Emerging Opportunities for the Application of Blockchain in the Agri-food Industry - Mischa Tripoli Josef Schmidhuber - FAO
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August 2018 | Agriculture
Emerging Opportunities for
the Application of Blockchain
in the Agri-food Industry
Mischa Tripoli
Josef Schmidhuber
Issue PaperAugust 2018 l Agriculture
Emerging Opportunities for
the Application of Blockchain
in the Agri-food Industry
Mischa Tripoli
Economist, Trade and Markets Division, FAO
Josef Schmidhuber
Deputy Director, Trade and Markets Division, FAO
Issue Paperii
Published by
Food and Agriculture Organization of the United Nations
and
International Centre for Trade and Sustainable Development (ICTSD)
International Environment House 2
7 Chemin de Balexert, 1219 Geneva, Switzerland
Tel: +41 22 917 8492 Fax: +41 22 917 8093
ictsd@ictsd.ch www.ictsd.org
Publisher and Chief Executive: Ricardo Meléndez-Ortiz
Senior Programme Manager, Agriculture: Jonathan Hepburn
Citation: Tripoli, M. & Schmidhuber, J. 2018. Emerging Opportunities for the Application of
Blockchain in the Agri-food Industry. FAO and ICTSD: Rome and Geneva. Licence: CC BY-NC-SA
3.0 IGO
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Organization of the United Nations (FAO) or International Centre for Trade and Sustainable
Development (ICTSD) concerning the legal or development status of any country, territory, city
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ISSN 1817-356X
Copyright: © FAO,2018
Some rights reserved. This work is made available under the Creative Commons Attribution-
NonCommercial-ShareAlike 3.0 IGO licence (CC BY-NC-SA 3.0 IGO; https://creativecommons.
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Acknowledgements
The authors would like to acknowledge and thank Christopher Emsden of the Food and Agriculture
Organization for his contributions to this publication. His input and intellectual curiosity have
enriched this paper. Their appreciation is also extended to the ICTSD team as well as Heike
Baumüller and Abhishek Sharma involved in the review of this paper.
ICTSD is grateful for the generous support from its core donors including the UK Department for
International Development (DFID); the Swedish International Development Cooperation Agency
(SIDA); the Ministry of Foreign Affairs of Denmark (Danida); and the Netherlands Directorate-
General of Development Cooperation (DGIS).
ICTSD welcomes feedback on this publication. This can be sent to Jonathan Hepburn
(jhepburn@ictsd.ch) or to Fabrice Lehmann, ICTSD’s Executive Editor (flehmann@ictsd.ch). The
paper’s co-author Mischa Tripoli (Mischa.Tripoli@fao.org) can also be contacted.Agriculture iii
CONTENTS
ABBREVIATIONS vi
LIST OF FIGURES iv
FOREWORD v
EXECUTIVE SUMMARY vi
1. INTRODUCTION 1
2. UNDERSTANDING DISTRIBUTED LEDGER TECHNOLOGIES 3
3. APPLICATIONS FOR DISTRIBUTED LEDGER TECHNOLOGIES
IN THE FOOD AND AGRICULTURE SECTOR 6
3.1 Current Trends in the Food and Agriculture Industry 6
3.2 Agricultural Supply Chains 7
3.3 Land Registries 16
3.4 International Agreements Related to Agriculture 17
4. PUBLIC POLICY IMPLICATIONS FOR FOOD SECURITY
AND RURAL DEVELOPMENT 18
4.1 Enhancing Trade Facilitation and Food Security through Efficient
Institutions, Traceability and Market Transparency 18
4.2 Strengthening Rural Development Outcomes for Inclusive Economic Growth 19
5. THE WAY FORWARD FOR DISTRIBUTED LEDGER TECHNOLOGIES 21
5.1 Challenges and Risks for Distributed Ledger Technologies 21
5.2 The Way Forward for the Public Sector 23
6. CONCLUSIONS 25
REFERENCES 27iv
ABBREVIATIONS
B2B business-to-business
CCA central competent authority
DLT distributed ledger technology
FAO Food and Agriculture Organization
IoT Internet of Things
MSME micro-, small- and medium-sized enterprise
OTC over-the-counter
RFID radio frequency identification
SDG Sustainable Development Goal
SPS sanitary and phytosanitary
TRIPS Trade-Related Aspects of Intellectual Property Rights
UN United Nations
WFP World Food Programme
WSIS World Summit for the Information Society
WTO World Trade Organization
LIST OF FIGURES
Figure 1: Traditional centralised ledger and a distributed ledger
Figure 2: Agricultural supply chain on distributed ledger technologyAgriculture v FOREWORD Distributed ledger technologies (DLTs) have the potential to transform the global food system by introducing important efficiency gains along value chains, and improving trust, transparency and traceability. While large actors are likely to make fast and significant inroads in exploiting DLTs, small farmers and processors also stand to reap significant benefits, provided the technology is made accessible to them. This raises the question of how an enabling environment can be created for smallholders to harness these new technologies, and, at a broader scale, for DLTs, so that these contribute to improving the functioning of global food and agricultural markets. This paper, by Mischa Tripoli and Josef Schmidhuber, seeks to make an initial contribution to the emerging public debate on this issue by providing an overview of DLTs and their application in food and agriculture, examining public policy implications for food security and rural development and identifying some potential challenges, risks and the way forward. Ricardo Meléndez-Ortiz Boubaker Ben-Belhassen Chief Executive, ICTSD Director, Trade and Markets Division, FAO
vi
EXECUTIVE SUMMARY
Distributed ledger technologies (DLTs) and smart contracts provide a unique opportunity to bring
greater efficiency, transparency and traceability to the exchange of value and information in
the agriculture sector. This paper aims to facilitate a better understanding of the opportunities,
benefits and applications of DLTs in agri-foods. It also identifies technical limits and possible
institutional barriers to their adoption.
