EKA > Commodities Now Back on Blockchain Gang
Jul 27, 2018

Commodities Now Back on Blockchain Gang

 

Is blockchain ready to take on the needs of the world’s agricultural markets? Shuchi Nijhawan, vice president of agribusiness at Eka, takes a look at the blockchain trajectory, what it means for commodities businesses, and whether the hype is justified.

 

Author: Shuchi Nijhawan, Vice-President of Agribusiness, Eka.

 

2017 saw the volume and value of corporate investment in blockchain technologies hit record highs. A CB Insights report shows that more than 140 equity investments with a total value of $1.2 billion have been made by corporations in the blockchain sector since 2012. Walk into any technology hub or start-up accelerator and you’ll soon be on the end of a blockchain-based pitch.

 

Just a few short years ago, the suggestion that blockchain technology was just the latest in a long history of over-hyped but under-performing and soon-to-disappear technologies would gain a lot of traction. Today, that view is largely confined to professional contrarians. Certain analysts are suggesting that this technology will have as profound an effect on industry as the internet has.

 

More and more proofs of concept are coming online demonstrating an extraordinary breadth of use cases, and highlighting some weaknesses. Initially associated with bitcoin and other disruptive cryptocurrencies, blockchain is finding a home in, and offering potentially huge benefits to, more conventional industry sectors – including agriculture and the wider commodities sector.

 

The potential of blockchain for global supply chains is such that IBM estimated that annual savings could amount to more than $100 billion – with a substantial proportion of those savings coming from more efficient commodity movements.

 

What is blockchain

 

The hype is very real and very widespread. Less widespread is an understanding of what blockchain is and what it does – and does not – do. The simplest explanation of blockchain comes from the

 

“[Blockchain is] an open, distributed ledger

that can record transactions between two parties

efficiently and in a verifiable and permanent way.”

 

Harvard Business Review, which says: “[Blockchain is] an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”

 

What that means is that blockchain technologies enable members of an online network to share a record of all transactions they make, giving them all complete and equal visibility and awareness of the latest event in a series of transactions. For example, a commodity supplier would establish a supply chain community of growers, elevators, consolidators, processors, and retailers, validating and authenticating each party. All participants agree to the rules for their shared ledger, and agree to the conditions for defining and enforcing contracts or transactions.

 

As transactions proceed, members register the transfer of goods on the distributed ledger, including information on the parties involved, the price, date, location, quality, current condition of the goods or products, and any other information relevant to managing the value chain. Post-facto amendments can only be made as addenda to rather than alterations of the underlying data; and as updates are logged they are made immediately visible to all participants.

 

Why is this so powerful?

 

Because it creates a transparent, immutable and indelible record to all participants in near real-time. Information in the ledger is visible to every participant at all times. Every change, disruption, delay, and movement is completely open to everyone involved. The scrutiny of the crowd keeps everyone honest.

 

Transparency and automatic compliance can facilitate transactions,

reduce conflict and confusion, ensure data integrity,

virtually eliminate fraud, hasten dispute resolution,

and avoid litigation – with all the efficiency improvements that implies.

 

Now that traditional trading patterns are being scrutinized and reformed, this kind of visibility and the trust it engenders are exceptionally valuable. Transparency and automatic compliance can facilitate transactions, reduce conflict and confusion, ensure data integrity, virtually eliminate fraud, hasten dispute resolution, and avoid litigation – with all the efficiency improvements that implies. It also does so without recourse to a central authority such as an exchange, significantly reducing costs, delays and overhead involved in managing the transaction.

 

Blockchain and agriculture

 

The agricultural supply chain is a complex one, with a huge paper trail that is not always tamper-proof or devoid of risks.

 

At one end of the value chain, blockchain could aid trade execution, collateral management, and deal clearing, making them more streamlined and secure. At the other end, it is about traceability. Managing documentation of ownership, conducting country-of-origin and rules-of-origin checks, ensuring the provenance of GMO and fair-trade products, and more become much easier.

 

Traceability has always been an essential component of maintaining environmental, health and safety standards, but the pressure to demonstrate provenance has increased with changing demographics and customer demands. With a blockchain, agricultural products can be securely tracked all the way from farm to retailer while retaining visibility at every step in the process.

 

The downtown diner selling pulled pork and ribs therefore knows exactly where the animal was raised, how it was fed, and where it was slaughtered. They know when the meat was shipped and how long it was in transit. They know the storage requirements and how long before each product is out of date.

 

In the same way, the end consumer can be sure that the products for which they pay a premium meet the standards they are looking for: whether that’s to avoid allergens, to maintain religious observance, or to express preferences for local or organic farming methods. If a member of a functioning blockchain network claims that a product is organic that information cannot be falsified: tracking will show when artificial pesticides are applied, and when they are not.

 

What’s more, blockchain can remove complete layers from the value chain so that farmers can work directly with retailers, increasing sales for both parties. For example, when a retailer runs out of tomatoes it can be flagged in the blockchain. The farmer who can fulfill the order notes the flag and updates the blockchain to indicate when they can deliver new stock– giving the retailer time to prepare for a new delivery. A blockchain enables the entire transaction to occur without a single telephone call or order form.

 

This scenario can make a tremendous difference to smaller farms, in particular, enabling them to open up new markets, including local restaurants and marketplaces, and bring the advantages of ‘just-in-time’ delivery to a localized supply chain.

 

Hype vs. reality

 

That’s the theory, at least. For blockchain to be an effective solution in diverse markets, each new application requires a clearly delineated process framework in which all participants agree on operating rules that are based on common standards.

 

The history of trade deals alone shows that developing commercial standards can be a delicate business at best, particularly in most commodity- centric industries that cross-national borders and cultural norms. The furor that emerged in the UK in the face of chlorine-washed chicken from the US is an indicator of just how entrenched those norms can be. Blockchain cannot smooth out the tangle of differing rules, regulations and standards in each market or determine a common business code that is agreeable to all government regulators and private enterprises involved.

 

Early reports from some of the proofs of concept run in the energy sector also suggest that the technology has struggled to establish new transactions (new blockchains) in the time required, and has not always excelled at processing large numbers of transactions in a timely and secure manner.

 

Nonetheless, investment in blockchain continues to grow, and new applications are being developed rapidly and the world of commodities continues to buzz with the sound of blockchain chatter. For example, blockchain can help agriculture companies deriven even greater value from existing CTRM platforms – not least by guaranteeing the veracity of the data being fed into commodity analytics models.

 

Blockchains can improve efficiency tremendously, eliminating several steps in the communication process to fulfill orders more quickly and more accurately. It has been linked to any number of commercial processes, from wholesale trade enablement to retail inventory tracking; and we’re already starting to see block-

 

Cautious optimism and due

diligence remain the cornerstone

of any sensible approach.

 

chain playing a powerful role in improving agricultural business performance.

 

That’s not to say that blockchain is the universal panacea that some claim. Any suggestion that it offers a fix-it-all solution – like a Swiss Army Knife of the international commodities trade – should be dismissed. Cautious optimism and due diligence remain the cornerstone of any sensible approach. The goal here is to distinguish between over-hyped promises and reality-based solutions. To borrow a phrase – it’s time to separate the wheat from the chaff.