Alimentation, agriculture, engrais et facteurs ESG – thèmes abordés lors de la 19e conférence annuelle sur les marchés agricoles de BMO : recherche sur les actions de BMO

Disponible en anglais seulement.

Camilla Sutton:

The state and outlook for agricultural commodities technology, inflation, water, and how all these themes all tie into equities, provided the foundation for the content of our 19th annual Farm to Market Conference and it is what is ahead for you on today's edition of our BMO IN Tune Podcast. I'm Camilla Sutton, Head of Equity Research for Canada in the U.K. and today you're in for a treat as we are joined by for over Equity Research analysts: Joel Jackson, Fertilizers and Chemicals analyst; Kelly Bania, Food Retailers and Distribution analyst; Doug Morrow, ESG Strategist; and Andrew Strelzik, Food and Agribusiness analyst. Joel and Andrew, why don't we kick it off with you? Can you walk me through the biggest takeaways from investors from the 19th Farm to Market conference.

Joel Jackson:

Thanks, Camilla. I think the biggest takeaway that I saw was really optimism we haven't seen in a while. This optimism came from better crop prices, better data points on the Ferts, and there's a bit of hesitation on crop chems in Q2. But you know, putting that together on crop prices, we've definitely seen tougher weather in Brazil and the Midwest, we're getting now weather-related premiums being built into crop prices. That's allowed farmers to sell some old inventories of grains, making farmers a bit more positive. On the fertilizers, we're definitely seeing a lot of different data points around the world. That's really let fertilizer prices start to autumn and come back. That's giving optimism. But definitely, you know, investors are a little bit concerned on crop chems being a little bit worse in Q2 than expected just a few weeks ago. And that's because of the poor weather that maybe will lead to less demand in the second quarter.

Camilla Sutton:

Andrew, what about from your side?

Andrew Strelzik:

Thanks, Camilla. You know, I think the biggest takeaway on my side was the few areas of fundamental strength that we're seeing across the space. If you rewind, a year ago, we were coming off several years of very strong ag fundamentals, record profitability in some cases, but now we've seen a dramatic shift where the earnings environment has normalized, we're seeing more strength out of some of the protein areas, including chicken, prepared foods in some cases, beef outside of the U.S., but really not a lot of areas of fundamental strength. There is some optimism moving forward as we get policy changes around biofuels and some of the opportunities that that will create, but as we sit here today, and over the next several months, the thing that really struck me was what was the fewer areas of fundamental strength relative to the same time last year.

Camilla Sutton:

Thanks, Andrew. Kelly, your takeaways?

Kelly Bania:

And for me, I think the biggest takeaway is just that it's refreshing that we're at this stage where the company-specific strategies are really starting to shine through. So we're getting back to a stock pickers paradise, rather than the homogenous sector-driven performance that we saw over the past few years where there was disruption from supply chains, or inflation, or stimulus, and those were the overarching factors impacting our sector. And you can see the evidence of this from the investor questions at the conference, which are just much more company-specific and strategy-specific, and you also are starting to really see the effects of how the company is managed through these past few years. So for example, did a company invest enough in technology or digital capabilities or headcount? And so we're doing a lot of work and hearing a lot from the companies and benchmarking that so we can compare and contrast across our sector.

Camilla Sutton:

Joel, help us set the stage a bit more. What is the impact of commodity price volatility and the dynamic geopolitics play on crop input producers?

Joel Jackson:

Certainly, we've seen very volatile commodity prices, I would say in the last couple months has been more stable, as we've seen kind of a seasonal decline in pricing, but kind of bottom out. This is because again, energy prices are quite strong, and because things have supply constraints, but the geopolitical situations we're seeing is really you know, adding support to floor price levels, be it sanctions in Belarus, or China holding back exports of fertilizers like phosphate and nitrogen, or India suddenly getting a little more gas and producing more nitrogen, not buying as much, is certainly a dynamic space that's been stable from a price perspective last month or two. But you just never know when something's gonna give.

Camilla Sutton:

Kelly, you're going bring us in from a different angle here. What were the takeaways from your side on the state of the U.S. consumer and how has that evolved from last year?

Kelly Bania:

For last year, in terms of the U.S. consumer, I think last year we spoke about how there were signs of consumer bifurcation among income cohorts, but it seems clear to me coming out of the conference that this dynamic has become even more pronounced this year. So consumers are really still adjusting to the extreme levels of inflation over the past few years, and the value consumer seems the most pressured across the income cohorts today. So we heard from companies such as Kroger, who are working on their opening price points and adjusting pack sizes to meet those needs. Another example is in the convenience store channel where it appears same store sales are as sluggish as they've been in the past 25 to 30 years. And I think the general viewpoint is that this cumulative inflation on many of these lowprice-point, packaged food and beverages have gotten to the point where consumers are being forced by budget constraints to be more discerning. And this should take some time to work through because historically, manufacturers and vendors of these products don't take pricing down. Now, there is still room for promotional activity to pick up and come back, and that there are some signs that that is already happening as we head into the summer months, and that's something that we're closely monitoring. The other end of the spectrum, premium consumers are still wanting quality and convenience and variety and the demand backdrop, for example, at higher-end restaurants still seems to be quite strong, so this is something that we will continue to be monitoring.