By utilising digital records, cryptography and the disintermediation of transaction processing and
data storage, DLTs can improve both agricultural supply chains and rural development interventions
in a number of ways. First, the ability of the technology to trace a product’s provenance, carry
detailed attributes for the product in each transaction and ensure its authenticity brings vast
improvements in traceability with positive impact on food safety, quality and sustainability.
Second, the disintermediation of transactions in agricultural supply chains and the use of smart
contracts enable frictionless and real-time payments for agricultural financial services, which can
reduce transaction costs, decrease risk for buyers and sellers and increase cash flow and working
capital for farmers and sellers which is usually tied up in complex and paper-heavy settlement
processes. More efficient supply chains and agricultural financial services lead to greater financial
inclusion and stronger business development. Third, DLTs allow users to build digital identities with
their recorded digital and physical assets. The vast amount of data generated from transactions in
agricultural supply chains provides more accurate market information and data for supply chain
actors and the public sector, which can be used to inform production and marketing decisions,
prove a farmer’s track record to access credit and strengthen the enabling environment with
better informed policies. Physical assets registered on the distributed ledger, such as land titles,
can be used as collateral to access financing. DLTs are a secure, fast and immutable method to
register land titles, providing greater legal clarity to land tenure systems.
In addition, DLTs also have the potential to improve the implementation and monitoring of
international agreements related to agriculture, such as World Trade Organization agreements
and provisions relevant for agriculture, as well as the Paris Agreement on Climate Change. DLTs
can bring greater transparency and accountability to compliance with such agreements.
There are a number of technical, regulatory, institutional, infrastructure and capacity development-
related challenges to be addressed before reaching maturity in order to ensure the scalability
and accessibility of the technology. Scalability, interoperability and product authenticity through
product-process links are important factors for widespread adoption of DLTs in agricultural supply
chains. DLTs are not a panacea for the agriculture sector, but the technology provides great
potential if the challenges for adoption can be overcome.
As DLTs continue to develop, the international community has an important role to play in
contributing to the creation of an enabling environment that ensures that the productivity gains
generated from DLTs can be shared by all market participants, including smallholder farmers,
processors as well as micro-, small- and medium-sized enterprises. Governments together with
intergovernmental organisations can lead this effort by contributing to technical dialogue on
DLTs; providing policy guidance on the use of DLTs in agriculture through intergovernmental
working groups and multi-stakeholder platforms; developing regulations and standards; enhancing
public and private partnerships; and providing outreach to improve infrastructure and digital
skills in rural areas. The technology has huge potential to address many of the challenges that
disadvantaged market players face by allowing them to participate in integrated supply chains,
in addition to improving rural development interventions and being an impetus to achieve the
Sustainable Development Goals.Agriculture 1
1. INTRODUCTION
All around the globe, regardless of the level of enormous potential to enhance efficiency,
economic development, humans are constantly transparency and traceability across the global
transferring value. The transfer of value is a economy. DLTs can be programmed to record
fundamental human activity enabling people not just economic transactions, but also other
to trade goods and services, and accumulate types of information that is of value and
productive capital and savings for their well- importance to humankind, such as: birth and
being. In order to lower uncertainty during death certificates, marriage licenses, deeds
the exchange of value, institutions are used to and titles of ownership, educational degrees or
ensure trust and mitigate risk between buyers anything else that can be represented in code
and sellers. The institutions that intermediate (Tapscott and Tapscott 2016).
