BAY STREET-Grain rally points to gains for Canada farm plays

* Machinery dealers, farm tech companies seen gaining

* Grain handlers would be winners with higher prices

* Could put pressure on processors and millers (In U.S. dollars unless noted)

By Rod Nickel

SASKATOON, Saskatchewan, May 31 (Reuters) - A rally in grain and oilseed prices will likely give a further boost to shares of Canadian companies that provide farmers with everything from fertilizer to tractors.

That's welcome news for a sector of the stock market that was hammered by shockwaves from the global financial crisis, which knocked grain prices from record highs and prompted many farmers -- no strangers to boom and bust cycles -- to rethink spending plans.

"The question is, where does the farmer spend his money when he's feeling better about the grains?," said Robert Winslow, an analyst with Wellington West Capital Markets.

"If grain prices are trending higher, the ag stocks will in general move higher as well."

Winslow said potential winners include farm technology providers like Hemisphere GPS (HEM.TO).

He also likes Ag Growth Income Fund AFN_u.TO, a maker of grain augers and bins, which serves overseas markets where demand is especially sensitive to moves in grain prices.

While last year's highs are still far off, benchmark July futures prices of spring wheat MWEN9 and canola RSN9, Canada's two largest crops, have jumped 28 percent and 9 percent respectively since March 30.

Farmers used to the stomach-churning highs and lows of grain prices had reined in discretionary spending. But a rare second straight year of good prices could pry open their wallets again, analysts said.

What's unusual about the latest round of high prices is they buck the agriculture trend of prices falling to exaggerated lows from high points, said Brian Oleson, chair of the University of Manitoba's agribusiness department.

"This is incredibly healthy, rather than going through that cycle," he said.

That health, many industry experts say, will spread to farm-dependent companies if grain prices remain buoyant.

Viterra (VT.TO), Canada's largest grain handler, is a double winner, Oleson said. Higher prices and the resulting rise in margins will give farmers incentive to plant big crops -- which is significant for a volume-based business like grain-handling.

The Saskatchewan-based firm was confident enough in its own prospects to recently offer to buy Australia's ABB Grain Ltd ABB.AX in a $1.2 billion share and cash deal. [ID:nNSYD33174]

POTASH DEALS KEY

Farm machinery dealers have also felt a slowdown in farmer spending, but that's about to change, considering 2008 farm net income rose sharply in two of three Prairie provinces, said analyst David Pupo of Macquarie Research.

Sales from existing retail outlets should rise for machinery dealers Cervus LP CVL_u.V and Rocky Mountain Dealerships (RME.TO), he wrote in a note to clients.

One area still in question is fertilizer, which many farmers held off buying last year after prices rose.

Major Canadian producers like Potash Corp of Saskatchewan (POT.TO) and Agrium (AGU.TO) stand to gain the most, but much still depends on whether North American farmers will like the benchmark price established when India and China negotiate new supply agreements.

"Definitely, that's a big shoe to drop," said Joel Jackson, a fertilizer industry analyst with BMO Capital Markets.

The commodity price rally is not good news for all stocks. Companies that rely on grains and oilseeds as key ingredients in their products -- from bread to biofuel -- are more likely to cringe than cheer.

Analysts say that with government in its corner, the biofuel industry may be well-positioned to handle higher input costs. Canada's biofuel mandate takes effect next year, virtually ensuring demand.

But high grain prices come at a particularly difficult time for food stores and processors, such as Canada Bread (CBY.TO), which is mostly owned by Maple Leaf Foods (MFI.TO).

The recession is pressuring retailers -- and by extension processors and millers -- to lower prices, but commodities are pushing in the opposite direction.

Maple Leaf may not feel the impact right away. Much of the grain it buys is still under contract at the record levels that preceded the grain price decline and now rebound, said Robert Gibson, an analyst with Octagon Capital.

"If the commodity prices had stayed down, they would eventually bring their prices (for store products) down. But because commodities are going up, they'll at least keep prices where they are and, depending where the commodity goes, may have to increase their prices." (Editing by Jeffrey Hodgson and Rob Wilson)