Food and Ag Takeaways From the Farm to Market Conference

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Dan Barclay | May 31, 2021 | Food & Beverage, Agriculture

Keywords:
Agribusiness And Protein
farm to market

Dan Barclay | May 31, 2021 | Food & Beverage, Agriculture

Dan Barclay, CEO, BMO Capital Markets, moderated a discussion on the takeaways from BMO’s 16th Annual Farm to Market Conference across the food and agriculture value chain.

Joel Jackson, Chemicals and Fertilizer Analyst, explores how farmers and crop input producers are handling higher commodity prices, how on-farm carbon management and sustainability are becoming increasingly relevant, how digital agriculture analytics tools have become table stakes, and how technology may become the solution to a host of farming stresses, including sustainability, labour shortages, and an aging farmer demographic.

Kelly Bania, Food Retail Analyst, discusses the critical importance of supply chains in the food industry, the outlook for food inflation, and how membership fatigue could push more partnerships across the consumer landscape so that retailers can offer benefits beyond the basics.

Ken Zaslow, Food and Agribusiness Analyst, dives into how many of the companies across the food supply chain are positioned to benefit from the current environment. In addition, he suggests that the inflation we are seeing is both broad based and demand driven, and exacerbated by supply constraints, implying it is unlikely to ease in the near term. Ken also digs into the learnings from his recent report “Mission Impossible: Assessing ESG Risks and Opportunities in the US Packaged Food Industry.”

Together, Dan and the three analysts take a deep dive into trends of the future, inflation, and ESG in a 20-minute podcast that covers the core themes of BMO’s 16th Annual Farm to Market Conference.

Subscribe to this free podcast and never miss an episode or visit the BMO Equity Research website for more great episodes of IN Tune.

Podcast disclosure

Transcript

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.

[Theme music]

Bert Powell: Today on BMO Capital Markets’ IN Tune podcast we dig into the investor takeaways of our 16th annual Farm to Market

conference. I am Bert Powell, Global Director of Equity Research for BMO Capital Markets. Our Farm to Market conference spans the global food

and agriculture value chain. In 2021 we had the pleasure of hosting 90 public and private companies presenting to more than 500 equity, debt

and private equity investors on the trends, ESG initiatives, technology and the outlook for companies who fall within the farm to market value

chain. Today on our podcast we are pleased to be joined by BMO Capital Markets Group Head, Dan Barclay who will moderate a discussion on

the core takeaways from our Farm to Market conference between three of our Equity Research Analysts: Joel Jackson, who covers Fertilizers

and Chemicals, Kelly Bania, who covers Food Retailers, and Ken Zaslow, who covers Food and Agribusiness. Dan, welcome to the In Tune

podcast.

Dan Barclay: Thanks, Bert. It's great to be here today and talk about our 16th Farm to Market conference and our second consecutively in a

virtual format. The common theme among attendees was acceleration and innovation. No matter what the vertical, they're all working

towards a common goal, to drive solutions linked to sustainability, scalability, and improved cost efficiency in order to combat inflation, labor

reductions, and supply chain management. During last year's conference, we were in the midst of a global lockdown and pandemic. We had

no idea how long it would last. Today, we're seeing vaccinations rolled out around the world, and the global recovery on the horizon, a very

different backdrop for the conference. And we started to see the impacts of COVID-19 in the agriculture and food sector. So, for our first

question to each of you, what was your single biggest takeaway from the Farm to Market conference? I'll start with you, Joel.

Joel Jackson: Thanks, Dan. I think for me, it was how quickly we went from the sky is falling in agriculture only 13 to 14 months ago. That was

because of estimates of huge crop carry-outs in inventory, closed ethanol plants, there were lower fertilizer prices, and there were challenged

seed markets. But now suddenly, we have top-of-cycle expectations for growers and crop input producer profitability. That being said, at the

conference, we did detect more cautious optimism than outright bullishness as I think that preceding challenging years of marginal

profitability and the fact that farmers still haven't monetized these high crop prices yet, and the concern that ag cycles tend to be short-lived,

where they're keeping farmers and crop input producers level headed.