the exchange of value use centralised
electronic ledgers to track assets and store Throughout the global economy, governments,
data. Since those intermediaries often rely on private institutions and technology start-
manual inputs and may be vulnerable to fraud, ups are exploring the possible applications
value transfers tend to impose a high cost on for DLTs. Over the last four years, more than
buyers and sellers, which drastically increases US$5 billion have been invested in these
the burdens of doing business. High transaction technologies (CoinDesk 2018). The financial
costs are a major deterrent to economic services sector is one major area where the
development. In addition, cash transactions technology is being tested and implemented for
(in both the formal and informal economy) payments and trading securities. Blockchain-
lack traceability, which ultimately hinders based payments have considerable potential
the ability of micro-, small- and medium-sized not only for retail banking, but also for
enterprises (MSMEs), particularly in developing agricultural value chains and the development
countries, to access credit and new markets sector in cash-based assistance schemes,
and to grow. remittances and procurement. For example,
the World Food Programme (WFP) piloted cash
Distributed ledger technologies (DLTs)1 transfers programmes using a blockchain-based
introduce a new method to accounting for technology to record supermarket transactions
value transfers that minimises uncertainty and in a Syrian refugee camp. The pilot programmes
disintermediates the exchange of value with a were believed to provide substantial financial
decentralised and shared ledger, functioning savings for WFP, by eliminating financial
as a digital institution of trust. DLTs offer a intermediaries, their associated transaction
secure system of recording transactions in fees and the time spent by WFP accountants
a digital database that removes third-party on compiling data and reports from banks
intermediaries, reduces transaction costs, and stores, which is no longer needed with
enables faster and even real-time transactions, automated record-keeping from the blockchain
assures immutable data entries and provides (Bacchi 2017). The potential applications of DLTs
access to the database for all participants in to simplify workflows and improve efficiency in
the network. After being first introduced as the development industry are enormous. The
the electronic cash system for Bitcoin2 in 2008, private sector is already partnering with the
blockchain and other DLTs have demonstrated United Nations (UN) to explore applications
1 For the purpose of this paper, the terms distributed ledger technologies (DLTs) and blockchain are interchangeable.
It is important to note that blockchain has become a colloquial name for all types of DLTs. However, blockchain is
actually one type of DLT. See section 2 for a further explanation.
2 Bitcoin is a digital currency that uses the DLT called blockchain to transfer funds between parties without a central
authority.2
to improve the effectiveness of its work and trade finance and promote inclusive trade,
strengthen efficiency in the UN system (Bacchi increase access to agricultural financial
2017). services, generate smarter market information
and provide greater legal certainty to
The agricultural sector is no different. There land-tenure systems. The agri-food and
are numerous transparency and efficiency technology industries are already exploring
issues in agricultural supply chains, which such applications. In fact, a consortium
ultimately put farmers and consumers at a of major food companies (Dole, Driscoll,
disadvantage. Transactions in agricultural Golden State Foods, Kroger, McCormick and
supply chains are inherently risky and complex, Company, Nestlé, Tyson Foods and Walmart)
thus relying on a number of intermediaries; are collaborating with IBM to use distributed
while more conscious consumers have poor ledger solutions to make their food supply
transparency on where their food comes chains more transparent, more traceable and
from and how it is produced. Ultimately, to streamline payments. Previously, IBM and
strengthening the linkages between farms, Walmart used blockchain-based technologies
markets and consumers can generate greater to track a package of mangoes along its exact
income growth and job creation (FAO 2017). path from retail shelf to farm in a matter
The potential for DLTs to increase efficiency, of seconds (Wass 2017b). This paper aims
transparency and trust throughout agricultural to facilitate a better understanding of the
supply chains and empower all market players opportunities, benefits and applications of
is real. The technology has the potential to DLTs in the agriculture sector. It also identifies
simplify and integrate agricultural supply technical and financial constraints in adopting
chains, enhance food safety, reduce risk in the DLTs in food and agriculture.Agriculture 3
2. UNDERSTANDING DISTRIBUTED LEDGER TECHNOLOGIES
Distributed ledger technologies are an evolving transactions timely and costly. In addition, the
technology and transaction system that has centralised model limits access to data and
many applications. It was first introduced as the control of it for buyers and sellers. DLTs do
cryptocurrency system for Bitcoin in 2008.3 DLTs not use any centralised certifying authorities.
can be used to make all types of transactions and Instead, when information is verified on the
store any type of data and information of value. distributed ledger, it is instantly recorded on all
A DLT is a digital database that uses cryptography of the participating computers on the network,
to link and secure transactions or data entries, which ensures every user has access to up-to-date
and disintermediates data processing and data information; there is no single point of failure
storage with a peer-to-peer distributed network and no single institution or actor can control the
of computers that are used to validate and store information. DLTs verify transactions by using
the transaction history and information. DLTs a consensus mechanism to reach agreement
function as a decentralised digital institution to between the participants on the status of a data
ensure trust between buyers and sellers or users, in the network. The consensus mechanism uses
thus providing an improved method to account validators (who are also participants), economic
for value transfers. incentives and consensus algorithms to validate
transactions or data entries in the shared ledger.
The technology has three key features that All users of the DLT can participate in the
are necessary to understand (see figure 1). validation process for transactions. This removes
First, DLTs disintermediate the processing and the need for intermediaries by maintaining the
storage of data entries. Currently, institutions element of trust, while replacing the current
ensure trust through intermediation, where they centralised data model which drastically changes
contract, clear, settle and record transactions the payment-cost structure (Cant et al. 2015).
in a centralised ledger. These intermediaries This method of validating data entries offers
often rely on manual inputs and are susceptible greater cost efficiency, with lower fees and
to error and fraud, making the execution of faster transactions.
