You can't set columns or not based on conditions: the syntax doesn't allow for it.
What you will have to do is two UPDATES or
UPDATE [AdventureWorks].[dbo].[tbl_FocusAgents]
SET Focus_FarmFocus = CASE WHEN @agency_lob = 'Farm' THEN 'Y' ELSE Focus_FarmFocus END,
Focuse_CommericalFocus = WHEN @agency_lob = 'Commerical' THEN 'Y' ELSE Focuse_CommericalFocus END
WHERE Focus_FocusAgentCd= @agency_entire_code