Wall Street goes bargain hunting in the farm bill

Money managers, including hedge funds looking to scoop up battered stocks on the cheap, have told their Washington-based consultants to keep close tabs on the farm bill.

High-flying Wall Street financiers hardly seem the sort to follow the mind-numbing farm bill negotiations, which have been swinging from mini-breakthroughs to near-collapse for months.

{mosads}But the talks have grabbed their attention, according to sources in the political intelligence business, because the legislation could prove a boon to ethanol producers, timber companies and farm equipment manufacturers.

“There’s a lot of interest in what might end up in the final bill,” said Mark McMinimy, an analyst with the Stanford Group in Washington. “People are sitting on pins and needles waiting to see what will happen.”

Wall Street investors have long traded on information flowing from Washington. But their hunger has grown in recent years with the hedge fund industry’s boom, making money managers more eager for any tips on legislation or regulatory changes that will give them an edge in the markets.

They are hunting especially for opportunities to bet on a stock likely to fall or rise sharply on a policy action. Businesses heavily concentrated in a sector affected by the policy change are prime targets.

The farm bill has given them plenty of fodder for such investment plays. Moreover, the uncertainty swirling around whether a bill will be enacted this year has intensified Wall Street’s interest because it has made it difficult for markets to discount the impact of the legislation.

House and Senate negotiators have been tangling for months over the bill. Unhappy with the latest proposal from Congress, the Bush administration on Tuesday called for a one-year extension of the current farm program, fueling speculation that there will be no reauthorization passed this year.

Wall Street investors are intensely interested in the energy provisions tucked into the $2.4 billion tax package the Senate attached to its legislation. The tax package has proved controversial in the House, and investors and their consultants are busy trying to handicap its chances of surviving.

Philip L. Fraas, a Washington lawyer who tracks the saga of the legislation on his farmbill2007 blog, says he regularly gets inquiries from people in the financial industry regarding the fate of the energy provisions, which are intended to spur alternative fuels.

Having poured money into ethanol plants during the ethanol boom, many investors are now aching from the ethanol bust. They’ve been burned by a surge in the price of corn, the fuel’s main ingredient, and depressed ethanol prices caused by oversupply.

The tax package contains a two-year extension of the 54-cent per gallon tariff on foreign-produced ethanol that has been crucial for U.S. producers. Without congressional action, the tariff will be lifted at the end of the year.

“Ethanol generally is of huge interest to the market,” said Pete Davis, who runs Davis Capital Investment Ideas. He said his money manager clients were “very concerned” that the tariff could be allowed to expire, opening the floodgates to cheaper Brazilian ethanol.

The ethanol tariff has heavyweight supporters in Congress, such as Sen. Chuck Grassley (Iowa), the top Republican on the Senate Finance Committee.

At the same time, there is lots of money betting on the tariff’s eventual demise. Investors such as billionaire George Soros who have sunk money into Brazilian ethanol stand to profit handsomely from the tariff’s elimination.

“A lot of people are expecting that it won’t be extended,” said Christopher Groobey, a project finance partner at Baker & McKenzie who arranges financing for ethanol plants.

The administration hinted last year that the tariff could be phased out given the growth in the industry. Since then, surging food prices around the world have fanned criticism of federal support for ethanol.

Meanwhile, many investors who sat on the sidelines during the ethanol craze are eager to enter the market at a discount. Stock prices for major producers have sunk to as low as $3 a share from highs in the $40-per-share range in 2006. But with oil prices scraping $120 dollars a barrel, ethanol is a good bet as long as the system of federal price supports and mandates stays in place.

“There are a lot of investors who are interested in the durability of the subsidies because they may want to get in at this price,” said Kevin Book, an analyst at Friedman, Billings, Ramsey.

Another provision in the Senate bill would reduce the current ethanol blenders’ tax credit by five cents to 46 cents per gallon to pay for a boost in incentives for second-generation or cellulosic ethanol. Along with the tariff and the phase-out of the fuel additive MTBE, the blenders’ tax credit helped to spur the ethanol boom.

But Book argues that nicking the credit by five cents will paradoxically help U.S. producers by hurting their competition. That’s because the credit also goes to importers, who use it to offset most of the cost of the 54-cent tariff. Under the provision, they will get less money back.

Investors are also watching a provision in the tax package, named the Tree Act, that would aid the timber industry, which is currently suffering from the housing downturn. The one-year incentive would cut taxes on traditional timber companies like Weyerhaeuser as well as clear up rules surrounding timber real estate investment trusts.

“I get a lot of people asking about legislation who appear to be monitoring it rather than lobbying it,” a Senate tax staffer said about the Tree Act.

Finally, money managers are eyeing a provision to accelerate the write-down of farm equipment purchases that could be a boon to machinery manufacturers like Deere & Company and Caterpillar.

It’s difficult to quantify the impact of these farm bill provisions on share prices, though it could be huge in the case of ethanol tariff extension. The stocks of some of the top publicly traded ethanol producers — VeraSun Energy, Pacific Ethanol and Aventine Renewable Energy — all climbed in anticipation of the Senate’s passage of the farm bill in December.

Book argues that Congress will extend the tariff in the farm bill or in some other vehicle, such as the “extenders” tax bill, by the end of the year. The tariff is “a very powerful way to protect 10 states that produce ethanol and amount to more than 100 electoral votes,” he said.

But that may not be a soothing prospect for many investors. Davis noted that Congress might not take up the extenders bill until a lame-duck session, if it considers it at all this year.

“What’s the market going to do if it gets down to the wire?” he asked.