Figure 1: Traditional centralised ledger and a distributed ledger
Clearinghouse
Centralised ledger Distributed ledger
Source: Author
3 There is a spectrum of DLTs, each with a different degree of decentralisation. It ranges from permissionless ledgers
(like the Bitcoin blockchain) that are censorship resistant, do not have any legal accountability and where users have
equal rights to permissioned ledgers that are censored, have legal liability and where users may not have equal rights.4
Second, DLTs use cryptography to ensure access, where actors in the network are
immutability and security for data entries. anonymous and do not need to have any
Each data entry is recorded with a timestamp previous relationship with the ledger. Public
and a cryptographic fingerprint of that record, or permissionless DLTs are censor-proof and
called a hash, that links each record to one fully decentralised systems. Participation in
another, and is then stored securely across the network is open to anyone in the world,
the distributed network of computers. Hashes which means anyone can make transactions,
are the basis of security and immutability for view the ledger’s entire transaction history and
distributed ledgers, which make it impossible participate in the consensus mechanism. The
to modify an entry without noticeably affecting advantage of public DLTs is that no individual
all of the entries in the ledger. This makes or entity is able to control the information on
fraudulent activity in the distributed ledger the ledger and, therefore, the system is neutral.
immediately visible to all of the other users. The two most well-known public DLTs are the
Bitcoin blockchain and Ethereum; the latter is
Third, the immutability of records and the a generalised transaction ledger that allows
disintermediation of data storage, through anyone to programme decentralised software
a shared ledger, make every transaction or applications using smart contracts and executes
record in a distributed ledger traceable and them on its DLT. The disadvantage of public DLTs
transparent. In theory, all participants of is that there may be some malicious actors in the
the distributed ledger have access to the full network, since the participants are unknown.
transaction history registered on the database. Therefore, there may be applications where
Depending on the purpose and the rules of the some types of information are too sensitive to
DLT, users have the ability to control which be shared in a fully open ledger, such as for
types of transaction details are shared, and financial institutions.
with whom. The information stored on the
ledger is protected by encryption and managed A private DLT is a closed ledger with permis-
with private and public keys.4 Together, these sioned access, where users are identified
keys allow users to protect and control who can and transactions are validated and processed
access their information on DLTs and when. For by actors that are already known by the
example, if a farmer wants to share their credit ledger. By requiring the identity of actors
history that is registered on the distributed to be known in the private or permissioned
ledger with a lender such as a bank, then they distributed ledger, there is an additional
could use the bank’s public key to encrypt and layer of security that limits malicious
send the data to the bank; the bank would actors, as they can be penalised and ejected
use its corresponding private key to decrypt from the network.5 Instead of anonymous
and read the information. In addition, the bank participants, permissioned distributed ledgers
could verify that the data actually belongs to use already authenticated legal entities to
the farmer by using the farmer’s public key. validate transactions (Swanson 2015). Using
Ultimately, access to data in the DLT can be authenticated validators to provide consensus
shared or private, depending on the rules of in the network does not mean they can control
the DLT (which are based on the purpose of the the approval of transactions. In fact, there is a
platform) and the users’ choices. trade-off for permissioned distributed ledgers
where censorship-resistance is sacrificed for
Currently, there are two main types of DLTs: legal accountability, while still operating
public and private (Jayachandran 2017). A without intermediaries. It is precisely the
public DLT is an open ledger with permissionless legal accountability that makes permissioned
4 In asymmetric encryption, each user has a private and public key that correspond to one another. The private key is
confidential and similar to a password. The public key is like an email address and is available to users in the network.
5 For more details on the benefits of permissioned distributed ledgers, see Swanson (2015).Agriculture 5
distributed ledgers more attractive for global contractual agreements, which are usually
capital markets, tangible assets, supply chains in the form of physical contracts. Physical
and smart contracts (Swanson 2015). contracts depend on centralised authorities
to clear and settle transactions, which are
The anonymity of participants in public DLTs costly, time consuming and plagued by error
and the identity of users in private DLTs make and fraud. Since DLTs have a high degree of
the process for verifying the transactions security and immutability, they provide a sound
quite different in open and closed systems. technological platform for smart contracts.
There are many different types of consensus Smart contracts are computer programs
algorithms that are used for public and private that automatically execute when predefined
DLTs. Each algorithm has advantages and conditions are met. Smart contracts are
disadvantages, which should be understood designed to automate much of the contractual
and used according to the specific application. process. The performance, monitoring and
For example, one of the best-known public DLTs enforcement of contractual agreements are
is the Bitcoin blockchain, which uses a consensus done autonomously, without any central
algorithm called proof-of-work. The proof-of- authority or human involvement. Contract
work algorithm is costly in terms of resources and automation could provide huge savings for
time, and therefore is not an optimal consensus businesses in transaction fees and legal costs,
mechanism for business blockchain networks while meeting contractual obligations in real-
(Hyperledger 2017). The Ethereum public DLT time (Shadab 2014; Cant et al. 2016). These
is transitioning to the proof-of-stake algorithm, efficiency gains have the potential to uproot
which is more efficient as it eliminates mining the traditional contractual infrastructure
and the expensive computational resources and eliminate the need for centralised
used in the proof-of-work algorithm. Private intermediaries.
