Food, Ag, Fertilizer, and ESG From the Lens of BMO’s Farm to Market Conference
This episode is hosted by Joel Jackson, P.Eng., CFA, Fertilizers and Chemicals Analyst, Ken Zaslow, CFA, Food & Agribusiness Analyst, and Doug A. Morrow, ESG Strategist
BMO Capital Markets’ Group Head, Dan Barclay, moderates a discussion on the takeaways from BMO’s 17th Annual Farm to Market Conference across the food and agriculture value chain.
Joel Jackson, Chemicals and Fertilizer Analyst, discusses his views on where we are in the ag cycle, the supply constraints on fertilizers, and the impacts of the invasion in Ukraine on his coverage of fertilizer companies.
Ken Zaslow, Food and Agribusiness Analyst, takes the listener on a deep dive into how inflation is impacting his covered companies and the sector.
Doug Morrow, Head of ESG Strategy, delves into the corporate value proposition of ESG, the implications of food insecurity, and how ag and food production contributes to climate change.
Together, Dan and the three analysts take a deep dive into the core themes of BMO’s 17th Annual Farm to Market Conference.
You’re listening to IN Tune, a podcast series featuring equity research analysts from BMO Capital Markets. Our shows explore key emerging themes, trends, and issues which are important to our institutional clients globally.
Bert Powell: Today on BMO Capital Markets’ IN Tune podcast we dig into the investor takeaways from our 17th annual Farm to Market Conference. I'm Bert Powell, Global Director of Equity Research here at BMO Capital Markets. The BMO Farm to Market Conference brings together the world's most important companies whose businesses span the global food and agricultural value chain. In 2022, we had the pleasure of hosting over 60 public and private companies presenting to more than 300 equity debt and private equity investors on the trends, developments, challenges and the opportunities for the companies who fall within the farm to market value chain. At no other time in recent history has the world been as focused on the security and the cost of our food supply. War, supply chain disruptions, increased energy costs, and the impact from global climate change are causing seismic disruptions. Today on our podcast we are pleased to be joined by BMO Capital Markets Group Head Dan Barclay. Dan will moderate a discussion on the key takeaways from our conference between senior members of our research team Joel Jackson BMO’s fertilizer and chemicals analyst, Ken Zaslow BMO’s food and agri-business analyst, and BMO’s ESG strategist Doug Morrow. Dan, welcome back to IN Tune podcast and over to you.
Dan Barclay: Thanks, Bert. It's great to be here following our 17th annual Farm to Market Conference, returning to an in-person format. And it's also great to be here moderating our second post Farm to Market analyst podcast talking about what we learned what we saw and what our clients had to say. During the conference, we had a great turnout from both institutional clients and corporate clients who've been attending since the beginning. It was also invigorating to see new clients, new technology stories, new ways to develop farm to fork as we did through time. As one of the leading industry conferences, we were proud to provide a forum for people to get together to talk about new ideas, talk about innovation, and the factors that are impacting the industry. Today, we have a few hot topics to dive in for today's podcast. The last two years have seen unforeseen disruptions to the food industry, whether it's inflation, supply constraints, and now exacerbated by the war in Ukraine. But amidst the chaos and shifts in consumer behaviors, we've seen innovation rise out of the disruption. I'm looking forward to our conversation as we touch on these topics and more and take a deeper look at the industry trends. Welcome Joel, Doug and Ken. So why don't we kick off their first question, which is what were our biggest takeaways from the Farm to Market Conference? Why don't we kick off with you, Joel.
Joel Jackson: Thanks, Dan. You know, everyone's bullish be it corporates be it investors on the Ag cycle. I think that even the most bearish people I've talked to think we have at least a two year run in the in the ag bullishness here. And you know a lot of investors we talked to are really willing to look at great investment opportunities in the crop input industry and and even if things sell off, they're looking as a buying opportunity and corporates are willing to make the money to invest in new capacity and new products. And this is because of of course geopolitics, concerns around Ukrainian crop. And you know, this could mean that we end up having a bit of oversupply and over capital investment in the next few years if things do settle down, because I do think that a lot of the fertilizer companies I cover are looking now at investing in more potash capacity, and they would have thought a couple years ago and if everything works out, we will have a little more potash capacity than we need. But maybe we will need it if Eastern European politics continues to be strained.
Dan Barclay: Ken?
