My position within the Wells Fargo Food and Agribusiness Advisors group, supporting the grain sector, has allowed me to interact with many intelligent people involved with grain. Several years ago, I recall visiting with a good friend and customer who stated, “The grain industry is as efficient as it can be. I don’t see any way it can get any more efficient.”
Hearing that, I wondered how many times this statement had been made over the past century.
More recently, I was visiting with a customer and the conversation turned to the topic of blockchain. Honestly, I have not been involved with a transaction that was done by use of blockchain, rather have only discussed the concept. Soon, I began introducing the topic of blockchain in regular discussions with grain industry contacts. And, with each conversation, I heard “Doesn’t that have to do with cryptocurrency?” or “That will never really be used in the grain industry.”
Well, blockchain is not used solely in cryptocurrency, and it is already being used in the grain sector. With so much confusion and trepidation surrounding this technology, it seemed appropriate to add some clarity and establish some context for how it can revolutionize the grain sector and many other commodity-based sectors as well.
So what is blockchain technology?
By Merriam-Webster dictionary definition, blockchain is a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network. Blockchain technology was invented in 2009 by an individual with the screen name Satoshi Nakamoto in order to facilitate transactions of Bitcoin. It is important to note that this is the only commonality between Bitcoin and blockchain, because blockchain has many applications other than cryptocurrencies.
As with many things, an example often makes the definition come to life. Imagine a normal transaction between two companies using a financial intermediary such as a bank to facilitate the transaction. When the transaction between the two companies begins, it is recorded in three separate ledgers, those of Company A, Company B, and the bank. By using three separate ledgers to record the same transaction, all of the organizations involved must be trusted to record the exact same terms and amounts of the deal. And, if there is a dispute regarding the original terms of the deal, the financial intermediary, in this case, the bank, must be trusted to have recorded the true and accurate terms of the deal. In the off chance that the bank has its ledger corrupted by hackers, years of expensive litigation or arbitration follow in order for the two companies to settle on the true terms of the deal.
Blockchain technology was created to eliminate the problems of inefficiency, and to increase security within the world of finance. Instead of relying on a third party to facilitate transactions, blockchain relies on a vast network of computers to do so. The transaction mentioned above would look far different if Company A and Company B used blockchain technology because once deal terms were settled, a contract would be drafted by the companies’ lawyers, and then scanned into a computer. The document would then be broadcasted to a network of thousands of blockchain computers known as nodes. These nodes take the data file and its corresponding algorithm and begin attempting to solve the algorithm. When one node solves the algorithm, it sends the answer to all other nodes on the network to be validated. Once all nodes have validated that the algorithm has been correctly solved, the contract is then uploaded to a ledger that is shared across the entire network of nodes.
After the contract is uploaded to the blockchain network, the file can no longer be edited, and is permanently stored on the shared ledger. If a hacker is able to break into a node on the network, he is only able to corrupt one of the thousands of identical ledgers on the network. And this is how blockchain’s most valuable asset ─ security ─ is created.
One may ask, “What if the terms of the contract change? How would the contract on the blockchain network be edited?” If a contract needs to be updated, a new version would be uploaded to the blockchain network and the process described above would occur all over again. This can be illustrated by a familiar example within the United States Constitution. In 1919, the 18th Amendment was passed and outlawed the production, distribution, and consumption of alcohol in the United States. But, when prohibition was repealed in 1933, the 18th Amendment was not removed from the Constitution, rather, the 21st Amendment was added and repealed the 18th Amendment. So, although prohibition was repealed more than 80 years ago, the Constitution will always contain the 18th Amendment. Blockchain edits occur in an identical fashion.
How can agriculture benefit?
Now, with a basic understanding of how blockchain technology works, we can explore how this technology can be implemented to benefit agricultural commodities. In early 2018, Louis Dreyfus Company completed the first commodity sale to Shandong Bohi Industry Co., LTD using blockchain technology. The two companies, along with their creditors and transporters, used fully digital documents for the sales contract, letter of credit, and phyto-sanitary certificate to execute the trade of soybeans between the U.S and China. Although this transaction was a proof of concept, the results were very promising. By conservative estimates, total deal execution time was five times faster, and Louis Dreyfus Company’s Global Head of Trade, Robert Serpollet, stated “Our expectations were high, but the results were even higher.” In addition to the Louis Dreyfus Company agricultural commodity transaction, ING executed an oil contract in 2016 using blockchain technology and reported cost savings of 25-30%.
While the above two proofs of concept were great successes, all parties agree that blockchain-facilitated deals are at least 12 months from being widely available. Currently, the blockchain network is too small to handle the volume of deals that are executed in the commodities market on daily basis. Furthermore, there is sure to be an adjustment period as trading and logistics firms adjust to the completely new deal execution technology.
With the time and cost efficiencies realized in the early transactions, it’s unfortunate that blockchain technology will not be readily available for another year, but there is a silver lining. Companies that have not yet contemplated the execution of trades using blockchain technology still have time to mentally and physically prepare their future trading arms to adopt this new technology once it can handle the volume of daily trading activity inherent in the commodities market.