DLTs employ two main groups of consensus
algorithms: lottery-based and voting-based. The areas for potential applications of distri-
Lottery-based algorithms are advantageous in buted ledgers are immense. The efficiency
terms of scalability but result in a longer time gains from executing transactions and
to finality, while voting-based algorithms are contracts through distributed ledgers have
advantageous in terms of speed and finality but huge implications for the financial industry, but
lack scalability (Hyperledger 2017). also for other sectors throughout the economy.
Seemingly every sector of the economy is
Another potential efficiency gain for the global trying to understand how this technology is
economy is the ability of DLTs to implement applicable and could be beneficial, and what
smart contracts. Commerce operates through the challenges for implementing it are.6
3. APPLICATIONS FOR DISTRIBUTED LEDGER TECHNOLOGIES IN THE
FOOD AND AGRICULTURE SECTOR
3.1. Current Trends in the Food and (FAO 2014). In these regions, agriculture is
Agriculture Industry marked by low labour productivity and low
capital intensity. This is in stark contrast with
Similar to other sectors of the economy, the predominantly large-scale farming in high-
agriculture and transactions in agricultural and upper-middle income countries, typically
supply chains have never fully undergone a characterised by high labour productivity and
digital transformation. World agriculture is high capital intensity.
facing numerous challenges. The agri-food
industry must: Globally, both food production and retail
channels are changing. There is a growing
• meet the food demands of a growing reliance on global supply chains and
population; large-scale distribution systems, such as
supermarkets. Food systems are becoming
• adjust to changing consumer preferences more capital-intensive, vertically integrated
in low- and middle-income countries from and concentrated in fewer hands. In some
cereal-based products towards higher instances, there is the integration of primary
consumption of animal, fruit and vegetable production, processing and distribution; the
products; automation of large-scale processing; and
higher capital and knowledge intensities (FAO
• promote more environmentally sustainable 2017). For low- and middle income countries,
agricultural practices and decrease envi- the changing agri-food value chains increase
ronmental footprints; barriers for small-scale producers and agro-
processors to participate in local, national and
• reduce supply chain costs;
global markets. Many small-scale operators
• maintain high-quality sanitary and phyto- struggle to participate in integrated value
sanitary (SPS) standards; chains, due to the lack of access to financing,
issues of market accessibility and transport,
• sustain profitable farming operations; and and of complying with the range of standards
on quality, traceability and certification (FAO
• raise incomes of small-scale food producers. 2017). By strengthening the linkages between
farmers, markets and consumers, agricultural
Globally, the agriculture sector is a major value chains can generate greater income
source of employment, which absorbs roughly growth and job creation.
30 percent of the global workforce (World
Bank 2018b). For many low- and lower-middle- Agricultural supply chains are risky and
income countries, the sector is an important complex, as agricultural production depends
source of income for the rural populations and on difficult-to-control factors (weather, pests
a major driver of economic growth. and diseases), agricultural supply chains lack
traceability and the settlement of transactions
Food systems and agricultural practices around is slow and often labour-intensive. Transactions
the world are diverse and range from modern, in agricultural supply chains are overrun with
large-scale distribution systems channels to intermediaries and dogged by inefficiencies,
traditional food chains. Agriculture in low- and while the actors that are able to consistently
lower-middle income countries is characterised access global supply channels are often large-
by a majority of small farms, with three quarters scale producers and agro-processors with a
and two thirds, respectively, of all farmland strong reputation. Agricultural supply chains
managed in farms of less than five hectares need more inclusivity for disadvantaged marketAgriculture 7
players, in order to boost their economic that records, tracks, monitors and transacts
development and contribute to the demand for physical and digital assets. DLTs enable higher-
greater food supplies by a growing population. quality transactions and enhanced traceability.
DLTs have the ability to reduce risk and The technology can integrate and manage
increase efficiency in the agri-food industry by each process and transaction throughout the
providing transparency and traceability and by agricultural supply chain in real time. Each
eliminating intermediaries in agricultural value transaction that is processed on the distributed
chains. In addition, by reducing uncertainty and ledger can carry transaction details and
enabling trust among market players, DLTs and specific attributes for the product which can
smart contracts also provide a real opportunity be added by supply chain actors. Supply chain
for more inclusive market participation for actors can identify and examine the product’s
smallholders and MSMEs. movement along every step in the supply chain
from the agricultural and livestock inputs and
3.2. Agricultural Supply Chains practices (fertilisers, fodder, water practices,
veterinary services, etc.) used on the farm to
3.2.1 Agricultural supply chains management
the transportation and storage conditions and
details as the product moves to the retailer and
Agricultural supply chains have substantial
consumer. The DLT stores immutable records
inefficiencies, which impact all actors in
that are transparent and, in theory, accessible
the chain from producers to consumers. It is
estimated that the cost of operating supply to any user with the software. This technology
chains makes up two thirds of the final cost has the potential to create vast efficiency gains
of goods (Niforos 2017b), while seven percent for each actor in the supply chain.
