Edition: U.S. / Global

On the Farm, Fertile Times

Published: February 11, 1996

WHEN the Senate voted last week to phase out farm subsidies, some investors might have assumed the move would depress agricultural stocks. But, while the possible impact would be gradual, Wall Street analysts say such a change would probably turn out to be good news instead.

If legislation ending the subsidies also makes it through the House of Representatives and is eventually signed by President Clinton, the Government will begin dismantling a system that dates back to the 1930's and focuses on key crops like corn, wheat, cotton and rice.

Farmers have received billions of dollars in income annually because of the subsidies. Increasingly, though, the Government has sought to control these outlays with a complicated web of restrictions. The regulations dictate on which land farmers can grow subsidized crops, when acreage must be set aside to reduce output of those crops, and what crops farmers can plant in these fields.

Analysts say the new law may be good news for investors because it wipes out many of the regulations, along with the subsidies. That should increase overall farm output, leading to higher incomes for more efficient farmers. Over the long term, it also means higher revenues for seed, fertilizer, pesticide and equipment companies. Greater production translates as well into more business for giant grain processors like Archer Daniels Midland, and it will keep costs down for big grain consumers like Tyson Foods and the cattle industry.

Still, the bill's impact on the industry would likely be modest compared with other forces like rising demand for American farm products in Asia and Russia. Moreover, grain and fiber reserves are so low that the Department of Agriculture has temporarily dropped most of its land set-aside requirements, the very change the legislation would make permanent. The shortages have also driven up crop prices to their highest levels since the 1970's, so that almost no one is relying on the Government safety net.

"Even under the old rules, this year would be driven by what's going on in the market," said Leonard Teitlebaum, who follows the industry for Merrill Lynch.

The clearest publicly traded beneficiaries of what the Republican sponsors of the Senate bill like to call "freedom to farm" are probably major equipment makers like Deere & Company, the Case Corporation and the Agco Corporation. The more acres that farmers are covering, the faster they wear out tractors, planters and other heavy machinery.

"This is just one more positive," said John E. McGinty, who follows equipment companies for CS First Boston. "It rewards the most efficient farmers, who are also the major buyers of big equipment."

Mr. McGinty rates all the major equipment companies attractive at current prices, in part because investors have been treating them -- mistakenly, he believes -- as though their markets have peaked after strong growth in 1994 and 1995.

The impact on seed companies is trickier to parse. Investors have been bullish for months on the expectation that there would be no restrictions this year on corn planting, whether or not policy changes occur.

They have also been excited by the introduction of new products based on biotechnology. Farmers are expected to happily pay premium prices for corn altered to produce its own insecticide against common pests like the European corn borer. Also reaching the market this year are soybeans engineered to be resistant to common herbicides so that farmers have more flexibility in how they use weedkillers.

Shares of the DeKalb Genetics Corporation had already more than doubled their 52-week low of $27.50 by Feb. 2, when Monsanto announced that it was investing in the seed company and working with it. The news sent the stock even higher, and it closed Friday at $68.875 on Nasdaq. Pioneer Hi-Bred International, the biggest player in the field, jumped $4.50 on Feb. 2, to $55.50, on the Big Board. It closed Friday at $57.25.

Analysts are venturing some opinions on the fate of seed companies if the bill becomes law. If farmers decide to grow less corn as subsidies are withdrawn, for example, the analysts figure that small, privately held seed companies are likely to lose sales before industry leaders do. But ultimately, the impact on seed-company stock prices may be hard to discern, given the influence of forces like new product development and globalization.

Will domestic demand for fertilizer increase? That depends in part on what farmers decide to grow. No matter what, though, the overseas growth prospects are greater for the leading fertilizer companies, like the Potash Corporation of Saskatchewan and IMC Global.

The impact on pesticide and herbicide companies is also subject to many variables and, in any event, is hard to play on Wall Street. Agrichemicals are typically just one part of larger chemical companies like Monsanto, Du Pont, Sandoz, Hoechst and ICI.

Table: "Plow Shares" lists 1995 total stock returns and Friday's close for three agricultural equipment companies that could see more business should the farm bill passed by the Senate last week become law. (Source: Bloomberg Financial Markets)