Camilla Sutton:

Andrew, what about from your side? What did companies in your coverage say about what they're seeing in the tight consumer spending environment?

Andrew Strelzik:

So we heard from a number of the companies about adjustments that consumers are making as they're becoming more cost conscious, things like trade down across channels, for example, on the restaurant side, from fast food restaurants to grocery, from full service restaurants to limited service restaurants, we're also hearing about, you know, trade down within proteins, for example, from higher-cost steaks to lower-priced items, such as chicken or pork or ground beef. So you're seeing kind of an evolution of the environment that's intensifying as a relates to managing where you're spending and how your spending on the margin across the food landscape.

Camilla Sutton:

Thanks, Andrew. Kelly, there seem to be a lot more discussion this year on private label, can you walk us through that?

Kelly Bania:

So the key theme across companies, no matter what the customer cohort or income spectrum is, is private label, this is not really a new theme, but as the headwinds from supply chains over the past few years have abated and the ability for retailers and distributors to invest in their private label programs is opening up an ability for them to step that up. And I think for retailers and distributors, this offers them an ability to offer a price point that is typically meaningfully lower than branded, create some differentiation compared to competitors, That is also high quality and as well often be a gross margin enhancer, So it checks a lot of boxes for the companies. And really, that's a common theme across all of the income cohorts.

Camilla Sutton:

Joel, let's switch over to you. Let's introduce the Ag tech side, what applications have seen the most advancements since last year's conference.

Joel Jackson:

So I think I'm seeing more interest in biologicals and then gene editing, so biologicals are obviously, some of these plant protection products and applications that are derived from living organisms. So not as difficult or challenging an environment as, say, crop protection, chemicals or pesticides. We're seeing a lot of companies buy into new portfolios, get a pipeline of portfolios, and try to really push out products, and farmers are just so used to you're adding new modes of application, you don't just get from typical, you know, pesticides. Also gene editing, we saw a relaxation over the last year in Europe of rules and regulations around gene editing. This is basically not GMO but being able to modify seeds without introducing foreign DNA materials. You're either just cutting genes or removing genes or adding genes from the same plant. And we're seeing companies like Corteva and Bayer and smaller startups like Inari really now try to drive new applications, new products with gene editing. You know, what we're seeing also in ag tech over last year as some applications we thought might see more interest and they're not, that's like carbon farming. We're not seeing as many farmers want to look at cover cropping and notill farming. Some of the as we talked about last year, some of the incentives for farmers to do that just aren't there yet. And you know, we always hear about some of the new equipment technology, so see and spray using machine learning and computer vision to be able to more automatically spray just smaller, focused parts of the crop field with pesticides rather than just broadcast spraying. That's certainly out there. But it's going to be going a little slower commercially, than people might have thought a year ago.

Camilla Sutton:

Interesting. And Doug, you published a note on water scarcity ahead of Farm to Market. What were some of the key findings as they related to food and agriculture companies? In addition, is this an issue that investors should be really thinking about?

Doug Morrow:
I believe it is an issue that investors should be thinking about, I think that water is where climate was 10 years ago. And I think food and ag companies are really going to be at the fulcrum of this discussion, because 70% of the world's water is used for growing our food, which means that food and ag companies are heavily dependent on a steady supply of high-quality, fresh water to grow crops, raise livestock, etc., and ultimately to generate their revenue. So as we said at the note, the basic issue here is that the supply of fresh water around the world is not keeping pace with demand. So we know that fresh water use has increased by 600% over the past 100 years. And what some people don't realize is that supply is actually going down. This is due to pollution effects, and also the changing climate, so climate change. And so basically, we have the situation now where water demand exceeds supply, and, you know, we're meeting this difference by drawing down what I think of as our water capital. So that's water trapped underground in non-replenishable aquifers. And this is taking place right now in the U.S., for example, with the Ogallala Aquifer and the California Central Valley. We're also seeing it in various basins of India, the North China plains, the list goes on and on. So yes, I think against this backdrop, we do believe that investors, certainly those with mid-tolong-range holding periods, they really need to be aware of how their food and ag holdings are addressing water issues. So some of the parameters that we think are important are things like acid location, how much water companies require, what companies are doing to manage their consumption, and through the use of things like targets, monitoring programs, and measurement, and from a commercial upside, what innovations companies are making that can help other companies reduce their water use. So this is in the same way that an LED light or an EV or a more fuel-efficient machine can help companies lower their greenhouse gas emissions. And then in terms of the companies on the management side, companies that we think you know, examples of companies who have rolled out a really strong water program include Archer Daniels Midland, and K + S. And on the product side, companies like Corteva, Darling Ingredients, and Nutrien all offer waterefficient products. So for example, Corteva’s Aqua Max technology, Darling’s Rendering line, Nutrien’s Black Max 22 fertilizer, for example. So we just believe that in an economy that is going to have to become more water efficient over time, we're bullish on these types of products that have a low water impact profile.

