Blockchain in the Farming Supply Chain: Building Trust and Automation
Interview with Genevieve Laveille (Agriledger)
Mango farmers in Haiti get 2% of what their products are sold for on the wholesale market.
How can we fix that and make sure that there's more equal redistribution of income - using blockchain to build trust and automation and the farming supply chain?
Also, how can we get farmers better access to financial services and reduce waste all using the same answer?
It's a pleasure to have Genevieve from AgriLedger here today to explain how.
What’s the solution that you’re working on then: with the high level aim of bringing STP?
If we start by thinking of the producer’s goods as an asset, then Agriledger is about an asset creation; an asset escrow; and an asset transfer. It just happens to be that the food or the food is the asset.
Part of the problem is that today ownership is given up early in the chain in order to be able to assure payment.
The statistics are that the farmer will keep around 40% of the total income from his or her goods. Sometimes that can be even lower and that doesn't take into account of the costs that he has to put in for new supplies or any work that has to be done in order for that commodity to be created.
So essentially there's a 60% haircut on the farmer needing to gain access to liquidity?
Exactly. And that 60% haircut is when we're looking at the wholesale price, not the retail price.
I'll use the Haiti example, which is even worse than 60%. Farmers there are getting about 5 cents per kilo and the price on the wholesale market is probably about $3: which means that about 98% is lost by the farmer throughout the chain.
The reason is that, if I'm not sure I'm going to get paid (ie I'm giving you my goods; I have no way of tracking them and I don't know if you're going to come back; and so I’m waiting for you to come back with my money) then I’d rather take money today. Even if I have to take less money now.
But if there is a fundamental application or system which can demonstrate what is mine and then provide me with assurance that I will get paid sooner than six months down the line, I can then feel much more comfortable and take that liquidity risk.
With the blockchain and the processes that we're putting in, the farmers get paid faster and they’re assured their payment. By doing that, we’re looking to smooth out the margins to the point where the network provider (the logistics firm or the broker – who historically pays the farmer) is being compensated for the work that they do - but by compensating them more fairly, you then allow for the farmer to get a bigger share.
So through assured payment, you’re taking away the need for the farmer to seek out cash and that's probably worth about 60% of the overall cost?
Yes. The World Bank ran this process on spreadsheets and they found that they were able to increase the income of the farmer by 8 to 10 times. I think we're should be looking at 10 to 15 times by my calculations in terms of what can be done now.
This is not something revolutionary in terms of market pricing. If we look at the flower market in Holland, that's how it functions: you send your goods and they are sold at the overall market price.
The opportunity with the blockchain is to move the agricultural supply chain to be much more of a shared economy.
We’re also working with banks to take in the factoring aspect as well. Obviously there's going to be a receivable (as soon as it goods are sold) and if we can bring in the factoring then we can more easily meet the payment terms that usually will be put in by supermarkets.
So to walk through the big picture: you've got participants of the agricultural supply chain who, first of all, are known – and so they have an identity. Second of all, because of the ability to transmit data amongst the supply chain you have the benefit of assured payment - and therefore you remove the liquidity premium of somebody having cash in hand. On the backend you also go as far as helping banks to treat these as receivables as assets and therefore start factoring and financing against them. Is that right?
Presumably that also has the ancillary benefit of reducing waste? If you have a farmer who can't find cash-in-hand at that specific moment, he has to wait for a day or a week: during which time the perishable goods could be wasted.
You also have the fact that the farmer, by accumulating a record of payments incoming and outgoing, can start to generate a credit record and history to the point where he becomes a viable participant in the wider financial markets?
What we're looking to do is provide the ability for the farmer to own their own record and then share them with those who need to see it. So it will be held at the farmers mobile wallet and he then has an opportunity to share it.
Can we maybe walk through what that would look like on a daily basis?
The farmer would have the app on his phone and he (or she) would be registered to the piece of land or the tree that is being worked on by the farmer. He would enter information such as his expected yield. Once the crops are ready for harvest, he would trigger a call-out to have the providers of services (e.g. pickers) come in and do the harvesting, the weighing and everything else that needs to be done. At that point the farmer is notified of how many crops have been taken from his property and he has a chance to approve that. What the service provider will then need to do (and this is our Haiti process) will be to then maintain the goods at certain temperatures, make sure certain processes are done (such as cleaning, sizing, etc.) in order to assure that the crops actually make it to the market in the right way.