Ken Zaslow: The biggest takeaway that we think about is the extent to which companies across the food supply chain are managing and adapting to supply chain challenges, and in many cases successfully navigating the pervasive inflation across the entire supply chain. They all believe that the years of hard work in less than ideal market conditions have laid the foundation for them to reap the benefits from their investment in strategic initiatives. Agribusiness companies, such as Bunge, ADM, and Darling are capitalizing on China demand renewable diesel and of course the unfortunate war in the Ukraine. Protein companies like Pilgrims and Tyson are benefiting from limited production, chicken sandwich wars and improved business execution. That said protein production will continue to be fairly limited with greater contractions in both the cattle and hogs cycles. Packaged food companies are benefiting from elevated demand and their investments in supply chain, data analytics and strategic revenue management to more judiciously price through inflation. That said here packaged food companies need to manage price elasticity and the potential for consumers to trade down to value brands, including private label.
Dan Barclay: And Doug?
Doug Morrow: Yeah, thanks, Dan. For me, the biggest takeaway was actually the discussions that many of the panels had and I had individually about food security. So the panels obviously approached it from different angles. But when I reflect certainly for me, food security was definitely one of the recurring themes of the conference. And it's really being driven by a confluence of factors including the recent increase in fertilizer prices, food price inflation, which we all know about and hear about increasingly, reduced grain exports from from Russia and Ukraine, and most recently, the heatwave in India. So it's really coming together to create the situation where many people, especially in developing countries, may struggle to afford basic food necessities. And unfortunately, I do think that we're going to be hearing a lot more about this theme of food security in the coming months. And secondly, although I'm probably guilty of looking out for mentions of ESG more than most people. For me, it was also interesting to see a consistent mention of the importance of ESG risk management at the conference. ESG was actually mentioned in every single panel that I attended. And if I if I could summarize, I think the consensus that I heard was that the measurement of ESG needs to get better. But management representatives from many companies, including Nutrien, Tyson Foods, Cal Maine Foods, Gotham Green, and others, all discussed how ESG practices are part of their value proposition.
Dan Barclay: I think that's a great summary of the big issues that we had at the Farm to Market Conference. Let's take a couple of minutes and drill into a few of them just to give our listeners a deeper piece. Ken, inflation was a big theme at Farm to Market and seems you know, all of us watching the press and recent actions really critical as we focus on inflation this year. How would you sum up the impact of inflation on your companies and the perspectives on the management teams on the outlook and what they're doing to adapt to inflation?
Ken Zaslow: It's a great question. Inflation has been the topic du jour. This inflation is different than what we've seen over the last 15 to 20 years in two ways. First, it's broad based across the entire supply chain, including inputs, packaging, logistics, and labor, which means it's pervasive and everyone is affected. Second, we're facing demand-driven inflation that has been exacerbated by supply constraints from the pockets of smaller crops around the world and the war in Ukraine. A misperception is that inflation began with the war in Ukraine. Instead, the actual announcement and the building of more than 3 billion gallons of renewable diesel capacity ignited the inflation spark way before the war even started. In addition, the inflation was further fueled by the small South American crop and the multi year impact from China's demand shift toward feed from protein following its hog rebuild. On the company side unhesitatingly the grain processors such as ADM, and Bunge, as well as the agribusiness companies that support the renewable diesel industry such as Darling and GPRE should benefit. And with the war in Russia, amplifying and extending the already demand driven inflationary environment, these companies are positioned to benefit from an even more favorable operating environment. Nobody would ever want this just most unfortunate, unnecessary war, the agribusiness companies are in the best operating performance in more than 20 years.
Dan Barclay: Well, let's, let's drill down on that, Joel. When we think about that invasion of Ukraine, the global implications, we heard a little bit about food scarcity and food supply, what's the impact of the geopolitical events and sanctions on your clients, for farmers and for crop inputs?