Camilla Sutton:

I think we've also put a link to that report in the notes for this podcast because it really is an interesting one and you did a deep dive there. That is something that all investors should be thinking about years into the future. Andrew, let's turn to you, how about biofuels policy, decarbonization efforts, any of that impacting your coverage.

Andrew Strelzik:

Thanks. Yeah, so biofuels and decarbonization is a key theme across our agribusiness coverage. Most of the companies are very focused on how they can position their business models to participate in the broad decarbonization efforts that are taking place globally. You have the grain handlers and crushers that are able to supply feed stocks, you have Darling Ingredients who both has low CI feed stocks, as well as a JV to produce renewable diesel and sustainable aviation fuel. You have some of the other green companies that that are forming JVs to participate as well on a more vertical integrated basis. So this is something that most of the companies in our coverage on the agribusiness side are focused on. What's interesting to me is how the policy is evolving, and this will really start to take more shape in 2025, but ahead of that we're starting to get some visibility to it in terms of the federal level, shifting from a blender’s tax credit to a producer's tax credit on the state level where you're seeing LCFS policies that are evolving to become more stringent, and in a lot of cases, they are the policies are increasingly trying to incentivize the feedstock usage to shift towards the lowest carbon intensity products so that you can accelerate the pace of which we're decarbonizing, so that has dramatic implications across the space in terms of where the demand poles are going to be coming from, whether it's shifting to waste fats and oils, how China can participate in terms of the U.S. imports of used cooking oil, how soybean oil and ethanol can participate in that, as well. So it's a very dynamic environment. The policies are still being defined in some ways and the timeline still being identified. The economics are still being worked out. But clearly this is a big focus at the national and the state level and our companies are at to various degrees very well-positioned to capitalize in terms of the ways that they're positioning their business models.

Camilla Sutton:

Joel, I know you and Andrew hosted an exciting BMO commercial ag lenders on the state of farmers and agribusiness. Joel, do you want to run us through what the major takeaways were there?

Joel Jackson:

For sure. And let's remember that BMO is the third-largest lender to farmers in the United States and the largest lender in North America when you include Canada. Let's hit the highlights here. Definitely, we've seen more farmers being able to sell inventories of old crop grains from last year's harvest, due to the higher crop prices and be able to forward sell more crop for this year, farm balance sheets are generally healthy right now. But we've seen them you know, definitely because of this concerns with lower crop prices earlier in the year, become more careful on crop protection purchases. There's no sense of shortages around there, it’s a more distant time dynamic. Farmers also delaying equipment decisions, more willing to go with maintenance on old equipment than buy new, we've yet to see really heifer retention and U.S. cow supplies are tightening. There's also a more positive outlook for ethanol, farmers are looking more for more flexibility around qualifying for sustainability tax credits. Although the credit system appears attractive, many farmers likely will find it difficult to reach the three sustainability requirements for row crop based SAF to qualify for the tax credit. So some of those new developments out there are taking longer to develop. When we ask the panel, you know, what are the three topics in ag that should be discussed more it was really about sustainability efforts, farming operations more frequently now shifting from the U.S. to Mexico, and how do we grow the farmer talent gap?

Camilla Sutton:

That's interesting. Joel, it was definitely a lively panel. Andrew, why don’t you close this out here? What is the number one investor question you're receiving post conference?

Andrew Strelzik:

So the number one investor question that we're getting ties back to the biofuels policy dynamics. And as we're getting changes, key changes really, to the policy in 2025, and the various implications across the agribusiness space, I think investors are really focused on trying to understand all of the nuances as far as we know them today, in terms of who's going to benefit, where's the demand going to come from, where is it shifting away from, which companies are really positioned, best or worse to capitalize, you have the tax policies that are changing and the incentives are all changing. And so I think investors are really, really focused on this opportunity that it could create in 2025 for some companies, the challenges it creates for other companies, and where do all the companies that we cover fit into this moving forward as we get to 2025. So I think that's been the biggest focus for investors coming out of the conference. In terms of the questions that we're getting.

Camilla Sutton:

Joel over to you. What about you, what is the number one investor question you are receiving post conference?

Joel Jackson:

I am seeing more interest in the fertilizers stocks as hasn't happened for quite some time. There's definitely a pick-up in interest. The fertilizer stocks have lagged. They've even lagged other ag-related names the last month or two. More work is being done on Nutrien, CF, Mosaic. I'm seeing more interest in Nutrien that I haven't seen a while. And so that has been interesting for me.

Camilla Sutton:

Well, that brings us to the end. Thank you very much, Andrew, Joel, Kelly, and Doug, really appreciate you joining us today. You just heard from our Equity Research analyst Andrew Strelzik, Joel Jackson, Kelly Bania, and Doug Morrow, discussing the themes of our 19th annual Farm to Market conference. BMO Capital Markets is proud to deliver a thoughtful analysis of upcoming Equity Research trends that will prove important to clients investment decisions through both this IN Tune podcast as well as their commodity-specific metal matters hosted by Colin Hamilton. If you enjoyed today's in tune podcast, please do subscribe and rate it.

To access our full disclosures, please visit researchglobal0.bmocapitalmarkets.com/public-disclosure.