of the global value of trade is absorbed by the
Ensuring immutable product–process links
costs of documents alone.6 The challenges for
supply chains include: the lack of transparency DLTs provide a platform for traceability in
due to inconsistent or unavailable data; high agriculture supply chains to track provenance
proportion of manual labour and paper work;
and ensure authenticity of agricultural
lack of interoperability; and limited information
products. Regulatory control will be easier
on the traceability of the product (Lierow et
with DLTs as the product can be traced along
al. 2017). Both private and public sectors want
every registered movement in the supply
to reduce the high cost of moving goods along
chain, and this allows for legal accountability
supply chains, and the World Trade Organization
for fraudulent behaviour regarding a product’s
(WTO) Trade Facilitation Agreement introduces
authenticity. However, for transactions to
measures to cut costs, avoid delays and reduce
be fully tamper-proof, an immutable link
uncertainty (OECD et al. 2014).
between the DLT (process) and the real-world
At the same time, the private sector is always product needs to be established. The basic
looking for technological advances to make challenge is that while the transaction data
their supply chains more cost effective and to can be traced by the cryptographic fingerprint
increase competitiveness. Already supply chains attached to each transaction, the movement
are being digitised with technologies such as of the physical product along a supply chain
cloud computing, artificial intelligence and the from farm to consumer needs to be ensured
Internet of Things (IoT). However, DLTs have the through such an immutable product-process
greatest potential to increase efficiency and link. Several options exist to establish these.
transparency in agricultural supply chains. They include the well-known QR code on the
product’s packaging, the more advanced radio
The application of DLTs in agricultural supply frequency identification (RFID) chips and,
chains would provide a digital database more recently and most promisingly, so-called
6 See www.tradefacilitation.org.8
crypto-anchors. QR codes are already used For example, when looking at the supply chain
in markets and require regulators to monitor for poultry (figure 2), we can see the real
product authenticity. IBM recently developed potential of an integrated supply chain on a DLT.
crypto-anchors as a means to ensure product With growing demand for more transparency and
authenticity for DLTs. Crypto-anchors are information on the origin of products, supply
tamper-proof digital fingerprints that are chain actors would use a mobile application and
embedded into products in the form of edible a QR code on the product to trace its origin and
ink using optical code or tiny computers, movements along each step of the supply chain.
and linked to the DLT to prove a product’s The consumer would scan the QR code on the
authenticity. Crypto-anchors are highly packaging of the chicken to reveal the product
secure, unclonable, smaller than a grain information. In order to have product traceability,
of salt and cost less than US$0.10 cents to the chain would start with the producer, who
manufacture (IBM 2018a). In the case where would keep records of all information on inputs
a crypto-anchor cannot be embedded directly (such as feed and medicines), animal health,
into a product, IBM also recently developed location, breed, age, sex, cost of production
a technology using mobile sensors (or a cell and any other technical information needed
phone) outfitted with a special optical device for domestic or export markets. Each time the
and artificial intelligence algorithms to learn chicken would be moved between supply chain
and identify the optical structure, the DNA actors, the transaction would be recorded and
sequencing and other features of certain verified by the DLT. Other information that
objects in minutes (IBM 2018a). For example, would be recorded is time (slaughter date, time
in the near future, a retailer or customs agent in transit, expiration dates) as well as export-
could use a sensor on a mobile phone to verify related certifications (such as health and country
the authenticity of a tomato’s provenance. of origin certifications). These details and their
The low cost and seemingly simple usability traceability would bring large efficiency gains
make crypto-anchors a potential scalable and to supply chain management, food safety and
useful tool to ensure authenticity. product sustainability.
Figure 2: Agricultural supply chain on distributed ledger technology
Supplier Producer Processor Distributor Customs Retailer Consumer
Agriculture and Chicken is Gov. inspected Stores and trans- In case of int’l Runs machine Scan QR code
livestock inputs tagged with facility gets data ports poultry pro- trade, receives learning-based via app
are sold to pro- RFID chip, on chicken, pre- ducts from digital certifica- fore casting
ducer and regi- proving free pares poultry suppliers to retai- tions Gets full infor-
stered on DLT range products and lers, restaurants Adapts orders mation on the
adds QR code to and importers Uploads data on and promos poultry product
Breeder enters Uploads data on packaging holding times, accordingly such as where
data on egg and Uploads data on
feed, veterinary testing resultis and where
pullet quality shipment and
reports, facility Uploads data on and customs- Uploads data on and how it was
and conditions, delivery details,
conditions, storage and clearing details delivery details, produced, pro-
sanitation and storage and
sanitation and slaughter condi- inventory metrics cessed and
transportation transport condi-
food safety tions, food safety Allows entry for and sanitation transported
details tions, and ware-
measures, other compliance, lot products and measures.
