Food, Ag, Fertilizer, and ESG From BMO’s 18th Annual Farm to Market Conference

Michael Torrance:

Welcome To Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On the show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries.

Camilla Sutton:

The State and outlook for agricultural commodities technology, inflation, food waste, and how all these themes tie into equities provided the foundation for the content at our 18th annual Farm to Market conference. And it is what's ahead for you on today's edition of BMO Intune podcast. And you are definitely in for a treat. We are joined by four of our equity analysts Joel Jackson, Fertilizers & Chemicals, Kelly Bania, Food & Distribution, Doug Morrow, ESG strategist, and Andrew Strelzik, Food & Agribusiness analyst. And today's podcast is being hosted by Dan Barclay, CEO and group head at BMO Capital Markets. Dan, over to you.

Dan Barclay:

It's great to be here following our 18th annual Farm to Market conference and to moderate this our third Farm to Market podcast. The conference again, was our desire to help our clients with innovation, deep insight and a collection of our best clients. It's great to have this podcast today so we can summarize some of the big takeaways that we had. For our first question, let's drill into the takeaways and what would investors have seen from the 18th annual Farm to Market conference?

Joel Jackson:

Sure. Okay, Dan, have a word for you. Are you ready? That word is confusion. So agriculture related stocks have been under pressure for many months; however, valuations look compelling. Earnings still look historically strong. And crop input management teams are very bullish. Investors, in my opinion, want to wade into the water and take new or larger positions in my crop input coverage universe. This is why investor interest in my coverage was extremely strong at the conference and corporate had incredible meetings scheduled with commodity prices not finding floors yet and no obvious catalyst. Investors are still sitting on their hands. We think waiting until late in the spring or summer, or perhaps we've seen post spring  commodity price floors. And the stocks look better technically from a historical seasonal returns chart.

Dan Barclay:

And Andrew, your biggest takeaway?

Andrew Strelzik:

Sure. You know, I think the biggest takeaway for me was that ag fundamentals are still very good. Similar to what Joel said, investors are very concerned about the theme of peak ag and the fact that earnings sequentially might be decelerating. And what's the new earnings level and the right way to value these companies, you're seeing depressed multiples, but companies by and large, were extremely positive about the outlook for their businesses. We had several company management teams either raise long-term expectations for parts of their business extend the duration to which strength is expected to continue. So I think it was a good reminder for investors that things are still very strong, we might not be at peak levels, but that things are very good and that there's value to be had in this space. As investors get more comfortable with the outlooks. I would argue that there is still concern among the investor base similar to what Joel said. But that's the opportunity we feel as the enthusiasm improves.

Dan Barclay:

And Kelly, your perspectives?

Kelly Bania:

Yes. Well, thanks for taking the time to talk about these takeaways with us, Dan, I would say from the companies that we had at Farm to Market, there's still continued evidence that the consumer landscape in the U.S. remains very bifurcated. So for example, higher income consumers have been able to manage through this this extremely high inflationary environment, a little better than consumers at the lower end of the spectrum. So for example, the SNAP program, the USDA Food Stamp Program, the expanded benefits for this program ended in March. And we are hearing from more and more companies that you're seeing that impact their business, their companies are adding more to their opening price points or value price points in order to cater to that consumer. Kroger highlighted their new opening price point brand called SmartWay where, you know, typical private label program like SmartWay can save 20-30% lower than their national brand equivalents. And so these areas where you're seeing these lower price points is where we're seeing the fastest growth across food retail, and even other retailers have talked about merchandising and reengineering quality or quantity just in order to hit certain price points, whether that be $5 or $10. So that's on one side of the spectrum. At the same time, there's still consumers that are trading up towards more premium categories such as fresh and natural and organics and higher-end products. We even heard from our food service distributor Chefs Warehouse, which caters to higher end restaurants that despite meals, you know typically going up anywhere from $20-30. Over the past few years. All the good restaurants are packed and they have not really seen a slowdown so the that consumers still might be ordering. Say a less expensive bottle of wine, but those steak dinners, but nonetheless, we haven't really seen a major slowdown. So just a lot of mixed data points out there on the consumer landscape depending on where the companies are positioned with their end consumer.

