The U.S. food and agriculture economy is moving through a year defined by tighter margins and changing consumer demand, with pockets of opportunity across resilient markets and companies. Across the food value chain, operators with strong balance sheets, disciplined capital allocation and exposure to areas of sustained demand are finding ways to adapt to the complex operating environment.

That was the backdrop for a keynote session at the 21st Annual BMO Farm to Market | Chemicals Conference titled “On the Ground in U.S. Ag with BMO’s Commercial Lenders: Profitability, Sentiment, and the Food Chain.”

Opening the session, Tony Sciarrino, Head, BMO Commercial Bank, U.S., welcomed attendees and reinforced the bank’s longstanding commitment to the food and agriculture sector, highlighting its importance as a core focus area for the business. He also set the stage for a discussion on how lenders are navigating volatility and supporting clients through industry cycles.

The panel, which was moderated by Joel Jackson, P.Eng., CFA, Fertilizers, Chemicals and Ag Equipment Analyst, BMO Capital Markets, and Andrew Strelzik, Restaurants, Beverages, Agribusiness and Protein Analyst, BMO Capital Markets, featured:

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  Tom Ausborn, Managing Director, Food, Consumer and Agribusiness, BMO Commercial Bank

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  Justin Emmi, Director, Food, Consumer and Agribusiness, BMO Commercial Bank

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  Betsy Erdelyi, Managing Director, Food, Consumer and Agribusiness, BMO Commercial Bank

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  Bradley Guse, Director, Food, Consumer and Agribusiness, BMO Commercial Bank

The conversation offered a ground-level view of producer sentiment, balance sheet pressures and changing consumption patterns.

According to Bradley Guse, the U.S. ag economy is currently divided into two camps: what eats and what grows. The first camp, anchored by livestock and protein-linked businesses, is in good shape. Profits and margins are healthy and operators are generally pleased. Crop producers, on the other hand, are facing more pressure, with oversupplied grain markets weighing on margins and drought, although those pressures vary considerably by state and crop.

In California, for example, Justin Emmi said some categories, including citrus and table grapes, have held up well. Almonds have started to recover after several weak years, but the rebound is still early and many growers are making up for lost ground. Meanwhile, the vegetable segment is particularly strong. “The market demand is there,” he said. “There are buyers in the market, so I would say that they’re doing well.”

Higher input costs are starting to affect the consumer, as prices increase in grocery stores and at restaurants. Inflation has kept the risk of trade-downs alive as shoppers look for cheaper alternatives or move more of their spending to lower-cost channels. The demand for protein is building demand, especially as more consumers focus on diet and health. But Tom Ausborn said that resilience will be tested as households continue to experience higher prices. “From a broader food standpoint, I think companies are doing pretty well but there is that overarching concern of how much consumers can bear.”

The gap between stronger and weaker operators has become one of the clearest ways to read the cycle, Guse said. The top producers are close to breakeven, while weaker ones are losing about US$150 an acre this year. Top operators similarly are earning around US$3,000 of net income per cow compared to a US$900 average. A differentiating point between operators is how quickly a weak year can eat into working capital because putting a crop in the ground requires more money than it did during past downturns.

A similar split is playing out in California where Emmi said land equity is giving some operators more leeway than others. Growers who paid down land can absorb weak prices for years, while those carrying more debt can’t wait out the change in cycle for as long. The divide is more pronounced in permanent crops because orchards require years of capital before they start producing returns.

Betsy Erdelyi said food-processing balance sheets are generally strong or moderate while dairy balance sheets depend heavily on the milk shed and the cost of recent expansions. Guse added that the row-crop picture is more strained, with some producers selling 40-acre parcels to shore up their balance sheets.

The food industry is still working through what the rise of therapeutics like GLP-1 drugs, which are used to treat obesity, could mean for consumer demand. Erdelyi cited recent research from Cornell University showing GLP-1 users spend approximately 5.4% less at grocery stores and 8.3% less at restaurants. That lower spending isn’t evenly distributed, since many users are being advised to prioritize protein in their diets. “People who are on GLP-1s snack less and they’re looking for protein-rich food,” Erdelyi said. “That’s why we’re seeing the boom in protein-rich food. We think it’s here to stay.”

Ausborn said that trend is creating very different outcomes. Products built around lean protein or higher protein per bite, such as chicken and turkey, are well positioned. Emmi said certain varieties of nuts are benefiting from the focus on protein while some fresh fruit categories—and in certain cases, wine—are seeing softer demand.

For food processors, the challenge is to protect sales as eating habits change. Lower spending at grocery stores and restaurants leaves less room for error, especially while inflation is keeping consumers selective. Ausborn said companies will have to work harder to keep customers and to stay ahead of competitors. “Volume is going to be the name of the game.”