Dan Barclay: Ken?

Ken Zaslow: Thanks, Dan. Echoing what Joel said, the level of confidence in which the companies across the food supply chain believe they are

positioned to benefit from the current environment was our biggest takeaway. Across our coverage universe, they all believe that years of

hard work and less-than-ideal market conditions have laid the foundation for them to reap the benefits from the current favorable

environment. Agribusiness companies, such as Bunge and ADM are capitalizing on China demand and Renewable Diesel. The protein

companies like Sanderson Farms and Tyson are benefiting from the chicken sandwich wars and the emergence from COVID. People sometimes

forget about the packaged food companies. But they also can benefit from elevated demand, as well as their data analytics, which is making

pricing easier to pass through.

Dan Barclay: And Kelly, take us home.

Kelly Bania: Thanks, Dan. So, our biggest takeaway is just how dramatic the change has been in one year. And I think nowhere is that more

evident today than in the supply chains. And I think it's crystal clear that the companies themselves learned a lot about their supply chains,

and will be investing in supply chains, even to a greater extent going forward. So last year, the food supply chain was so stretched at the

grocery industry, and now supply chains are being stretched on the food service or food away from home side. And as flexible as employees

have been over the last year, it's just evident that you cannot start and stop the global supply chain for food on a dime and expect no friction.

So, we're working through that friction now. But these extreme scenarios have allowed the companies to learn a lot about their strengths and

weaknesses in their supply chains. And I think we'll see a lot of investment across the food supply chain going forward as well as investment

in employees.

Dan Barclay: That's great. Obviously, one of the hot topics for the conference was a conversation about inflation. So Kelly, maybe first with

you, what are you seeing from an inflation perspective across your coverage? And how are the companies managing?

Kelly Bania: Sure, so a lot, a lot to talk about on inflation. And I think, importantly, to put the current environment into historical perspective.

So we are currently expecting high-single-digit food inflation. The last time we were anywhere near that high was a decade ago in 2011. And

that was in the five to six percent range. Prior to that it reached as high as seven percent in the late 2008. But levels higher than that have

not been seen since the late 70s or early 80s. And that would be in the low-double-digit range, which we're not expecting today. But what's

interesting is that we've done a lot of work on the consumer stimulus here in the US and the state of the consumer suggests that they're in

better shape than recent memory to digest an above-normal level of food inflation. In a normal environment, we would say low-single digit

could be a positive. So perhaps the threshold is a little bit higher today than what would be normal. But at the end of the day, the inflation not

only in food, but across the consumer landscape will be eroding the purchasing power of consumers. And I think what we heard at the

conference was some companies starting to admit that the potential for inflation to be a little ahead of their plans from just even a couple of

months ago, but we're also hearing that some of the inflation may be induced by the labor-related challenges across the supply chain. And

there's this expectation that some of that could subside by the fall timeframe. And so we'll be watching closely to see if the rate of change

could moderate by then, which I think would be a positive. And what we've been talking a lot about in our coverage across food and food

retail, and distribution is that the distributors can really pass through the inflation. There may be a little bit of a timing lag, but it's the retailers

that have to deal with the end consumers.

Dan Barclay: That's great. Ken, how about in your universe? How are they thinking about inflation?

Ken Zaslow: Yeah, inflation has been really 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 commodities, packaging and logistics, which means it's pervasive and affects everyone. As a result, the

packaged food companies believe they can take pricing across their entire portfolios. Second, it’s demand-driven exacerbated by supply

constraints, which means it will be around for at least another year. Although we think the rate of inflation will slow after the pent-up

consumer demand wanes and supply constraints ease, we will still be left with China and Renewable Diesel driving inflation. What this means

is that it is still a very favorable environment for agribusiness and protein companies.