house and vehicle
certifications number, custom duties
food safety and
and farm certifications are automatically Provides app for
sanitation
location and QR codes dispersed by end-consumers
measures
smart contract
Source: AuthorAgriculture 9
Currently, there is an influx of start-ups in the free status. In addition, the CCA should be
food and beverage sector that aim to transition able to easily, quickly and confidently issue
agricultural supply chains onto DLTs. INS is an export certifications. Virtually all of the
e-commerce platform that aims to disrupt the required information associated with the
concentration of power in the grocery market product will be in the DLT and certifications
by using DLTs to connect manufacturers could even be automated. CCAs will still play
directly to consumers through the integration an important role in monitoring and inspecting
of data. Globally, approximately 60 percent of farms and processing facilities’ compliance
the grocery market is dominated by the top with international SPS standards.
five retailers, which can lead to unfair trading
practices for farmers and manufacturers, and In the case of an outbreak of an animal or plant
high prices for consumers (Michail 2017). By disease, contaminated agri-food products or
bypassing grocery retailers, manufacturers food fraud, DLTs will also enable businesses and
could save money on the business-to-business regulators to trace and pinpoint contaminated
(B2B) marketing directed at retailers, which or fraudulent products more quickly and less
will save consumers 20–30 percent for products wastefully. Both food fraud and foodborne
bought on the INS platform (Michail 2017). INS diseases are extremely costly in economic
is envisaged to give small food enterprises terms, and environmentally in terms of wasted
increased market opportunities. Ambrosus is a resources. Food fraud is estimated to cost the
Swiss tech firm that aims to use a DLT, smart global food industry US$40 billion each year
contracts and high-tech sensors to trace food (PWC 2016), and the estimates of foodborne
and pharmaceutical supply chains. Ripe is diseases in the US alone are roughly US$55
another company that is using DLTs, scanners billion annually (Scharff 2015). Currently,
and specialised sensors to provide agricultural neither firms, governments nor consumers
supply chain actors with better data on crop are able to capture a product’s movement
production to yield higher-quality produce along the entire supply chain, since often
(Massa 2017). Provenance, a UK start-up, governments only require firms to record data
successfully launched a pilot project to track on a product’s movement one step forward
tuna fishing on DLTs. The company aims to and one step backward. This can make it more
curb illegal fishing and fake certifications, by difficult to track contaminated or fraudulent
registering each catch on the blockchain and products to the exact farm or plant that might
selling the fish with a blockchain ID in order to have caused the outbreak. DLTs can quickly
ensure traceability. trace contaminated products to their source,
allowing faulty items to be removed from
3.2.2 The future of food safety stores to minimise both illness and financial
losses.
By enabling transparency and recording every
detail of the production and processing of The food and beverage industry is currently
agricultural goods, the ability to ensure experimenting with deploying the DLTs into
compliance with food and sustainability global food supply chains. A consortium of
standards will be improved. Data will be large food suppliers, including Dole, Driscoll’s,
available on the quality (freshness, safety, Golden State Foods, Kroger, McCormick and
geographic indications), safety (health, risk Company, Nestlé, Tyson Foods and Walmart, is
management) and sustainability (organic, fair- collaborating with IBM to test their DLT and
trade) of products. DLTs will help businesses identify new areas where the technology can
and governments’ central competent benefit food ecosystems (Wass 2017b). The
authorities (CCA) to track and monitor non- collaboration is based on a successful pilot
compliance with international standards and project that IBM carried out with Walmart on
improve their ability to control plant and how DLTs can solve food safety problems and
animal diseases in order to maintain disease- trace contaminated products to their source.10
The results from the pilot project showed include multiple copies of agreements between
that, when tracking a package of mangoes the shipper’s banks and receiver’s banks,
from the supermarket to the farm where they as well as agreements on the value of the
were grown, it took six days, 18 hours and 26 shipment and how it is loaded. Through these
minutes with traditional methods, whereas complex and inefficient transaction systems,
with the DLT it took just a couple of seconds to financial intermediaries lock up billions of
identify the exact origin and the path the fruit dollars as they process the transactions. For
followed to the retail shelves (Wass 2017b). example, the payment terms in Australia’s
grain sector range from two to five weeks, and
Similar projects are underway in Asia these terms pose counterparty credit risk to
with two of China’s largest e-commerce growers (Fintech Australia 2016). Naturally,
companies, with the objective to combat such long periods have negative impacts on
food fraud. Alibaba is launching an initiative sellers’ cash flow, working capital and ability
with PricewaterhouseCoopers, Blackmores to manage their business.
