Investors need to choose carefully in commodity markets to exploit a rebound as developed economies rebound, Barclays Capital has said, in a note recommending long positions in corn and sugar.

The extent of the revival in commodities demand "could provide an upside surprise to markets over the next few months" as demand in Western markets follows China's higher, the investment bank said.

However, with the extent of rebounds last year leaving many investors wary, making the best of further recovery will prove more tricky than in 2009, when plain vanilla long-only strategies performed well.

'More challenging task'

"A trend that is starting to become apparent is that 2010 is likely to be a year of far more diverse performance among different commodity markets," BarCap analyst Kevin Norrish said.

The hedge fund strategy of playing off a long position in one contract against a short position in a complementary lot expected to underperform was likely to fare considerably better than in 2009, when across-the-board price rises left many funds with flat or negative returns.

"The more diverse set of price outcomes for different markets so far this year appears to be providing an environment in which algorithmic long-short or hedge fund replication strategies are likely to perform much better," Mr Norrish said.

Go long on corn 

Among farm commodities, corn looked the best bet, supported by growing demand from ethanol plants, and by the technical factor that funds had already sold off many of their long positions.

The net long held by managed funds had fallen to 7% of total open interest in corn futures, compared with 20% two months ago.

"We suspect that most of the negative news on the supply side for corn has been priced in following several recent upward revisions to supply projections," Mr Norrish said.

'Substantial deficit'

However, sugar prices which have fallen some 40% since the beginning of February, were also due a recovery "before long".

"Until then, we continue to see considerable upside risk to sugar prices."

The comments follow a similar recommendation on Wednesday from Goldman Sachs.