And this will really depend based on the commodity: what you do with mango and avocado will be different from what you do with rice, wheat or cocoa. We are looking to get to a point where we become agnostic to what the commodity is. It's more what is the process that that commodity needs to follow in order to be able to be tracked.
And that information becomes not only valuable to the distributor or to the logistics provider, but also to the banks who are financing the whole supply chain in the first place?
And also to the customer. You or I, as customers, can understand if it's ethical; that there is fair distribution of revenue; and that the farmer has been well compensated. It also gives you information such as what have been the different costs throughout the value chain. So you start understanding better. Imagine that you, as a consumer, could now see what percentage of its cost was given to the person who worked on picking it.
It's almost a new form of Fair Trade: because it is really defining how to have full transparency on all the participants in the supply chain, without having to reveal all the information about each one.
So a kind of “Clear trade” rather than Fair trade?
Exactly. Oh, I like that!
The role of blockchain is our DLT is fairly clear, but can we maybe talk about why DLT is such a key part of this platform?
Blockchain is an enabler of what you're calling the Clear trade.
All participants can be assured that the data was right at the time of it being entered and you can always rectify it. That replaces a situation where, if you don't have a sense of trust, you don't believe everything and you're checking everything that people say.
And its not just blockchain. We are going to be using IoT as we're tracking the crops: there is a sensor which is tracking the location and also the temperature. That information is then getting recorded onto the blockchain. Those are things that are just not possible with centralized databases.
So it's fine to have STP, but you can have it today without trust. In the Agriledger context, you can have the STP and trust because of the immutability of the blockchain?
One of the points that strikes me in your example of the Haiti mangoes supply chain is how many actors there are in the chain: you've got the landowner, the farmer, the pickers, the logistics providers, all the way through to the wholesaler and down to the retail level. How you go about including each of these actors and bringing them into the story?
One of the examples that was given to me was from years ago in Kenyan flower markets. At the time, the flower pickers would sell their goods to a local middle-person who would then get take the goods to Holland to be sold.
A few years back that changed: and the logistics provider became just a logistics provider – who was paid just to get the goods to market. They didn’t have to buy the goods any more. Then, because the goods were then being sold at a wider market price (instead of having to be discounted locally), the farmers began getting a fairer and bigger share of the money.
Once you start having that trickle-down economy, you can then start bringing in other participants of the value chain. But if you can concentrate first on the major players (namely the producer, the logistic provider, the broker or the seller and the person), the buyer’s costs can now be much more clearer and much more transparent – to the point where you can see a reduction in prices.
Airbnb has created that in that certain hotels are no longer charging you outrageous prices. And I would expect that once we start having that, we could see that in the food market.
With our Haiti project and also in China, we're currently looking at commodities which are rare and desirable. We should also be looking at the core commodities which people need to be able to eat - and to understand where they are so that we can reduce waste.
That's another big issue. People say that, if we don't change things by 2050, we will not have enough food to feed the world. But the fundamental problem is more that we don't know where the food is and that it doesn't get to market fast enough (because there isn't the mechanism for assuring that it's getting to market). So that's why the idea of cold-chains or logistical chains are very important because you can overlay through the process a mechanism to know where the goods are in the chain.
The China rice example is targeting about 5,000 farmers and so you’re talking about a scale that's obviously multiples of the Haiti example. What obstacles do you see to scaling out your platform?
I think that scaling it out means that we have to recognize what we are: which is really software as a service.
You have to create trusted relationships with other entities, to be able to have them deliver, and then that allows you to concentrate on doing your business.
What is important is to demonstrate first capability – and then from there you're able to expand and scale. That's why we're very interested in a global reach rather than just looking at one continent: because it will help form the knowledge that is necessary to for us to build in the right flexibility.
In the China example, where do you actually start? I mean do you start by approaching the farmers or the logistics providers?
