Is blockchain technology about to go mainstream in food and agriculture?
Commodity traders, exchanges and even enforcement agencies are taking the digital leap
The blockchain has become one of the buzzwords of recent years, with major players like Cargill and Louis Dreyfus Company conducting successful trials, but is the technology ready to be implemented on a large-scale basis in the agricultural commodities sector?
So, first of all, what is blockchain? Put as simply as possible, it is a form of distributed ledger technology (DLT), fundamentally a decentralised record-keeping system which uses networks of computers to share and update information in near-real time.
Each computer stores a ‘block’ of time-stamped data, which is encrypted and only accessible by the data owners or those the owners have granted access. It is important to note that while every blockchain is a DTL, not every DTL is a blockchain.
In a blockchain transaction, the need for third-party verification is eliminated as both sides of a deal – buyer and seller – can be completed at the same time.
The use of blockchain in banking is also expected to reduce the risk of fraud in letters of credit and other transactions, as well as cut down on the number of steps used. A group of European banks recently completed the first live blockchain-based cross-border financial trades via a jointly developed platform called ‘we.trade’.
Other potential uses for blockchain technology include:
- Smart contracts: distributed ledgers enable the coding of simple contracts that will execute automatically once certain specified conditions are met; for example, a derivative could pay out when a financial instrument meets a certain benchmark. Ethereum is an open-source blockchain project developed specifically for this use.
- Supply chain auditing: the blockchain offers increased transparency and traceability through time-stamping data with dates and locations. UK-based Provenance for example offers supply chain auditing for a range of consumer goods based on the Ethereum blockchain (see examples below).
- Stock trading: stock and commodities exchanges that are trialling blockchain prototypes include the Australian Securities Exchange, Deutsche Börse and Japan Exchange Group.
Quicker commodity trading
Commodities giant Louis Dreyfus Company (LDC) announced in January that it successfully completed the first full agricultural commodity transaction using a blockchain platform to sell US soybeans to China, with the help of ABN AMRO, ING and Societe Generale.
The trade was conducted using the Easy Trading Connect platform, and included a full set of digitalised documents (sales contract, letter of credit, certificates) and automatic data-matching.
The transaction demonstrated significant efficiency improvements for all participants in the chain, with time spent on processing documents and data reduced five-fold.
Asked whether the blockchain will become the standard way to trade in agricultural commodities, Arien Bikker, senior press officer corporate banking for ABN Amro, told IEG Policy’s sister website IEG Vu: “To do the administrative part on the blockchain gives benefits, so we can expect the technology and its benefits will definitely come into practice. How long it takes depends on several legal, IT and other factors.”
Meanwhile, HSBC announced in May that it had made the first commercial trade finance deal using the Corda blockchain for a Cargill shipment of Argentine soybeans to Malaysia. Rani Misra, regional treasurer APAC at Cargill, said: “Simply put, we took a highly manual, complex transaction and made it more secure and efficient. We see the exciting potential of extending this technology into other areas of our financial ecosystem.”
HSBC said the transaction demonstrates that blockchain “is commercially and operationally viable”. Conventional exchanges for paper-based documentation related to letters of credit usually take between five to 10 days, it added, while this exchange was done in 24 hours.
Traceability & compliance
From tuna fish to halal meat, blockchains have been shown to increase transparency in food supply chains.
Another example is Provenance’s blockchain project to verify proof of payment of a living wage to 55 farmers whilst tracking coconuts from South East Asia to Europe, thus tracking ethical claims and digitally proving fair trading practices.
In the regular sales processes, it’s almost impossible to find out what a farmer receives for the goods he produces. Working with NGO Fairfood, Provenance tracked payment one way, product the other way, registering the harvest via SMS, and verifying chain of custody along the supply chain.
Provenance is also currently taking part in a collaboration of fintech start-ups with consumer goods giants Unilever and Sainsbury’s aiming to link financial incentives to verifiable sustainability claims and transparent supply chains for tea farmers in Malawi, and working with the World Bank and Nestlé to explore how blockchain technology can empower Vietnamese smallholder coffee farmers with access to finance and a better deal for their product.
Meanwhile, the UK’s Food Standards Agency (FSA) this week announced it had completed a first pilot using a blockchain as a regulatory tool to ensure compliance in the food sector, another potential use for the technology.
“This is a really exciting development,” said Sian Thomas, head of information management at the FSA. “We thought that blockchain technology might add real value to a part of the food industry […] whose work requires a lot of inspection and collation of results.”
A further pilot is planned for later this month.
What next for the industry?
Thomas said that any permanent use of blockchain technology would need to be industry-led, because the current data model is limited to the collection and communication of inspection results.
For commodity trading, there are also remaining obstacles in the form of divergent national rules, regulations and standards. Blockchains require a clear framework with operating rules based on common standards agreed by all participants. The technology itself cannot smooth out any differences in regulations.
However, the potential savings in terms of both money and time are huge. HSBC estimated that if all of Asia Pacific’s trade related paperwork were put into electronic form, this could slash export times by up to 44% and costs by up to 31%.
A version of this article first appeared on IEG Policy’s sister website IEG Vu. For further information on IEG Vu, contact the Customer Support team. Alternatively, start a free seven-day trial by clicking on any article on the IEG Vu website and selecting the 'Free Trial' option.