Blockchain: Changing Interaction in the F&A Supply Chain

RaboResearch analyst Wesley Lefroy examines how the digitised approach to managing supply chains through blockchain could benefit farmers, traders, processors, supermarkets, and consumers by boosting transparency and efficiency.

A feature of many new digital agricultural technologies is that they focus on an individual segment of the food & agri value chain. 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 transparent way which will deliver efficiencies, while also alleviating counterparty risk.

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.

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.

Blockchain in the Grains & Oilseeds Supply Chain

Application of the technology is advancing quickly within the Grains and Oilseeds sector. Australian Grains handler CBH recently announced a pilot of the technology within their 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.

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.

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.

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 reconciliation meant cross-checking paperwork from multiple sources, now the technology reconciles the transaction, at the time of the transaction—drastically boosting efficiency.

Is Blockchain ready to take off in the F&A supply chain?

The pool of companies trialling blockchain is growing rapidly, but 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, must all participate in a common interface and enter 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.

Read the complete RaboResearch report here.