Dan Barclay:

Thanks. And Doug, take us home on the summary.

Doug Morrow:

Thanks very much, Dan. So for me, the single biggest takeaway at Farm to Market was that sustainability continues to be an important priority for companies across the food value chain. So obviously, long-term themes like regenerative agriculture were front and center. But we also saw consistent references and company presentations to the importance of things like improving energy efficiency, maintaining excellent health and safety practices, setting impact goals, and developing sustainable food and agriculture products. I would say another takeaway for us was a subtle shift in the way that some companies were describing these initiatives, we actually saw fewer direct references to ESG than we did last year, and more to sustainability and environmental management. So I would say companies are still aggressively managing these issues. But the language that they use to describe their approach may be shifting a little bit.

Dan Barclay:

I think that those were great takeaways from all four of you, as we showed the deepening of the insight and the transition to current market environment. Let's do a little bit of a deeper dive on some of these issues. Joel, I'm going to start with you. Help us set a stage on what the impact of commodity price volatility on crop input producers.

Joel Jackson:

Okay, Dan, it's a very interesting time as crop and crop input prices remain above mid cycle historical prices. But there is bearish in the market as although prices are good. Like I said, they continue to erode lower from the service we saw last year, as well. Fertilizer and commodity cost curves are also lowering as European gas costs are suddenly back to normal after almost two years of being at elevated levels, particularly after Russian supplies became more at risk. As Ukraine invasion started last year, it seems on post harvest future crop prices. U.S. farmers who rent farmland are now breakeven on a cash basis at best. Considering the highest higher costs we've seen percolating. So we've seen so much volatility that both farmers and crop input distribution networks are afraid to hold on to inventory of fertilizers, seeds and crop chemicals to limit commodity price risk. Plus, of course, interest rates are higher now. So carrying costs are higher. So this has led to more just-in-time purchasing volume uncertainty and a push out of demand.

Dan Barclay:

Andrew, let's drill into your coverage universe a little bit deeper. But how is the outlook for crop prices? And how does it impact the companies in your coverage universe?

Andrew Strelzik:

There was a lot of optimism at the conference among management teams about potential for lower crop prices, corn and soybeans. We have record crops in Brazil, we have planting in the United States that's ahead of schedule, assuming that we have good weather, there's a belief that the futures curves still are a bit elevated, still have a weather premium in there that it ultimately dissipate as we get closer to the harvest. But there's varying impacts. And I think equally as importantly, there's varying interpretations among the investors in terms of what this means across my coverage on the ag and protein side. So for proteins in particular, you know, there's a lot of optimism that lower feed costs, corn and soybean meal can have a positive impact on chicken margins. That's a direct input there. So that would be a potentially big positive. On the chicken margin side, you have others that use corn as an input, like sweeteners and starch producers corn processors, ethanol producers, where this could also be a direct benefit not only because of the lower crop prices, but also because of lower basis, which is incremental, if you have a big crop that also is more favorable in terms of transportation and the actual buying incremental cost of the corn or soybeans or soybean meal. The interesting side for me though, is the way that investors think about the implications for the for the Ag processors and grain handlers. And in particular, the ADMs and Bunges of the world where even though those generally are spread businesses and volume businesses, there's a perception that lower commodity prices is a negative for those businesses. I think that's maybe overly generalizing the way that this is going to play out. Again, we spoke about the durability of some of these cycles because of the spreads that we expect to play out. So it's interesting that the perception is that that would be a negative for some of the Ag processors. We think that's maybe not exactly the way that it would play out and potentially creates an opportunity.

Dan Barclay:

Well, let's continue along the value chain. Kelly, as we think about your clients and your companies that you cover, touching on the end consumer, what was the discussion around inflation and ongoing pricing?

