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July 25, 2018 | Greg Gerber
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Secure,  Rapid and Unchangeable — Blockchain Will Revolutionize Ag Transactions

Agriculture giants are starting to use blockchain technology to increase transaction transparency and decrease expenses, risk

Secure,  Rapid and Unchangeable — Blockchain Will Revolutionize Ag Transactions

New technology is promising to revolutionize the agriculture industry, especially when it comes to trading commodities. 

The framework for blockchain technology came out of the cryptocurrency industry, but it really has nothing to do with electronic money. Instead, its focus is on document control.

Blockchain provides a new way of storing data, allowing users to transfer value, or assets, between themselves without the need for intermediaries, says Emma Weston, CEO of AgriDigital, an Australian company.

There are some notable features of blockchain technology, she explains, including:

  • Blockchain allows peer-to-peer transactions rather than relying on an intermediary to facilitate transactions.
  • Information is distributed throughout the network in place of data being stored in a centralized database.
  • Data is cryptographically secure and stored in a way that it is immutable. 
  • Changes to the state of the network require consensus among participants to approve transactions.

“Despite the overall digitization of the global economy, agriculture remains one of the world’s least digitized industries,” says Weston. “Agriculture missed out on many of the benefits of the ‘first wave’ of the internet and associated technologies, due to a lack of connectivity and ready technical skills.”

Blockchain involves a single electronic register that gives everyone party to a transaction access to the details about it. If one person changes something on the ledger, it is updated on everyone else’s copy in real time. 

The technology is so new that banks and software companies are competing with each other to develop what could become the standard for the rest of the industry. Consequently, few people will go on record to talk about their company’s role in developing or deploying blockchain.

Replacing letters of credit

Blockchain technology is poised to replace the old “letter of credit” transactions that have dominated agriculture and industry sales for years. It is estimated that one in five commercial transactions worldwide still require letters of credit. Firms spend hundreds of millions of dollars annually to remain loyal to 19th-century technology. Blockchain will eliminate that expense and greatly improve the speed at which transactions can be closed. 

Overseas sales can be complicated at a variety of levels, and when physical documents have to accompany a shipment on every leg of the journey, it takes time. 
For example, with letters of credit transactions, grain leaves a farm on a truck that takes it to a storage facility. From there, it goes on a train and then to a shipyard, where it’s placed aboard an ocean-going vessel. Once it arrives at its intended port, it goes back onto a train, then to a truck until it arrives at its final destination. Banks serving buyers and sellers are involved in every step of the way, as are shipping companies and customs officials. 

Each time the goods changed hands, accompanying documents were exchanged as well. Files would go missing, or customs officials would declare them to be incomplete. Duplicate documents would need to be recreated, assembled and delivered to the bottleneck.

“Global trade is still largely paper-based and manual, and information around a commodity does not flow freely between supply chain participants. Costly back-office reconciliation processes continue to add additional costs and human error into agri-supply chains,” says Weston.

Blockchain allows each participant, large and small, to grant permission to others to view documents of particular importance to them. A ship’s captain, for example, would have access to documents pertaining to content, customs clearance and hazardous material. He would not necessarily have access to the price paid to the grower, or data about the trucking company that moved the grain from the grower to the warehouse.

Each party knows exactly who is in possession of the goods and where the shipment is along the journey. Blockchain shows that the six-ton order of wheat is on a numbered container on a ship expected to arrive at a certain port on a particular date.

A robust supply chain

“Supply chains are a natural market for blockchain technology. These are networks where multiple participants operate who may not trust each other, but who require access to a single set of verifiable data and claims about a common asset,” Weston explains, noting that it could become the foundation for a  very robust supply chain.

One source says it’s not unusual to have 60 different pieces of paper for any transaction. That can include packing lists, quality reports, certificates for imports, custom waivers, invoices, purchase orders, receipts, proof of insurance, bank agreements, etc.

That big stack of paper was often delivered via overnight carrier from one party to the next on the custody chain. The recipient would review the stack, add material, sign off and pass it on to the next party. Even with overnight delivery, it could take up to three business weeks for everyone to agree to terms — and that’s without someone losing or accidentally discarding an important document.

Blockchain technology allows each person to have access to information required in real time. The “smart contracts” are accepted through electronic signatures that are then visible to all other parties with permission to access the data. 