Dan Barclay: And Joel, you've got a slightly different perspective, with commodity prices having stepped up materially over the last year, what

are the impacts for the growers and the crop input producers?

Joel Jackson: Right, you know, growers, particularly in the US, really have struggled to be profitable up until this year. Farmer incomes have

been marginal despite subsidies as crop prices have been lackluster following many years of strong yields and good production. And this has

definitely led to deteriorating balance sheets and lower liquidity for farmers and in turn has limited fertilizer seed and crop protection chemical

price upside. In the seeds market, for example, large seed producers like Bayer and Corteva have not been able to raise prices sufficiently to

cover large research and development budgets. And growers have not been paying the proportionate share of having higher yielding seeds

that produce higher revenue for them. In fertilizer, we've seen prices barely higher than marginal costs. And that's led to quite low margins,

production curtailments and other negative outcomes. Suddenly, with corn prices no longer trading generally before $4 per bushel, but now at

$6 even higher, and we're seeing similar increases in other crop prices. Well, suddenly growers are set up on paper this fall to earn nearrecord profitability, and they want to do anything they can to ensure strong yields this year. This along with higher cost curves, because of the

general commodity inflation we're seeing, this has led to the highest fertilizer prices in close to a decade, and expectations for much higher

seed prices starting the second half of the year. So, sentiment is bullish among growers and crop input producers for a sector that has

generally been depressed for years, and we're likely to see higher farmland values as well.

Dan Barclay: Those are great perspectives. I think the second big topic that we wanted to do a little dive on coming out of the conference was

around ESG. Ken, BMO’s approach is to integrate ESG into our fundamental research. How is the packaged food industry progressing on its own

ESG initiatives?

Ken Zaslow: That's great question. With the meteoric rise in ESG investing, we tackled the ESG topic within the food industry in a report we

published a couple of weeks ago entitled “Mission Impossible: Assessing ESG Risks and Opportunities in the US Packaged Food Industry”. Our

key finding in the report is that the pace at which the US food industry is executing on ESG has accelerated markedly over the past few years.

And now we're actually on a mission to debunk the perception that the US industry are not a favorable ESG investment. In fact, we expect

companies that are accelerating the ESG initiatives to enjoy the greatest valuation premiums over time as the ESG initiatives become more

appreciated by the market. But what really distinguishes the best in breed are those, what we call, Superpowers a focus on or a specialty area,

such as regenerative agriculture, such as General Mills. So again, what we think is that the US packaged food industry is really tackling this

issue and making serious progress.

Dan Barclay: And Joel, how is the topic of carbon management in farming come along? And will it be a benefit or a burden for farmers and

crop input producers?

Joel Jackson: Thanks. You know, earlier if you asked me what the largest takeaway was from the Farm to Market conference, I gave a different

answer, but could have also answered that the monitoring and monetization of sequestered carbon farmland, and just the general assessment

of sustainability of crop production, how stakeholders will deal with it. Well, that's become one of the most talked about topics among

growers and the broader agriculture industry. Many believe that farmland management is one of the largest contributors to climate change,

with ag having the potential to move from being a net emitter of CO2 to a net sequesterer. Soils are known to have strong carbon

sequestration properties and emissions can be reduced, and sustainability scores improved, by following different ag practices such as no till

farming and optimal crop input application. Actually, many farms already do follow these practices. What we are seeing is the potential for

two revenue streams to be established over time to encourage growers to bank more carbon in the soil and be more sustainable. First,

straight carbon credits from government sources in various countries if growers can lower carbon emissions. Second, and what's really

interesting is the concept of food and ingredient companies contemplating demanding the grading of sourced grain based on sustainability

and carbon metrics, and perhaps offering higher grain price premiums to products sourced from more sustainable farms. Now, the issue here

is how to monitor the farms, assess sustainability, allow farmers to collect carbon credits, and feed this data to grain purchasers. Many leading

crop input and technology companies, as we speak, are working on tools for this. With the dreams of a hydrogen economy starting to

percolate, nitrogen fertilizer producers also seek to sell lower carbon fertilizer at premiums. In order to get growers to pay for such products,

the hope would be farmers could get incremental revenue from the ways I just described.