Kelly Bania:

Yeah, so Dan, this topic has been incredibly topical for food retail investors. So if you step back and think about the average American consumer, food as a part of their budget accounts for about 12% of that typical consumer expenditures. And so this past year, we've had 12 consecutive months of double-digit inflation at the grocery store. And it has started to moderate in recent months. But we, we haven't really experienced that magnitude of food inflation since the 1970s. And quickly here the conversation has turned from inflation to risks of deflation. And what we're hearing investors focus on is really trying to analyze the grocers and the food retailers that maybe have passed on their cost inflation, and some have actually tried to hold prices. And so the strategies have really differed by company. And the debate is really shifting to what happens to volumes as prices come down. And this has been one of our themes for quite some time, we call it ‘how much margin is too much’. Because what we are seeing is better unit volume and traffic trends for those retailers that have kept their prices low. And so as this consumer does start to shift back to value, we think the conversation is going to be shifting to volume, because clearly you cannot rely on price as the driver long term for sales. So we're starting to see that shift pretty dramatically from inflation to deflation, and now the focus on volume.

Dan Barclay:

I think that's a great lead-in. That's one of the panels that we hosted. Doug, you had a lively panel on food waste in managing food waste. Why do you feel like it's such a big issue? And what were the opportunities that got created both for the companies and thus for investors?

Doug Morrow:

Yeah, I think the panel discussion that we held on food waste was definitely thought provoking. I was joined by executives from three private companies, all of which are tackling this food waste problem in different ways. We had, for example, Divert on the panel, they convert food waste into RNG. Through anaerobic digesters, we had the CEO from Agro Fresh, which helps extend the shelf life of food products through plant-based coatings, and we also had Luke Mission up on the panel, they have a really interesting circular economy setup to produce fruit juices and other beverage products. But let me step back and give you some numbers to scope this food waste problem. Right now, it's estimated that 39% of the global food supply goes uneaten around the world each year. Now, this happens for many different reasons, including poor harvest scheduling, the lack of proper storage, inappropriate packaging, and even consumer confusion with some types of food labels. And the amount of food that gets wasted each year has been valued about a trillion dollars. And some of that shows up as lost revenue for companies. And from a sustainability point of view, food waste is also responsible for 9% of global greenhouse gas emissions. So on top of all that, you also have to think about food waste as lost supply. So right now, it's estimated that global food production will need to increase by between 35-56%, to adequately feed the world's projected population in 2050. And we also know that the amount of land available for agriculture and food production is shrinking over time. And one last number here, an additional consideration would be that there are 800 million people right now around the world who are malnourished, but we're throwing out 2.5 billion tons of food every year. So when you put all these numbers together, it's pretty clear in our view that the global food system will need to become much more efficient. And part of that means reducing waste. So as a result, we do think investors should have exposure to companies that can help other companies reduce food waste through technological innovation, companies that have expertise in methane capture, and companies that have set up systems to minimize food loss and waste throughout their operations and supply chains. Now, in our note that we published just before Farm to Market, we identified 21 companies from across our coverage that we believe will benefit as the world moves towards reducing food waste.

Dan Barclay:

Obviously, Kelly, this has an impact on some of your clients, how we think about waste your comments you made a moment ago on inflation, what came up in your conversations with your clients and with investors around this impact and the impact on your coverage universe?

Kelly Bania:

So as Doug mentioned, that figure that 39% figure, it's amazing that that number is actually pretty similar in the U.S. as well. So 35% of the U.S. food supply chain is wasted, which is clearly unfortunate and disturbing given that one in eight Americans struggle with hunger. So this is a very big topic for our food retail coverage, both from an ESG standpoint, but also for an efficiency and cost savings standpoint. And so the good news is that the companies and stakeholders are very aligned on this topic. So retailers tend to call this shrink, which typically can be around a mid-single-digit percent of sales for a grocery retailer. And there are different factors that contribute to this from spoilage, but also theft, which has been on the rise across retail. But the good news is that retailers definitely are motivated to bring this number down. Some companies have implemented things such as new warehouse technologies, such as robotics, that really help reduce product damages at the warehouse and in the back room. We've seen some companies do things as simple as locate their stores closer to distribution centers, which really allows the company to give more days of freshness back to the consumer, which helps the consumer reduce their own shrink. So at the end of the day, the probably biggest factor, though, that the companies are really doing across the board is really donating food. So we pulled these figures together, down and total this from some of the work we've done in our ESG reports. But when we look across our eight food retailers in our coverage, they donate about over 1 billion pounds of food annually, and that figure has been on the rise.

