History was made on December 8, 2016, when Australian wheat grower David Whillock delivered 23.46 mt to Fletcher International Exports in Dubbo, New South Wales. The transaction was settled through blockchain, the technology underpinning emerging cryptocurrencies such as bitcoin. And Whillock got his payment instantaneously: a global first between a grower and a buyer for the agriculture industry.
Blockchain technology is a secured database allowing multiple independent parties to share information and trade using the synchronized and shared ledger.
The deal was “auto-executed” by a smart contract run by commodity management platform AgriDigital. This smart contract performed a series of tasks, including valuing the delivery, verifying that the buyer had sufficient funds, and securing the funds in the grower’s name pending delivery.
— Emma Weston, Full Profile CEO
Once the grower made the physical delivery, the title for the grain was transferred to the buyer as the grower’s payment was simultaneously created from the reserved funds.
The transaction was done as part of a live pilot, during which AgriDigital was connected to a multi-node private Ethereum blockchain network.
Throughout the process AgriDigital managed the nodes, acting as operator, buyer, and regulator, to create an example of ecosystems that may occur a lot more frequently across commodity markets in the future.
In an interview with S&P Global Platts, Emma Weston, co-founder and CEO of Full Profile, which owns and operates AgriDigital, talked about this groundbreaking deal and its implications for commodity trading.
Q: What are the main benefits of using blockchain technology for Agri-markets as a whole?
A: Blockchain has the potential to transform the entire agriculture industry.
For a sector that employs 40% of the global workforce, the benefits to be gained from applying distributed ledger technologies are enormous. In particular, blockchain has huge potential in three key areas of the agriculture industry:
1. Provenance and radical transparency
2. Mobile payments, credits, and decreased transaction fees
3. Real-time management of supply chain transactions and financing
De-risking the agri-supply chain through real-time settlement of physical commodity transactions has broad benefits for all participants by increasing efficiency, trust and security.
For growers, blockchain technology provides enormous benefits by providing fast and secure payment.
Typically, payment terms in the Australian grains industry range from two to five weeks, and it is these terms that pose counterparty or credit risk to growers. The elimination of this risk means growers can be secure in their cash flow and better manage their businesses. For buyers, blockchain offers both back office and liquidity benefits.
AgriDigital offers workflow automation (via smart contracts and integration with key machinery and data collection points such as weighbridges and quality testing instrumentation) as well as auto-reconciliation for inventory, which poses high cost and risk to buyers. Buyers are also reliant on various supply chain finance forms to ease their working capital needs, particularly in high transactions periods like harvest. Blockchain enables more flexible supply chain finance options that operate in real-time.
Automation of accessing finance and instant payments are vast improvement on current manual processes and slow turnaround times. An additional benefit of the distributed ledger model is improved access for regulators, quasi-regulators and authorities. Levy and royalty collection and remittance with transparency to the relevant data in respect of those payments is a significant problem that we are now able to solve.
Finally, the entire agri-supply chain will have access to verified data on each commodity, meaning consumers can trust where their food comes from.
Q: Can these benefits be repeated in other global commodity markets?
A: While we are currently focused on the grains industry, we have designed our solution to be both cross-commodity and cross-geography. We have immediate demand from the grain and livestock industries and we are also seeing demand from aquaculture, horticulture, cotton and wool sectors — the demand is global.
We are going to see more and more novel applications of blockchain and blockchain-inspired technologies in the agricultural sector from both incumbents and startups. In 2017, it is likely we will experience the rise of the supply chain use case more generally with increased experimentation in this area. We have already seen a lot of focus from banks and technology providers in this space and we believe this will increase.
Q: Can you see any obstacles to its deployment across commodity markets?
A: The practical application of blockchain technologies currently relies on integration with existing commodity management software to facilitate the transactions and provide user interface.
Currently, many participants rely on older, legacy software with limited functionality and inter-operability.
Innovative commodity management software solutions are critical to deploying blockchain technologies. We are focused on developing user-friendly interface for ease of adoption, minimizing any need for change in behavior and mapping our technology solutions to the physical environment — for example with existing infrastructure and commodity life cycles.
More generally, but of critical importance is the impact of regulatory and other market uncertainty. We are committed to continuing our stakeholder engagement in an effort to address these uncertainties and to build pathways for mutual understanding and cooperation around technology standards, governance models and cross-border compliance.
Q: How does your business interact with physical supply chain operators?
A: AgriDigital is designed as a platform for all supply chain participants, and site operators such as bulk handling companies are already able to act on the platform. Freight and inspection services will be incorporated in the future.
Q: Are transactions settled via blockchain confidential?
A: While the transactions happen in plain sight, each counterparty’s data is encrypted so the content and meaning of it can be completely obfuscated.
Confidentiality of certain transactional data is important to many of our users and so this is an area we continue to investigate. There are also blockchain technologies that allow only counterparties to view the information.
Q: Are counterparties required to use bitcoin to trade?
A: For the AgriDigital pilot, though transaction settlement occurred via a distributed ledger, ultimately the grower received payment in local currency (in this case Australian dollar) to its nominated bank account. The settlement on the distributed ledger created a message file to the bank to make the payment using traditional methods on a same-day basis. The initial approach we have taken, allows for ease of adoption and there is no need for users to hold a cryptocurrency. With the advent of digital currencies that are fiat backed or issued by central banks, we anticipate that smoother settlement and payment methods will be built out in AgriDigital.
Q: What are your plans for expansion?
A: We plan to execute a similar pilot in the Canadian grains industry in 2017 and expand into other commodities. We have deliberately started at the beginning of the supply chain with our farmers. It is crucial that the primary transaction in the supply chain be accurate and validated to ensure informational integrity as the commodity passes through the chain.
Our focus in 2017 is on expanding AgriDigital in the Australian and Canadian grain markets, building our financing platform, and, commercializing the blockchain component of our solution. Beyond this, we will be investing our efforts in provenance, entering the global markets and other commodities.
Applications for blockchain are becoming clearer as use cases and tailored solutions begin to emerge around the world, with the aim of helping trade become quicker, cheaper and more efficient.
The highest profile case is Swiss trader Mercuria, which is working on the settlement of a large oil transaction with ING and Societe Generale, Reuters quoted Mercuria CEO Marco Dunand in Davos last month.
Cotton trading platform The Seam announced in January that it was working with IBM to “lead an industry-wide collaboration initiative” to create a supply chain and trading ecosystem based on blockchain. This move comes hot on the heels of a blockchain-settled trade between Wells Fargo and Commonwealth Bank of Australia for a shipment of cotton from the US to China in the final quarter of 2016.
Another Australian startup, Blockfreight, is aiming to bring similar efficiencies to global container freight markets.
Improved cargo traceability through blockchain could help avert fraud such as the Qingdao port scandal, where in 2014 real or imagined physical volumes of copper, alumina, steel and other metals where used as collateral for multiple loans.
Trading practices can be slow to change in some of the more conservative commodity markets, but given the range of applications that blockchain offers, it is hard to believe that it won’t play a role of some sort in the near future.