Dan Barclay: Thanks, Joel, why don't we switch to the future? And what we're seeing and what we're thinking about? Kelly, I'm gonna start

with you. What is retail media—and why are retailers investing in these capabilities?

Kelly Bania: Sure. So retail media, the simple answer is that retail media has actually been around for a long time. What we're talking about

today is really digital retail media. So that means basically advertisements on eCommerce and retailers’ apps. And what that could include is

everything from sponsored search, display ads, even digital out of home. So if you're checking out at a grocery store or a gas station, and you

see a screen with an advertisement, that would be retail media. And so what has happened, as retailers, both large and small now, they have

taken notice to what Amazon was able to do with their platform, generating a multi-billion-dollar advertising business. Now, for a retailer

advertising is a very high margin business. Obviously, food retailers operate on historically pretty low margins. So as food retailers have gone

deeper into eCommerce, and clearly the last 12 months and the pandemic has really accelerated that penetration of eCommerce, and

probably pulled forward a trend that was happening by years. So just for context there, we probably went from a low-single-digit penetration

of grocery sales being online or digital to now a low-double-digit range, which was basically almost overnight. So as that low margin, part of

their business has increased, retailers have really been developing capabilities to capitalize on this high margin advertising dollar business.

And that can include on their own properties, and sometimes even off property, because retailers have valuable first party customer data. So

some of the large retailers like Walmart and Kroger are doing this in-house with their own capabilities and building out their tech stacks.

Albertsons is one that spoke about this at the conference last week. They are even building some more capabilities in-house and investing

here. And even some of the small retailers now, even some of the small and large retailers can work with a third-party provider which such as

Quotient, who was also at the conference. So retailers are very focused on driving that digital engagement with their consumers in order to go

after this high-margin area of their business which may be able to help them buffer some of the margin pressure from a growing eCommerce

business.

Dan Barclay: That's fascinating. Joel, how about you? You've done some recent work on digital agricultural data science software, analytical

tools for crops and equipment suppliers. And you're suggesting this technology is simple table stakes. What are your perspectives around this

today?

Joel Jackson: Yeah, thanks. Yeah, in March, we published a thematic deep dive on digital agriculture entitled “Digital Ag – Powerful Analytics

Tools, but So Far Only Table Stakes”. The report talks about the big data analytics software and automation tools developed over the past

decade and supplied by crop input producers, ag equipment makers and some independents. The tools attempt to create actionable and

predictive agronomic intelligence for farmers to manage planting, the fields and yields. Bayer and Deere are the industry leaders here, there

are many large competitors, including Corteva and Nutrien. Look almost a decade ago, companies like Monsanto had big aspirations to charge

farmers large, discrete per acre fees for digital ag analytics. But our bottom line is today, the promise never panned out. Truly paid acres are

now only tiny, with growers struggling to justify return on investment. Plus, ROI is difficult to quantify. Farming has many variables such as

weather, pests, product decisions, luck, human actions… And good datasets take years to generate. So digital ag is clearly now not influential

in driving farmer decisions. In turn, almost all suppliers despite investing billions in this so far, they now largely bundle the software with core

crop input products and services for free or near free as table stakes and throw-ins. For these crop input suppliers, value creation stems from

promoting farm digitization as a means to better understand your growers and better tailor advice to those growers and identify product and

service upsell opportunities. Therefore, while the tools do add some value, standalone digital ag providers not connected to crop input or

equipment sales, despite any independence, will likely continue to struggle to be profitable solely on advice-tied subscriptions. And to really

monetize these tools one day, digital ag likely requires clear evidence of direct ROI for farmers. This could stem from input cost savings, such

as reducing nitrogen fertilizer spend without sacrificing yield, or supporting new revenue streams (for example, on-farm carbon

management).

