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Grain traders prove Blockchain will help agriculture

Published on 30th May 2018

Blockchain is a new way of doing business that could revolutionize the way trade is conducted. By reducing time involved in trading and increasing transparency it has particular implications for the agriculture commodities business.

One company has already used blockchain to make a large trade and it went very well, showing great potential for the future.

Louis Dreyfus Co., an American company that has been in business more than 100 years, sold 60,000 tons of Soybeans to the government of China. As you might imagine there is a lot of paperwork involved in such a transaction. Contracts have to be sent back and forth, paperwork and documentation have to be sent to various officials, and that has to all be translated into English and Chinese.

Cutting the time involved in the paperwork, as well as increasing the accuracy were the main benefits, but adding transparency also has potential. Adding transparency cuts down on fraud, and consumers are demanding more and more knowledge about the food they eat. Blockchain has the potential to provide a lot of information from the farm to the dinner table for all sorts of food commodities. It is just one big shipment of soybeans for now, but it is just the beginning, traders like Dreyfus are hoping.

Traders involved say the entire time involved in the transaction was reduced to one-fifth the time it would normally take. The actual movement of the soybeans was not greatly changed. The soybeans still had to be loaded on to boats and shipped to China where it was unloaded. What is different is the record keeping and the transparency involved.

"Our expectations were high, but the results were even higher," said Robert Sperollet, a trader involved in the deal being quoted by Financial Times of London.

Another dealer, Karin Kerson,  said the trade proved it could be done, "and it also proved that it yields what it promised. The trade saved labor and time as well as reduced the risk of fraud and human error," he said.

This type of ag commodities transaction - even before the soybeans are shipped - can take weeks. If there is any kind of problem, even a typo, the whole thing can be set back for days. With Blockchain it took less than a week. Another great thing is that if there is a typo or some small problem, it can be fixed in real time almost immediately. Instead of several day delays because of having to fax papers back and forth, the problem is fixed with one keystroke which updates records in all the blocks off the chain.   There is also a record of the change, increasing transparency even more.

In the case of soybeans going to China, with blockchain everyone involved was able to monitor temperature during shipment, as well as when it is delivered and where it was every step of the way. Someone in China could even look up what kind of pesticides were used on those soybeans. In this transaction, most of the blockchain type parts were the paperwork involving traders, bankers, sellers, and buyers. There was no need to wait for steps to be taken. For instance, one person could input a document, and another person could sign off on it and it could be moved on immediately. The beautiful thing about blockchain is it is all done in real time. Everyone in the system or chain sees everything as it happens.

The technology is still developing and it is not clear what the future will bring, but so far the results are promising. Blockchain is a series of computers, which are called blocks, and they are all linked together, which makes it a blockchain. Every computer in the chain can see the entire record at the same time. Only people involved in the transaction have access to the information, and if one changes anything it is changed in every block of the chain instantly. In theory, at least, everyone from the farmer to the grocery store selling the product would have a block in the chain, and all of them could see what is happening in real time.

This is new technology that was designed to track Bitcoin transactions. It is already being used somewhat in the oil industry. The Dreyfus trade was the first one involving agricultural commodities and the first deal of substantial size.

The biggest immediate impact of this was to reduce the hassle involved in exchanging contracts and letters of credit, as well as inspections. This could take weeks when done by hand. In this transaction, with all the computers linked in the chain, contracts were exchanged in real time - or immediately.  

This first trade was successful, but more will have to be done to make these kinds of trade more common.  Agricultural traders, banks and everyone else involved in the supply chain - including the farmers of course -  will have to get involved for blockchain to really take off. Officials say there will have to be a platform of some kind designed that will allow people to create chains.

The chains, or blockchains, are closed systems, which will make them very hard to hack.  The beauty of blockchain is that it decentralizes the data. In a large transaction like this, there is no central bank with all the information. A central location like that can be hacked and has been in the past. In the blockchain, in the closed system, only those involved in the deal have access, making it nearly impossible for hackers to infiltrate. 

The technology is not there yet, but eventually, shoppers in grocery stores will be able to get information about grapes they are buying as part of the blockchian. That will increase transparency for consumers. It could also allow small farmers around the world to be more involved in selling their produce. They could be an active participant via the blockchain as opposed to having to rely on big central locations who may or may not give them the information they need to make a good trade. These are still in the potential stage, but the deal with Dreyfus did show that it can be done at least.

Dreyfus and others created the infrastructure for this trade to happen. It was sort of experimental, but the infrastructure is not there for others to do a similar trade. That is something Dreyfus and other traders hope will change as the blockchain idea catches on. They hope they have shown the benefit from the one trade.

In order for others to get in on the trading, an industry standard will have to be developed so chains can be established when they want to do a trade. It should not be necessary to have to start all over with each transaction. If one person involved in cannot get a block into the chain, the deal cannot happen in this way. The biggest obstacle then, at present, is this lack of infrastructure or industry standard. If the infrastructure can be standardized it could even go across industries.

As this is developed more people will have to buy into the system, and once that happens we will have a clearer picture of what might happen.

For now, in the Dreyfus deal, the information about the soybeans - things like pesticides used and harvesting information, was put into the beginning of the chain of blocks. The temperature at various times is also logged into the system. Whenever the soybeans were moved, that was also put into the system. Any other pertinent information is also entered as it happens. To make sure the information is correct there have to be certificates issued that certify the information is correct. In the soybean deal, two shipping companies did the required certificates. The U.S. Dept of Agriculture was also involved and helped design specialized certificates as well. The certificates themselves are also still in the development stage, but there has to be a means of assuring that the information being entered is accurate, and having someone certify that seems to be the best way at the present time.

Even though it is still in its infancy, one successful big blockchain deal has food officials  predicting big things.  An article in Bloomberg predicts it will improve efficiency, lower costs thus increasing profits, and will create new business opportunities.

The Dreyfus deal shows how this can make trading more transparent, and that in itself should reduce fraud and error. A Michigan State study suggests fraud itself costs the food industry $40 billion per year in the United States alone. That does not count food that simply spoils in the field or before it reaches its destination. Developing countries could also benefit from this level of transparency and speed up of the process. While there has been one blockchain trade involving agriculture that was successful, that does not mean the world will switch to it tomorrow.

Serpollet said a lot more development needs to happen. It is developing quickly but we are not to the point of being able to scale it to the point of making it a national business he explained. Being able to guarantee security and confidentiality of data while making it transparent at the same time is something that is still being perfected. It worked well in the one sale that was completed by Dreyfus. That gives traders and developers hope.

Serpollet also said there is the question of whether a fully digitized transaction will meet all legal standards across the world. Cryptocurrency is still in its infant stages as well, and more also needs to be done there to make sure everything is secure. The potential for efficiency and speed is tremendous, he said, but the system still needs to evolve before it is used a lot, he said.

Serpollet added in an article produced by Dreyfus, that while it is promising, the market will have to develop and share standards and rules to make it work.

The transaction showed ag commodities can be moved much faster than they are now, and it showed that more transparency is possible. It is hard to say where it goes from here but people involved so far are positive about what they have seen so far.