Dan Barclay:

Wow. That's actually a shocking number. On top of the rest. Let's get into some of the things that we brought up at the conference in terms of new content and new ways to look at emerging issues. Joel, I want to start with you. Let's have a bit of a dive into ag tech and what you saw a lot of it was on display with your clients and at the conference. But why don’t you share some of your perspectives around that?

Joel Jackson:

Thanks, Dan. I'm going to talk about what I think was the most interesting ag tech observation. So I think we're actually finally seeing some critical mass in the biologicals or microbials domain. So what are biologicals they are diverse, a diverse group of crop protection and stimulant products derived from living organisms and naturally occurring compounds. Not only do they provide new modes of action to attack pests, weeds are insects, they also can help you perform cool things like extract or fix nitrogen from the air into the soil to potentially reduce the amount of synthetic chemical nitrogen fertilizers, growers might need to apply. And they will have a part of sustainable farming going forward as we try to reduce pesticide use. Now, biologicals have been around for some time with all the main crop chemical producers, and many upstarts developing products. But progress is always slow. That's because not only did developers need to figure out how to solve a problem, like how to attack a weed or pasture an insect, but then the solution has to be replicable, and work in different soil types consistently. So for example, a producer would send a test product to a farm, and the organisms would literally die before delivery. So what's new now is time and a lot more R&D dollars thrown at the problem. We've seen many acquisitions now, but the major crop chemical producers, such as FMC, and Corteva, and we're definitely seeing a rise in broader acceptance to try out these products. Farmers are using them, they are telling their neighbors, and the neighbors are trying too. So let's stay tuned to see what happens next.

Dan Barclay:

We had a very interesting lunch session on regenerative agriculture, and how it connects to the food chain. We hosted that with Joel and Andrew and I thought it was a really interesting perspective that we shared at the conference. And enjoy. Why don't you give us a takeaway and Joel, you can kick-off.

Joel Jackson:

Good, Dan. Thanks. So first of all, I think it is clear that even defining what regenerative agriculture is, is a problem as the term is used broadly and answers can vary. Many farmers think they have been engaging in regenerative agriculture behaviors, even if more purists think they have not. Second and we've done a lot of work on this in the past, including a report we wrote in August of 2022. Growers are still struggling with whether the incentives justify overhauling the farming system to utilize practices like cover cropping and no till farming, which reduces emissions, but also reduces crop yields. In most cases for the first years of the transition. There is no doubt that we need all this, but incentives have to improve either from the food industry or from other stakeholders. And also, the modeling still isn't clear exactly how emissions work through the lifecycle of a farm and these programs. However, is a marathon it is not a sprint. And as growers crop input producers and the food industry become more comfortable in the end-to-end connections here and improve incentives, we imagine grower buy-in will improve.

Andrew Strelzik:

I would agree with Joel, you know, with the sentiment that this is a marathon and not a sprint. But for me. One of the things that was very evident based on the conversation is how important the collaboration between these large agricultural enterprises is going to be to connect growers to and customers in terms of incentivizing and creating a demand pull for regenerative ag products. One of the things we were hoping to hear a little bit more about was some real customer durable customer incentives in terms of encouraging growers to make the investments. It doesn't feel like we got all the way there, ut we've seen partnerships between Pepsi and ADM to support regenerative AG, we've seen agreements between Bunge and Corteva to support regenerative AG. And just the day before the conference, we had another agreement there between Bunge and Nutrien to support regenerative AG. So these collaborations are going to be increasingly relied on to tie the growers to the end customer and build those incentives that Joel mentioned.

Dan Barclay:

That's great. As we get to the end of the call, let's do a rapid fire wrap up. What's the number one question that clients are asking you, Andrew?