We’ve started in a B2B model, working with a rice producer. He has contracted with the farmers for their production and he works with them to pick it up when it's ready; package it; and sell it to market.
One of the key things when you talk about rice is people will say to you “This rice is grown in a very specific region and very limited”. So if I'm telling you this is product A and you know that there's a whole bunch of pretend A around, you're not going to pay me full value. But now imagine that I can demonstrate to you with assurance that this is what it says it is and you're able to track back the whole journey of the product. You’re then going to be willing to pay multiples of what the normal rice is charged at. That and you start rooting out those who are fake.
So authenticity carries a premium that the producer is able to include into the cost of their goods when selling it?
A few weeks back I was in New York at NYU waiting to go into a meeting and they had something on the board which I found very fascinating. They were measuring what authenticity does on a mindset, studying music and others goods.
Their conclusion was that, if you know there are fakes in a market, you are going to be wary of even what is original. If you have doubts, then the value that you attribute even to an authentic item is reduced because you don't know for sure whether it is real or not. On the other hand, If I can prove to you that is authentic, then you are not going to devalue it in the same way.
That is fascinating. So behaviorally trust changes the entire marketplace. If the turnover is 100 today with a very limited degree of confidence and authenticity, what we're saying is that it could be 130 or 150 tomorrow if we could demonstrate authenticity - because people would pay the real providers properly and the other (fake) providers would just gradually disappear.
We were talking early about the transition of the network providers (or logistics providers) from being owners of goods that they then on-sell, to more of an escrow arrangement (where they are literally just transporters of somebody else's goods). How have they reacted to that? Particularly from a compensation perspective?
Their compensation is actually pretty good. They're getting a contracted price, but with that also come penalties for failure to deliver. They have certain temperatures that they have to keep; they're agreeing to those; and those same things are being tracked and captured.
That’s where you now have the real power of the blockchain in the Smart Contract: which means you can automatically enforce a contractual covenance that has been agreed and, if needed, you can actually go into dispute resolution in a much cheaper and faster way.
We have a lot of disputes that happen – with a lot of unnecessary costs (if you think of court cost, the time costs of somebody actually having to go to court and so on). Now, if you could start using the internet and you could start using data that you know is the truth, not only would we reduce frivolous litigation, warranted liquidation could be handled and resolved with much low costs.
So STP even in litigation.
So just to recap: in the old world, we're talking about a producer looking to a logistics provider as somebody who they just sell to; and a logistics provider moves the goods, picks up the cost if some of the food goes bad (for example) and then sells on what they can. In a new world, you're talking about a producer who sells the goods to the market, having contracted a logistics provider to make sure that set conditions are met (in terms of temperature in transit, etc.). And there is complete transparency and digital evidence in case there actually is a problem and they need to go into arbitration.
Yes. And then you have the broker on the other side who's working for the producer to sell the good to the producer and get the best price.
If you take the China rice example, where do you think this can get to in say five years?
I think that this is something which is developing. To me it’s also about actualization and implementation. So that's what we're working very hard on.
I think blockchain gives us is what the Internet didn't give us: which is the trust factor. We can get a lot of information from the Internet, but we don't know what is real.
One last question. What's the role of standards in this whole equation? If you have one provider of STP matching up against another provider of STP in the same supply chain, how do we avoid that becoming a limitation to scale?
Working with the organizations like the Government of Haiti and being supported by the World Bank will allow us to help work with them in creating standards. We have deliverables in terms of making sure that we adopting existing standards – and there is also the ISO project going on around blockchain. I'm not sure that the latter is defining it yet at the level that is necessary right now. We're still living in the Wild, Wild West, but I think that in order for this to be a successful, we will all eventually have to conform.
It's a fascinating journey I think in terms of picturing Step 1, Step 2 and how this plays out. Thank you very much for talking through it as clearly as you have.
It's been my pleasure and thank you very much for giving me the forum to do so.
I'm Barney Nelson, and thanks for listening to this week's #Goodstart episode. Next week there'll be another amazing story about how blockchain is being used for good, and so make sure to join us. In the meantime, if you'd like to get involved, look us up on thevalueexchange.co/good start or on Linkedin or Facebook.
Thanks and see you next week