When the market goes sour, it’s a splendid time to fall back on investment themes that make sense and good, old-fashioned stock picking. Fewer money managers have better credentials in this arena than Andrew Melnick, a former head of global equity research at Goldman Sachs. These days, as a principal at hedge fund Somerset Capital Advisors, Mr. Melnick is putting his money where his mouth is.

Since last fall Mr. Melnick and his partners have been buying stocks that benefit from higher corn prices. The confluence of rising ethanol production in America and increased protein intake by the Chinese has led to growing demand for corn and, consequently, fatter paychecks for farmers. “Farmers are going to be paying taxes for the first time in generations,” Mr. Melnick says.

Mr. Melnick acknowledges that this idea has been around for some time. “This is not a new story,” he says. “But the trend will, I think, be longer lasting than many people think. This is not a short-term spike we’re looking at.”

There is no doubt that as incomes climb in China, hunger for pork, poultry, and fish climbs, too. Purchases of feedstock for pigs and other animals have skyrocketed in recent years. For instance, the food company CHS reports that protein intake outgrew population by 173 times in China between 1990 and 2005, and that soybean meal consumption over the same period increased 26 times. With so much of China still far behind the country’s economic surge, these trends are expected to last for some time.

Notwithstanding the money he’s made from the ethanol boom, Mr. Melnick is not a huge fan. “The government has mandated this program; we’re not making judgments, but rather, trying to assess the impact. Is it economical? Probably not. Also, the burning of ethanol isn’t helping rein in greenhouse gases.”

Although the stepped-up use of ethanol may have questionable value environmentally, there’s no doubt that it’s been a bonanza for farmers. According to the U.S. Department of Agriculture, the prices received for feed grains and hay have moved dramatically higher in the past year; the annual index (1990-1992 = 100) for 2005 was 95; by May of this year the index stood at 158. Corn prices have sold off in response to weather issues and rising crop levels, but are still way ahead of where they were a couple of years ago. At the end of 2005, corn prices were below $2 a bushel; by early 2007 futures had surged over $4; today the futures price is around $3.40.

The rise in corn prices and in other commodities has significantly bolstered farm sector finances. The USDA reports that net farm income in the 1990s averaged $46.1 billion a year; since 2000 it has come in at nearly $62 billion annually. Rising income has beefed up balance sheets. The debt-to-equity ratio for the farming industry averaged 19% in the early 1990s; today that figure is less than 13%.

As corn prices have risen, farmers have planted more acreage. Steve Leer from Purdue University predicted last year that in 2007 acreage might rival the all-time high of 88 to 89 million acres, set in 1946 when the country was attempting to feed all of Europe.

That’s great news for farm equipmentsupplier Deere& Company (DE $ 117), one of Mr. Melnick’s favorite stocks. The company’s improved outlook has not gone unnoticed; the stock is up 69% year-over-year (compared to an 8.5% gain in the S&P), and is selling only about 10% below its high of $134 set earlier this year. Still, the company has been consistently reporting positive earnings surprises and is today selling at only 14 times next year’s consensus estimate of $8.61.

Another name in this sector is Titan International (TWI $29), which, like Deere, has had a big run over the past three years. The company manufactures wheels and tires used in farm and construction equipment. In the most recent quarter, sales were up 20% and for the first six months hit a record of $437 million. Earnings in the latest quarter were lower, falling short of analysts’ estimates. A higher tax rate appears to have been the culprit; estimates were downgraded for the current year but were unchanged going forward. For next year, the company is expected to earn $1.73, up from 44 cents this year.

Because ethanol cannot be shipped through pipelines, Mr. Melnick and his team have also been investors in railcar company American Railcar Industries (ARII $34). This Missouri-based company manufactures covered hopper and tank railcars and is fairly young, having been founded in 1988. Over the past year the stock is up nearly 19%, but is today selling nearly 22% off its high. Analysts are mixed on the shares, but coverage is increasing, which is a healthy trend. The stock is currently selling at about 12 times next year’s estimated earnings of $2.86, up from $2.28 this year.

The folks at Somerset have also pursued the boom in agriculture by investing in Midwestern banks catering to the farm belt. There are a large number of small and mid-size banks that fit this bill, specializing in trusts and estates, as well as commercial lending. A basket of such names is a reasonable approach to the sector, given that many have market capitalizations of below $1 billion, and are thinly traded.

Of course, the impact of rising corn prices is not all positive. Inflated food costs pinches margins for restaurants and others in the food industry, where Mr. Melnick and his partners have found numerous short-sale opportunities.

Although excitement about ethanol may wane, the double whammy of diet enrichment in China and other developing nations, and the increased use of biofuels seems unlikely to lose speed anytime soon. Though farming-related stocks have indeed outperformed over the past year, there may be more bountiful harvests ahead.

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