Andrew Strelzik:

There for me, it's still trying to get comfortable with the rebasing of earnings and what where numbers are headed across the agriculture space, I still feel like even as positive as a company sounded at the conference, there is still a lack of confidence among investors, there's a little bit of a ‘Show Me’ story there as well, on the Ag side. And then on the protein side, you know, it feels like we've been in a bit of a trough of the cycle there, and so investors are trying to get a sense for whether we've hit the inflection here, whether it's lower crop prices, it sounds like demand is not quite as strong as we'd like to see across the protein space. So is the lower fee costs enough to get there? Are the management teams approaching this the right way? From a strategic perspective? A lot of focus on Tyson in that regard. So those have been the biggest questions that we've been getting.

Dan Barclay:

That's great, Kelly?

Kelly Bania:

So across our coverage, the biggest topic is really the risk and the implications of food deflation. So this is kind of kind of ironic, because many investors we've talked to have really been resigned to the fact that there are some clear recession risks, but only more recently has the topic of food deflation come back into the fold. And it's ironic, because when we look at the past recessions, three out of the last four recessions did have grocery price deflation. So in 1991, in ’01 and ’02, and ’08 and ‘09. And so what investors are really doing is a lot of scenario planning and looking back at those past cycles and analysts analyzing how the companies have performed in past recessionary cycles, as well as past deflationary cycles and try to make sure they're positioned to weather the storm here.

Dan Barclay:

And Doug? Questions you're getting asked?

Doug Morrow:

The number one question that we get from investors, anytime we talk about food and ag is around water use. So I believe that investor concern around water is where climate was five years ago, we know that droughts are becoming much more common, aquifers are not being sustainably managed. And agriculture requires an enormous amount of freshwater. So actually, about 70% of all freshwater withdrawals globally, go to agriculture. So the investors that we talk to are increasingly thinking about this issue where the vulnerabilities are and what companies are doing to manage this issue.

Dan Barclay:

That's great. And Joel?

Joel Jackson:

Dan, I'm going to cheat I'm going to answer the two questions are getting the most from investors first, it's basically “Joel, I like such and such stock, such and such stock, or I love the group of stocks. But what's the catalyst?” Well, there's no catalyst. And the answer I give is basically, you know, if you get more confidence that commodity prices can stay at midcycle levels or better, this will render the stocks and my universe is very attractive valuation wise. The second question I'm getting is “whether all the chatter and early investments we are seeing in low carbon and carbon free ammonia capacity for non agricultural uses, such as marine fuel will actually come to fruition and how will that impact ammonia supply demand and hence, mentioned prices down the road?”

Dan Barclay:

That's great. So let me say thank you to Joel, Kelly, Andrew and Doug, I think you guys did a great job summarizing the big takeaways of the conference, and allowing us to use a creative format to put our insight and our ability to accumulate and aggregate companies, investors in the networks that we have together. Our focus of BMO continues to bring innovation, insight and value-add to our clients to the platforms that we provide. I'm looking forward to the 19th Annual Farm to Market conference next year and monitoring on the way through how the industry evolves. What are the key issues for investors, and how do we add value for our clients?

Camilla Sutton:

That was Dan Barclays CEO and group head at BMO Capital Markets, joined by four of our equity analysts Andrew Strelzik, Joel Jackson, Kelly Bania, and Doug Morrow discussing the themes of our 18th Annual Farm to Market Conference. BMO Capital Markets is proud to deliver thoughtful analysis of upcoming Equity Research trends that will prove important to clients’ investment decisions through both this IN Tune podcast, as well as our commodity specific Metal Matters hosted by Colin Hamilton. If you enjoyed today's podcast, please do subscribe and rate it.

Thanks for listening to IN Tune, presented by BMO Capital Markets Equity Research. You can subscribe to IN Tune on Apple Podcasts, Spotify, Google Podcasts, and other podcast providers. Or, visit our website at researchglobal0.bmocapitalmarkets.com to listen to more podcasts. Until next time, thank you for tuning in.

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Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainability leaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward-looking statements. Investors are cautioned not the place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment, legal or tax advice, and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment tax and or legal professional about their personal situation. Past performance is not indicative of future results.