FUNDVIEW-Hermes sees corn as top pick; risks to gold, natgas weak

* UK fund Hermes has $35 bln AUM, $2 bln in commodities

* Top pick is corn; natgas weakest, cautious on gold

* Commodities are the ultimate risk insurance

By Nick Trevethan

SINGAPORE, April 6 (Reuters) – Buy corn, sell natural gas
and be wary of gold, was the advice from British asset fund
manager Hermes, for investors looking for the next big thing in
commodity markets.

“The top pick for us and a position we’ve have in our
portfolio for a long time is corn,” said Colin O’Shea, head of
commodities at Hermes, which has $35 billion under management,
and around $2 billion in commodities and energy, speaking on the
sidelines of a conference in Singapore.

“The stocks-to-use ratio in corn is now under 5 percent, the
lowest since 1995/96. In terms of planted acreage we are
expected to go up from 88 million acres to 92 million, which
could help alleviate the tight situation we have, but the ratio
next year is still expected to be low, just below 7 percent.”

He said continued significant demand for ethanol for fuel,
underpinned by high oil prices, would support corn.

“What we are looking for now is some demand destruction in
order to bring prices down, that will probably come first from
the export side. But if we have trendline yields we could have
somewhere around $7-$7.50 for the December contact.”

Currently December corn is trading at $6.45 a bushel
versus the prompt May contract which touched a record high
at $7.70-3/4.


In oil, O’Shea noted a $20 premium associated with the
turmoil in Libya.

“Libya has taken output off line and that has changed global
spare capacity and balances regionally. Before this Saudi was
producing well over 9 million barrels per day (bpd). Spare
capacity has been ramped up now so you are looking at south of 3
million bpd spare capacity.”

“So while prices are high now in the absence of any other
shock, oil is probably at the right level, we don’t really know
what’s going to happen, but that is why you have these
investments — there are the ultimate insurance premium for
geo-political events.”

O’Shea said some 40 percent of assets under management were
in fixed income, and five percent in commodities.


O’Shea was cautious on gold — seen for years as the
ultimate safe haven against political and economic risk, as the
chance of rising interest rates would undermine the zero-yield

“Gold could have potentially a positive price outlook for
the next few months, however now with the spectre of rising
interest rates, you’ll probably see falling gold prices.

“Yes, there are rising inflationary expectations and there
are still some sovereign risk issues but we have moved on now
and there is more risk now of significant downside to gold as we
move towards the backend of the year.”

Spot gold rose to a record high on Wednesday above
$1457 an ounce.


The one market O’Shea saw with the weakest outlook was
natural gas.

Increasing production through shale gas and a rising rig
count in the past year and a half, meant supply was very strong,
he said.

“If we look at where end inventory levels are expected to be
at the end of the summer, they could nearly breech storage

“We got out of jail last year because we had a really hot
summer and quite strong natural gas usage, I think it is
extremely unlikely to have a two standard deviation weather
event for a second year.”

But in the longer term he said things were a lot more
bullish for gas.

“You have a bill in the United States which means a lot of
coal power plants may get shut down, they are exploring
liquefaction… and there could be some litigation about water
contamination from natural gas drilling.”

(Reporting by Nick Trevethan; Editing by Ed Lane)

FUNDVIEW-Hermes sees corn as top pick; risks to gold, natgas weak