Joel Jackson: Right, Dan, I mean, there's a reason why fertilizer stocks have been some of the hottest ones to own in 2022. Because the war in Ukraine, and then some of the adjacent issues have really impacted both crops and crop inputs. I mean, first, you're literally losing some crop out of Ukraine, we're not planting all the acres, and we'll see how much gets planted. And it's hard to get the grains out. Number two, Russia and Ukraine are large suppliers of nitrogen fertilizer and some phosphate. And number three, I mean, the largest input to nitrogen fertilizer is natural gas. And natural gas prices in Europe are at all time highs, because of restricted supply and other things going on there. And then fourth, there's related sanctions with Belarus, which aren't exactly related to the war, but sort of are. And Belarus is responsible for about a sixth of the world's potash. And so this has really meant that fertilizer prices have gone to all time highs and crop prices have gone up as well. So farmers, it's still kind of affordable. But you're getting to the point where because we're literally missing supply of potash, and we're missing some supply of other fertilizers. Farmers are really now rationing what they buy, and you're causing some sort of artificial demand destruction to balance the market, because you're missing supply. Over time, you know, we think that Russian fertilizer will still continue to make their way to end markets because the US sanctions, for example, have exemptions or licenses that exempt food and fertilizer, although it's not that easy. But for farmers, they're going to have to decide what they do, do they shift to soybeans, which require less fertilizer and take the risk of not applying potash this year and maybe apply next year? What in their input cost buckets are they going to ramp down on try to offset some of the higher fertilizer prices. So it's definitely affecting farmers, at least they have the high crop prices to be able to offset the costs. But hopefully we'll get to a resolution over time and product will flow and things will will soften down but if they don't, you know, we're definitely into a number of years where we could see a lot of problems around yield as farmers cut back on inputs.
Dan Barclay: And I presume, Joel, you've got pretty strong input price forecasts up material over the last 18 months.
Joel Jackson: Yeah, like fertilizer prices have tripled in the last, you know, 18 months. And the hard part, Dan is to figure out the job of forecasting this. What do they do in the next 18 months. And I don't think anybody can really accurately suggest they know what's going to happen. All you can do is probably project a reasonable scenario and put that through models. And for us, you know, we assume that things kind of come back to midcycle levels in the next couple of years, which would mean a fair reduction in some of these fertilizer prices. But maybe not. Maybe this war goes on for a long time. And we have sanctions supply issues for a long time. But it's going to be very tough for farmers and industry participants to really plan around what they're going to use and cap allocation decisions with so many wildcards.
Dan Barclay: Ken let's go back to you for a minute. What other major events have you watched our investors grapple with? With around the industry, and any insights you picked up through the conference.
Ken Zaslow: After speaking with many investors over the last two days, we can kind of narrow it down to two interrelated issues investors continue to grapple with. One is how long would this inflationary environment last. And throughout the conference, what we did hear is that most of the companies thought it was going to be a minimum of one and could be as long as three years, and then two, how much demand destruction or elasticity will emerge from this inflationary environment. And then General Mills kind of indicated in their fireside chat, that there has been some increase in private label consumption. So there could be some beginnings of a little bit of demand destruction and price elasticity.
Dan Barclay: Did anyone really make a bold prediction about how much demand would come out?
Ken Zaslow: Nobody came out that strong, but ADM came out with the strongest conviction that it would take about three years for this cycle to kind of be compensated with all the with Ukraine, and Russia being fixed as well as the crop cycle coming back. But again, the longest period of time was about three years.
Dan Barclay: That's great. Let's shift to climate Doug. Often we think about climate change in the context of the energy sector or buildings, transportation, but the food and agriculture industry is actually a significant contributor to greenhouse gases. You also made the observation around how much of a priority is for everyone to think about ESG and energy transition, climate transition in the various discussions you had. Can you walk us through a little bit how GHGs are produced in the industry, how they're being mitigated? And what do you think the leading Food and Ag companies are doing to manage their contribution to climate change?
