) in pretty much every style of system; this has been a very aggressive break on the upside," said Barnaby Cardwell, chief executive of Cardwell, an independent managed futures firm.

The upward shift follows a period of about 18 months when investing in the agriculture sector was tricky.

"There had been no sustained trends and some erratic behaviour, but in the last few weeks we have seen some big moves in corn, wheat and soya. There's a big trend forming," Cardwell said.

A prolonged drought in the U.S. corn belt and floods in Russia's southern wheat export region have pushed grain markets to fresh highs this week due to worries about global supply.

The benchmark front-month corn contract hit $7.86 a bushel on Monday, leaping from $5.51 at the start of June, while spot-month soybeans rose to $16.79 a bushel from $13.17 on June 1.

Weekly crop ratings from the U.S. Department of Agriculture (USDA) late on Monday confirmed a sharp deterioration in the state of corn and soy crops.

The Cardwell Global Fund, which has some $22 million under management, uses computer models to determine its positions, including both trend-following strategies with a maximum duration of 30 days and shorter-term systems.

HIGH VOLATILITY

It is up 0.63 percent in the year to the end of June, while the Barclay CTA index, a popular benchmark for managed futures funds, is up 0.32 percent at July 10.

The fund invests 25 to 30 percent of its assets in commodities futures and the rest in equity indexes, currencies and interest rates.

High levels of volatility mean its short-term strategies have showed the best performance in recent weeks.

"Also, reacting to intraday large price moves has proved particularly profitable in oil and grains," said Cardwell. "The large move on the last day of last month was particularly good in the oil market if you traded a shorter-term system."

Brent futures rose almost $6 on the last trading day in June after falling through April and May.

Industrial metals have also been falling, reflecting concerns about slowing economic growth, so the fund is beginning to look at getting into short trades there.

"They're all playing this slowdown trade," Cardwell said. "Copper, aluminium and zinc are all coming off - there's still a lot of correlation out there."

Gold has been very volatile over the past two months, frustrating funds that rely more on longer-term trend-following systems. Cardwell said his fund's shorter-term systems had had a profitable run, however.

"Each day gold seems to hold to one direction, so our range-break systems are doing well. We have no medium-term positions in gold as it has been whipsawing around," he said.

The range-break systems suggest intraday trades, which are often exited towards the end of the trading day. They are based on a break from the early range of trading or on a specific amount of movement from the open.

(editing by Jane Baird)