Rabobank's Wes Lefroy explains how blockchain technology can enhance trade, provenance and transparency, and eliminate payment risk, in agricultural markets

By Wesley Lefroy*

Generally, the focus of new technologies can be on either the inputs sector, or on the farm, in the supply chain or on retail/consumers.

Blockchain is different.

This digitised approach to managing supply chains, is set to facilitate the transfer of physical commodities, finance, and associated information, in a way which supports provenance and transparency, delivers efficiencies, while at the same time alleviating counterparty risk.

By its very nature, blockchain is not focused on one segment of the value chain but leads to implications and possibilities for all; altering how farmers, grain handlers, processors, supermarkets, and consumers interact. Application of the technology is advancing quickly within the Grains and Oilseeds sector. Australian agtech company AgriDigital, partnering with CBH Group, recently announced a pilot of the technology within the CBH oats arm, while GrainCorp, Cargill, and Dreyfus are also investigating the technology with various initiatives. With this in mind, the implications for the industry, and especially farmers, might be closer than most expect.

Blockwhat?

In its simplest form, blockchain is a digital platform that stores and verifies transactions between users. Transactions, or blocks, are recorded on a shared ledger. Individual entities, such as growers or processers own their own copy of the ledger, which is connected to thousands of other ledgers across the network. When a transaction is made, a new record (or block) is created and verified by the network and added to the blockchain. This enables secure and near-instant interactions between businesses. Critical to blockchain is that each block is an encrypted and non-replicable digital record—it cannot be deleted, reversed, or edited—only a new entry that is validated by the entities in the chain can alter the blockchain.

Farmers: new markets will evolve, but provenance and transparency must be achieved

A cornerstone of blockchain is that it enables traceability of information in the value chain, drastically simplifying the process of verifying product origin, quality attributes, and production practices. This offers huge possibilities in a world where consumers increasingly want high-quality, safe products but also want visibility of the supply chain. As a result, transparency along the supply chain will become more important for farmers if they want to take advantage of consumer-driven market change, growing niche markets, and maintain their access to current markets. This is particularly pertinent for Australian, US, and Canadian farmers, who have a growing reliance on quality, safety, and reliability in order to find value in the market. Equally, within these markets, blockchain will likely facilitate the measure of grain quality and value against functional attributes rather than origin, enabling market access for non-traditional suppliers. Ultimately, the lower cost delivery of provenance and supply chain transparency to consumers will create a new minimum expectation in the marketplace.

Transparency and provenance along the grains & oilseeds supply chain

A traditional Grains & Oilseeds supply chain requires each party to transfer financial and specification data records along the supply chain, together with the transfer of the physical grain commodity.

A blockchain system records the data generated by each party along the supply chain and adds it to the transaction record on the shared ledger. It can then be accessed by parties on that shared ledger. Growers can see market information about the time/location of purchase and demand and consumer preferences on the shared ledger. This provides growers with more information about consumption and improves their ability to match production with demand. Conversely, supermarkets, and to an extent, consumers, can have a greater level of understanding of the product inputs, especially at the farm level, with input data and production location easily verifiable.

The sophistication and interoperability of blockchain technology sets it apart from alternate existing traceability programmes such as database record traceability systems and application-based QR code systems. However, for blockchain to be effective, it still relies on the accuracy of information entered into the system, at farm level and throughout the value chain.

In the future, the use of Internet of Things (IoT) will automate the recording of data for input into the blockchain system, reducing the quality of data input issues. However, trust will always remain an issue when it comes to data inputs. A commitment is required from all parties who transform a product in the supply chain to digitally collect and record data, as this is the basis for creating trust in the supply chain. This is particularly important for farmers, as the provenance story is still diluted, without high-quality information about production inputs and origin.

Trade and handling: counterparty risk eliminated, reconciliation simplified

With any transaction there is always an element of ‘will I get paid?’, or counterparty risk. During a transaction completed on a blockchain, the availability of funds is verified prior to a physical transaction, thus removing this counterparty risk. Transfer of the physical product can therefore occur simultaneously with the financial payment. Both for domestic and international transfers, a host of new opportunities are being created to service markets where there is no, or limited, prior trust or where generating trust is more costly. This may open market opportunities where counter party risk was previously a prohibitive barrier to entry. Because the flow of financial information in value chains is already digitised, adoption of blockchain technology will very likely start in financial markets, as the benefits should be easier to reap initially than in other areas.

The shared ledger approach of blockchain dramatically simplifies back-office processes such as the reconciliation of transactions and reporting, a benefit for both grain handlers and farmers. Previously, where reconciliation required collating and cross-checking paperwork from multiple sources, the technology now reconciles the transaction, at the time of the transaction - drastically decreasing the resources required for reconciliation and reporting.

Reality: pilots are flying, commercialisation yet to take off

At home and abroad, the shift towards a digitised supply chain is progressing quickly. In Australia, the world’s first settlement of a transaction involving a physical commodity on a blockchain was completed by AgriDigital in 2016. Aside from the AgriDigital pilots, major grain handlers such as Graincorp, Cargill, and Dreyfus are all testing the application of this technology. More widely, blockchain pilots have taken place for imported Chinese pork and Mexican mangoes into the US by retail giant Walmart, in partnership with IBM. For now, the pool of companies trialling blockchain is growing rapidly, also for applications well beyond agriculture.

In order to achieve value, blockchain requires the involvement of all stakeholders along the value chain.

This means, inputs suppliers, farmers, traders, port authorities, banks, logistical providers, and processors, for example, all participating in a common interface and entering their digital information into the same blockchain. Illustrating value and calculating a proper distribution of costs and benefits may take considerable time, and remains the largest barrier to wide-scale adoption.

Wesley Lefroy is an agricultural analyst at Rabobank Australia based in Sydney. This article was originally published here and is reposted with permission.