Obama vs. McCain: Which Candidate is Better for Ethanol and Equipment Companies?

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Includes: AGCO, CAT, CNH, DE, FINGF, GRU, JJG, TMTNF
by: FP Trading Desk

America’s ethanol subsidy program that was fuelled by President Bush’s signing of the Energy Policy Act in August 2005 has been great for heavy equipment companies with exposure to agricultural equipment. Since then, the biofuels push and boost in grain demand that is also being supported by new protein-rich eating habits in emerging economies has driven shares of Deere & Co. (NYSE:DE), AGCO Corp. (NYSE:AG) and CNH Global NV (NYSE:CNH) up more than 100% on average. Industrial equipment names like Caterpillar Inc. (NYSE:CAT), Finning International Inc. (OTCPK:FINGF) and Toromont Industries Inc. (OTCPK:TMTNF) haven’t done quite so well, but are still up closer to 50%.

In a research note, Desjardins Securities analyst Benoit Poirier said:

Companies that cater to farmers and other agricultural buyers have significantly outperformed industrial machinery manufacturers and distributors.

However, he noted that so far in 2008 the downturn has been worse for agriculture stocks than it has been for construction and mining equipment companies.

But with the U.S. presidential election just a few months away, things could change quickly for ethanol and equipment firms. So investors are being advised to watch the outcome closely given the expected impact on ethanol production, grain prices and heavy equipment demand.

Barack Obama is good for corn-based ethanol while John McCain is not, Mr. Poirier told clients.

Among Senator Obama’s decisions that involve ethanol, the analyst highlighted his opposition to import tariffs against Brazilian sugarcane ethanol and his vote in favor of the 2005 Energy Policy Act. But he didn’t attend the Energy Independence and Security Act of 2007 vote, which set out to increase the sale of biofuels and introduce them more into commerce. The presumptive Democratic nominee also recently said:

If it turns out we need to make changes in our ethanol policy to help people get something to eat, that has got to be the step we take.

Meanwhile, Senator McCain asked the Environmental Protection Agency to reduce ethanol production requirements in 2007. He also opposes ethanol subsidies and the barriers to Brazilian exporters, Mr. Poirier said, noting that the Republican candidate therefore presents more risk to the corn-based ethanol industry.

The analyst said:

If he were elected president, he would be able to select a partisan EPS secretary to decide on crucial ethanol policy matters.

So while support for corn-based ethanol has lost some steam as food prices rise and doubts about the benefits it has for reducing greenhouse gas emissions remain, Senator Obama is expected to at least maintain current regulations. If he opts to support ethanol and corn producers further, some of those stocks could have plenty more upside. If Senator McCain is elected, the sector will likely face some disruption.

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