Ultra-secure transactions

“The nature of blockchain means that transactions are visible to all collaborating parties and can only occur once verification against predetermined rules is authenticated,” says Weston. “Once it is authenticated, an immutable and cryptographically secure ‘block’ is created that cannot be changed or deleted, thus building an effective and accurate audit trail. 

“This immutability eliminates the occurrence of fraudulent transactions and captures and tracks provenance, while also making payments instantaneous, improving cash flows and helping businesses to grow,” she added.

Cross-industry collaborations in the blockchain and agricultural space are beginning to emerge.  IBM recently partnered with Walmart, which sells 20% of all food in the United States, to develop software that uses blockchain to track products through its supply chain from the farmer through to the consumer, says Weston.

“The aim is to reduce the time taken to track produce and identify food fraud, tampering, or spoilage,” she explains.

“With awareness and demand for traceability continuing to grow, we’re seeing more and more agtech collaborations using blockchain and other technologies such as artificial intelligence (AI) and the Internet of Things (IoT),” she adds. “It’s an exciting time to be involved in this industry, and it is growing at a rapid pace.”
Blockchain transactions can be considered either on-chain or off-chain, says Weston. 

“Put simply, on-chain transactions are validated and authenticated by each participant along the chain and are then publicly available. However, in cases where data is sensitive, the transactions can be performed off-chain,” she says. “Here, information is moved outside the blockchain, relying on other methods to record and validate the transactions,” Weston adds. “Not all information must be shared on-chain. It is at the party’s discretion.

“In terms of data security, all transactions recorded on a blockchain are secured through cryptography. Network participants have their own private keys that are assigned to the transactions and act as a personal digital signature,” she notes. “If a record is altered, the signature will become invalid, with the network immediately aware that an attempted breach has occurred.”   

First transaction tested

In December 2016, AgriDigital completed the world’s first sale of a physical agri-commodity on a blockchain between a farmer and a buyer. Farmer David Whillock sold a truckload of wheat to Fletcher International Exports in Dubbo, New South Wales, and made history. 

“Since that time, we have conducted a number of pilots and proofs of concept including demonstrating how provenance of organic goods can be maintained and confirmed from farmer to retailer and automating access to supply chain finance for buyers and its provision by banks and other financiers,” says Weston

Other firms are jumping aboard the blockchain train, too. In January, Louis Dreyfus Company, Shandong Bohi Industry, ING, Societe Generale and ABN Amro were involved in an agricultural commodity transaction using a blockchain platform.

This trade included a full set of digitalized documents and automatic data-matching, thus avoiding task duplication and manual checks. The transaction demonstrated significant efficiency improvements for all participants in the chain. Time spent processing documents and data was reduced fivefold, a press release noted. 

Last year, the firms involved in that test developed the Easy Trading Connect platform to digitalize and standardize commodity transactions. It was first validated with an oil cargo transaction in February 2017. The same principle was then applied to develop a blockchain-based platform tailored to agricultural commodities trading. 

The enhanced platform was then used to execute a soybean shipment transaction from the United States to China and covered the full complexity of the operation, including a larger number of participants and a broader scope. 

“One thing is clear: the digital revolution is transforming the commodities sector,” says Gonzalo Ramírez Martiarena, CEO of Louis Dreyfus Company. “Distributed ledger technologies have been evolving rapidly, bringing more efficiency and security to our transactions, and immense expected benefits for our customers and everyone along the supply chain as a result. 

“The next step is to harness the potential for further development through the adoption of common standards, and welcome a truly new era of digital trade flow management on a global level,” he adds.

Available soon

Blockchain technology will be rolled out soon by banks serving the agriculture industry worldwide. Some people predict wide-scale acceptance and application within two years after the first software is released to the industry. To speed acceptance, bigger banks are willing to share their open source software with smaller financial institutions that want to join the consortium, one source notes. Technically, the software isn’t legally owned by any person or company, although patents have been sought to help prevent its use for illegal purposes. 

Banks are hoping for a snowball effect in that as more companies use blockchain and see its benefit, the more acceptance it will gain. 

AgriDigital is currently the only provider of blockchain-enabled agri-commodity management software globally, says Weston. 

“At AgriDigital, we believe blockchain, in combination with a whole digital solution, holds some exciting prospects for agriculture including building digital trust across agri-supply chains, reducing transactional risk, improving commodity traceability from the farmer through to the consumer,” says Weston. ❚

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