Dan Barclay: Quite a difference than expectations from what seems like a short while ago. Let's move to close out the podcast and we'll go

with one final question. Staying with the future. I'm curious about what a trend is that you would expect a year from now that few are talking

about today? Why don't we start with you, Kelly?

Kelly Bania: Sure. So such an interesting question, and so many ways to take this. But you know, one of the things that we thought about just

coming out of the conference, and given some of the work we've done on the state of the consumer, it's this notion of membership fee

fatigue. And if you think about how many memberships consumers are being asked to join today, I think you could get to a point where

consumers increasingly become more discerning on the memberships that really bring a lot of value and convenience, and that some on the

periphery may get streamlined. And particularly again, when we come out of this consumer environment here in the US where consumers’

wallets are not being massively supplemented by stimulus dollars like today. So we did some work and have estimated that the magnitude of

consumer stimulus checks that have hit wallets for consumers in the US in 2021 is nearly twice as large as it was in 2020. And 2020 was

pretty unprecedented as well. So you know, this kind of came up at Farm to Market but I think it may have fallen under the radar. And one

example was when we were speaking with Kroger, who's obviously the second-largest food retailer in the US, they mentioned some

challenges with a test that they're doing for an online grocery delivery membership. And they kind of suggested that consumers already get a

lot of free perks with their existing loyalty program, and that adding a fee onto that is difficult. And so just curious if that may be one of the

first signs that we're seeing, which will be interesting because investors really love those recurring revenue streams for obvious reasons. So

this will be I think, something interesting to watch as we move into next year.

Dan Barclay: Over to you, Ken.

Ken Zaslow: We think there are really two key trends that will probably emerge over the next couple of years. The first one, we would not be

surprised if investors restart the conversation about food versus fuel, as inflation takes hold and policy focuses on the environment. The

second one, which links again to the ESG side of it, is we think that carbon capture will become the topic for next year across our industry.

Dan Barclay: And lastly, Joel.

Joel Jackson: I think a few people in the investment community are really talking about the stresses and strains on farmers, and perhaps how

technology can start to solve some of these problems. The stresses we see come from sustainability and carbon management, labor shortages

and aging farmer demographic. While perhaps digital ag isn't that valued for assisting growers in their input decisions, better analytics and

data science tools could possibly help growers deal with many of these other problems I just mentioned.

Dan Barclay: That's great. Let me say thank you to all, especially you Joel, Kelly and Ken, great insights from you. And once again, congrats on

a successful Farm to Market conference. Hopefully you've enjoyed the podcast, we continue to focus on ways that we can provide a forum for

our clients to engage and pass along our insights in a very relevant and digestible way. We're looking forward to next year's conference. It will

be the best ever. And hopefully what we'll do is we'll see you all in person.

Bert Powell: That was Dan Barclay, BMO Capital Markets Group Head, Joel Jackson, Fertilizers and Chemicals Analyst, Kelly Bania, Food Retailer

Analyst, and Ken Zaslow, Food and Agribusiness Analyst sharing their takeaways from BMO’s 16th annual Farm to Market Conference. We are

pleased you could join us for this edition of BMO’s IN Tune Podcast.

[Theme music]

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

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

Dan Barclay

Senior Advisor

Effective November 1, 2023, Dan Barclay will retire as Chief Executive Officer & Group Head, Capital Markets, and transition to a role as Senior Advisor to the …(..)

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Dan Barclay, CEO, BMO Capital Markets, moderated a discussion on the takeaways from BMO’s 16th Annual Farm to Market Conference across the food and agriculture value chain.

Subscribe to this free podcast and never miss an episode or visit the BMO Equity Research website for more great episodes of IN Tune.

Podcast disclosure

This is part 1 of a 4-part series on