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.

The bullish corn outlook translates into to increasing concern among livestock producers, however. "Hog profits took a sizeable hit in November as prices fell and costs rose," according to Steve Meyer and Len Steiner, CME Daily Livestock Report authors. "Average Iowa farrow-to-finish operations lost $20.70 per head in November, the largest monthly loss figure since November 2009. Our model suggests that producers will lose another $10 or so for each hog sold in December, bringing average returns for 2010 to $10.25/head."

"Projections for 2011 are still positive — but barely so at $1.68 per head," write Meyer and Steiner. "That number goes quite a ways in explaining this week’s Hogs and Pigs inventories that show very little change on the horizon."

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.

“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.