Benefits of blockchain: lower costs, transparency and gains for SMEs
We caught up with Harry Smit, senior analyst, farming and farm inputs at RaboResearch Food & Agribusiness, to hear more.
“The blockchain is about linking digital information about operations from all participants in a supply chain.”
The technology is based on decentralized systems; it is like a shared ledger, and information cannot be manipulated once it is input by the relevant party. “Of course, the information has to be correct to begin with."
The shared nature of the blockchain technology means that, once data is entered, all those involved can view it.
Access to that data means all participants are better able to anticipate changes either in the upstream or downstream part of the value chain. "That factor can help reduce the need for significant buffer inventory in case of future demand and supply fluctuations."
Be aware of bottlenecks
Crucial for realising the benefits of blockchain is the interface between the phyisical and digital world, he said.
There are two prerequisites to a blockchain becoming successful, according to Smit. Firstly, processes within companies and between companies have to become digitalized and standardized, and secondly, a broad participation of stakeholders along the value chain is required. Otherwise, the value of the blockchain is lost.
"For this reason, a lot of early blockchain project work is going on in financial services sector or international trade markets."
The development of sensor technology and its greater use at farming and crop cultivation level will increase the digitalization of primary agriculture and make it more blockchain friendly, he said.
Northern Ireland’s Arc-net is an example of a food traceability start-up that uses blockchain to ensure authenticity and traceability.
Its platform is designed to deliver confidence in a global supply chain. It tags and identifies individual animals at birth relying on DNA sampling and RFID technology; it tracks the animal across the entire supply chain, with its movements and interactions verified by supply chain members. Consumers can interact with the final meat product through a smartphone device and find out where the animal was reared, as well as the feed and veterinary care it received.
Data services and transaction costs
As blockchain technology further develops, there will be more data available in the supply chain, said Smit.
“That will likely generate new services such as data analytics or predictive modelling.”
Another benefit of the technology, he said, is that transaction costs will decline as the need for verification decreases in the blockchain.
“A big benefit we see of using blockchain technology, particularly in international commodity trade, is that the cost of doing business can go down significantly.
"Typically, nowadays, a letter of credit is used, and there is lots of checking of physical documents by all parties involved – the bank, the seller, the buyer, the port authority, and customs. They all have to provide their stamp of approval and then the payment is made. That approval process can take several days and there are often high costs involved.
“If all that information is available digitally in the blockchain and is trusted due to the integrity of the technology, in that information cannot be manipulated, then the process can go from several days to five minutes, saving both costs and time.”
Global grain traders do use a kind of smart contract already but it is more cumbersome and requires a lot of physical checking of documents, he said.
“If it is done through blockchain, costs would come down.”
Smit said the technology could also end the information backlog for small and medium sized enterprises (SMEs) - they could get data that larger companies typically receive through their networks and operations.
Pilot projects
A lot of companies and banks are working on blockchain technology to launch platforms and systems. “I expect many of those pilots to go live in 2018 and 2019.”
Rabobank itself is involved in one such pilot – we.trade – aimed at allowing SMEs in any sector to carry out trade with foreign entities. The system is based on the notion that payment is executed once certain conditions are met.
“So, if a buyer doesn’t trust the supplier, they can trust the blockchain.
“In the case of a small retailer that wished to buy, for instance, a limited quantity of Christmas decorations from China, a letter of credit option would be too expensive so, typically, then they would have to pay for the goods a month in advance and trust that the supplier in question will deliver, that the container will arrive. That is a high-risk venture.
“If that supplier and their bank were using a blockchain system, along with the transporter, the buyer and the buyer’s bank, then the container will be shipped and the buyer could see where it is in real time. The bank of the buyer can guarantee the payment, and once the container arrives in the port of entry, say Rotterdam, the payment is automatically triggered.”
