High crop prices and tight global grain supplies fuel a bullish outlook for the agricultural economy next year, signaling a windfall for makers of farm equipment, fertilizer and animal feed, investment manager Joe Dancy said.
Grain prices likely will be “substantially” higher in 2011 as rising demand outpaces production, driving food inflation globally, said Dancy, who manages LSGI Venture Fund L.P. The potential for shortages may lead to a repeat of the crises of 2008, when food riots broke out in some countries, he said.
Drought in Russia earlier this year slashed production from one of the world’s top wheat exporters, while in the U.S., corn supplies are expected to decline to a 15-year low following a disappointing harvest.
“We’re going to need a record harvest to turn that around, to even stabilize it,” Dancy said in an interview today, referring to shrinking grain supplies. “Even if we have a normal harvest, (supplies) are going to drop. We’re going to need more grain.”
Corn prices, which earlier this week reached the highest levels in more than two years, may spike to $7 to $8 a bushel next year, Dancy said.
Part of Duncanville, Tex.-based LSGI Advisors Inc., the LSGI Venture Fund has about $10 million under management. The fund has gained about 36 percent this year, primarily by investing in small-capitalization energy and agriculture stocks, Dancy said. By comparison, the Standard & Poor’s 500 Index is up 13 percent.
Equipment companies are poised to cash in on surging farm incomes, Dancy said. He said he’s been buying shares of Art’s Way Manufacturing Co., an Armstrong, Ia.-based maker of grinder-mixers, sugar beet harvesters and other machines.
Art’s Way revenue was up 18 percent during the first nine months of this year, and Dancy says revenue may rise another 20 percent to 25 percent in 2011.
“In this environment, agricultural equipment manufacturers should perform extremely well,” Dancy said. U.S. farm equipment in the U.S. are “booming,” and “more capital will be required to increase grain production. Record farm incomes mean equipment is affordable.”
“While rising prices for food and energy are a global problem, the U.S. farm sector is a major beneficiary of these trends,” Dancy said.
Dancy has also bought shares of Balchem Corp., an animal health and nutrition supplier based in New Hampton, N.Y.
“The ag sector is so attractive” for investors, Dancy said.
Corn, wheat and soybeans are among many commodities that soared this year amid tightening supplies and an improving global economy.
An index of agricultural commodities tracked by Dow Jones & Co. was up 37 percent this year through yesterday, propelled by gains in soybean meal prices (up 37 percent), soybeans (up 32 percent) and corn (up 29 percent).
Still, grain and livestock prices lagged several other commodities this year. A Dow Jones cotton index was up nearly 92 percent through yesterday, while silver and coffee rose 80 percent and 66 percent, respectively.
The broader Dow Jones-UBS Commodities Index, which tracks prices for nearly two-dozen products, is up 15 percent so far this year.