Doug Morrow: Yeah, thanks, Dan. It's a good it's a good question. And as I said, during my talk on Thursday afternoon at the conference, many people just fundamentally don't realize the extent to which ag and food production contributes to climate change. The sector actually accounts for about one quarter of global GHGs. That's more than the emissions from transport and buildings combined. But to be fair, that stat includes emissions from deforestation, which most people don't, you know, necessarily think about when they conceive of the agriculture and food production industry, but it's nevertheless a big part of the story. Deforestation is a major problem because as trees are cut down to create cropland or pasture, the embedded carbon in those trees is released into the atmosphere. So the other ways that ag and food production contribute to climate change include methane emissions from livestock, that we were probably more familiar with. Pasture management, emissions from fertilizer use, obviously, and food waste. So food waste actually got a fair bit of attention at the conference, the keynote, mentioned it Michael Solomon, and like deforestation, it's a major problem. So it's actually a generally accepted stat that about 30% of the food prepared around the world for human consumption is never eaten, and often ends up in landfill. So not only does this needlessly push up global emissions, it's deeply unfortunate from the perspective that almost a billion people on the planet are undernourished and don't get enough to eat. So clearly, this is a situation we need to fix. One of the things I stressed during my talk is that it's not just about the impacts of ag and food production on climate change, though, for investors and companies. Equally important are the effects that climate change is having on ag and food production. It's a two way street. And I think companies and investors really need to be thinking about this. You know, as we've said, so far on the podcast, there's a lot going on in the world today, Russia's invasion of Ukraine, inflation, ongoing effects of COVID. But these risks and opportunities from climate are not going anywhere, they still need to be managed. And to put it bluntly, the buildup of CO2 in the atmosphere is already negatively affecting food systems, animal health and food availability. And what's interesting is that the net effect of climate on agriculture and food production across the world is negative. But some crops in some regions may actually benefit. The effects on animals are far more uniform. So one of the things I actually learned while prepping for my talk on Thursday, was that animals eat three to 5% less for every additional degree of warming, thus negatively impacting their, their productivity and their fertility. So you know, what can be done against this backdrop? This kind of ties into the second part of your of your question? I think agricultural technology obviously offers a lot of promise to improve efficiencies and reduce emissions. We heard lots of presentations at the conference about growers using ag tech innovations such as temperature and moisture sensors, digital agriculture, etc. There's another basket of solutions and sustainable farming techniques such as the use of cover crops, low till, no till, etc. And frankly behavioral changes in terms of a shift to more balanced and healthy diets. These could all play a role in reducing emissions. And then as, to close out here, then as far as companies, yeah, there's a lot of things they could be doing and are doing. These include, you know, the basics like measuring and assessing your greenhouse gas emissions across all three scopes. Ideally, we'd like to see targets that are set to the science based targets initiative, disclosures around the TCF D framework are also important. Another standout practice, in my opinion is getting out and engaging with your suppliers and your farmers and, frankly, exploring business models that encourage farmers to adopt many of these technologies. And then also something we consistently flag in our ESG work is also the importance of governance, and really getting the CEO involvement and the rest of the C suite team involved in a company's ESG and climate change approach.
Dan Barclay: I think those are all on point, Doug, one of the things I was struck with was the amount of innovation people are putting into food and ag principle, you know, things like vertical farming ways to produce the same amount of food with a much lower impact? And I think we're going to continue to see a lot of that over a while. Why don't we shift into a final question and flip our perspective a bit and talk about what investors are saying, perhaps each of you could take us through the number one question you've received, either at the conference or just post? Ken, why don't we start with you?
Ken Zaslow: The question that we're hearing most is, look, look with record inflation levels, increasing focus on environment, the environmental policy, the conversation about food versus fuel continues to gain steam. So the number one question we're hearing is how governments around the world try to reel in inflation, or has the train already left the station?
Dan Barclay: Okay, Doug?
Doug Morrow: Yeah, for me, it's really two things. I've received a few questions from investors about the role or potential role of carbon offsets and how they can potentially create revenue streams for farmers to adopt more climate friendly practices. In the voluntary offset market, we've had credits for reforestation and avoided deforestation for a long time. But, you know, we're seeing also the emergence of protocols around things like soil carbon sequestration, it's really early days on this, but I think it's definitely an important area to watch in the future. And then the second question, partly because of the content of my talk on Thursday, investors need are asking for clarity around the SEC proposal around climate change disclosure, and what that's going to what that's going to mean and how that's going to play out. So those are the two things I'm seeing.
Dan Barclay: Joel bring us home.
Joel Jackson: Mine's a little more specific and short term is that, you know, with all the concerns around food inflation and all the sanctions on crop inputs, there's a lot of stories of last week, the United Nations is trying to broker a deal to where they might, you know, might be willing to support the removal of sanctions of Russian and Belarusian potash in return if the blockade of the Black Sea is loosened, so more grain can leave Ukraine and if that happens, that might lead to lower crop input prices and help ease a lot of tension here so that that question was coming up a lot, Dan.
Dan Barclay: Thanks, Joel, Ken, and Doug great insights from our team and great takeaways from the conference. We continue to believe in building relationships, driving intellectual capital, and creating forums where our clients can engage and advance their thinking of how to invest and how to develop and build their companies. I look forward to next year's event and how the industry will continue to evolve. That's a wrap from our end. Back to you, Bert.
Bert Powell: The BMO Farm to Market Conference is the leading conference in the sector and demonstrates our commitment to forums to bring people and ideas together to grow the good in business and in life. Dan, thank you for moderating again for the second year. Doug, Ken and Joel, thank you for your insights and continuing our thought leadership in this important sector. And thank you the listener for listening.
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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