and Australia Post to develop and implement
blockchain-based technologies into their Trade finance digital platforms using DLTs
supply chains to eliminate food fraud. can reduce costs, reduce risks for sellers
Similarly, JD.com, China’s second largest and banks and bring greater efficiency gains
e-commerce company, is working with Kerchin, to supply chains. DLTs use smart contracts to
a Mongolia-based beef manufacturer, to track auto-execute the settlement of payments in
the production and delivery of frozen beef real time, by first valuing the delivery, then
(Huang 2017). verifying the buyer has sufficient funds and
lastly securing the funds in the buyer’s name
3.2.3 Greater efficiency for trade finance pending delivery. Once the physical delivery
is made, the title for the grain is transferred
Trade finance plays a vital role in global to the buyer as the payment is simultaneously
trade. Roughly US$18 trillion of annual trade settled from the reserved funds (Fintech
transactions involve some form of trade finance, Australia 2016). Real-time approvals and
while the total size of the trade finance market payments in trade finance would eliminate
is more than US$10 trillion annually (Auboin the counterparty risk that sellers face and
2015). Financial institutions bridge the gap in free up working capital. In addition there are
the exchange between buyers and sellers with huge efficiency gains through the workflow
some form of finance, such as credit, insurance automation and digitisation of documents.
and guarantees. There is substantial risk when All information (related to agreements and
two companies send high-value and large certifications) that is traditionally stored on
shipments domestically or internationally, paper would be stored on a single digital ledger,
such as a load of rice. The potential risks are which is quickly accessible to all parties. Banks
related to the transaction between the two would no longer need intermediaries to assume
parties (i.e. the time difference between risk. Lastly, DLTs could also improve the ability
when sellers or exporters want to be paid of regulators and authorities to collect taxes
and when buyers or importers will release and customs duties. The technology brings a
the payment), possible alteration or loss of high level of accountability, traceability and
goods during transportation and fluctuations in verifiability to the transaction.
exchange rates. Trade finance mitigates these
risks for sellers and buyers (or exporters and DLTs can also increase access to trade
importers), which is a fundamental aspect of finance. Trade finance has been unable to
being able to trade goods. meet demand, particularly from MSMEs and
emerging economies, resulting in a loss in
The current methods of trade finance are economic growth. In 2017, the global trade
cumbersome, time-consuming and rely heavily finance gap is estimated to be approximately
on paper to conduct transactions. Transactions US$1.5 trillion (DiCaprio et al. 2017). Access toAgriculture 11
trade finance often depends on reputation and and French banks (ING, ABN Ambro and Société
being an established player in supply chains, Générale), partnered with Louis Dreyfus Co.
which ultimately is a disadvantage to MSMEs. (one of the biggest agri-food traders), to ship
Since DLTs reduce the risk for banks, they have a cargo of soybeans from the US to China using
a greater incentive to be more inclusive and a DLT. It is said to be one of the first fully
also extend their services to MSMEs. fledged agricultural commodity transactions
using the technology, which reduced the time
Currently, a number of trade finance appli- spent on document and data processing to a
cations using blockchain-based technologies fifth through digitising documents for the deal
target MSMEs and locations where trade (including sales contracts, letter of credit,
financing is unavailable. Seven major European government inspections and certifications)
banks are collaborating on the development (Bloomberg 2018). Another initiative, including
and commercialisation of a permissioned DLT a group of international banks (Barclays,
trade finance platform for SMEs, hosted by Standard Chartered and BNP Paribas), large
IBM and powered by Hyperledger Fabric 1.0 corporations (Unilever, Sainsbury’s and Sappi)
(Wass 2017a). 7 The platform, called Digital and fintech start-ups, has launched a project
Trade Chain, is designed to manage open to use DLTs to track physical supply chains
account trade transactions for domestic and unlock access to financing for sustainable
and international trade for European SMEs. sourcing (Wass 2017c). The first pilot plans
Its goals are to provide a single platform to test the technology to track tea and tea
for trade deals, provide easy access to packaging materials from farmers in Malawi to
financing and reduce transaction costs for the corporations. This pilot is one of the first
businesses. In addition, a US-based company, initiatives to combine supply chain tracking
Skuchain, has developed a DLT to reduce with trade financing.
friction in trade finance and global supply
chains. The venture aims to make financing 3.2.4 Agricultural value chain financial
available to SMEs and to emerging markets services: payments, insurance, credit
where it was not previously accessible. and derivatives
Skuchain’s blockchain technology provides
a “collaborative commerce platform” that Other types of financial services, like payment
combines payments (letter of credit or wire services, insurance and credit, also play an
transfer), finance (operating loans or short- important role in helping agricultural supply
term trade loans) and visibility (integration chain actors to reduce risk, improve crop
with back-office systems such as “Systems yields, manage liquidity and maximise returns.
Applications and Products in Data Processing” DLTs have the potential to reduce friction
or an “Enterprise Resource Planning” system) costs and increase access to agricultural value
(Allison 2016). One potential application of chain finance particularly for smallholders and
Skuchain’s blockchain is with WFP, as they MSMEs. According to Capgemini Consulting,
are currently exploring options to finance distributed ledger-based smart contracts are
the procurement of food in East Africa estimated to save consumers up to US$16 billion
(Besnainou 2017). annually on banking and insurance fees (Maity
2016), and certainly savings from reduced
There are many other applications in trade friction costs generated by DLTs will also apply
finance and supply chain management that to agricultural financial services. Greater
are in the process of testing their proof of efficiency in supply chains and agricultural
concept, with the intention to pilot and scale financial services can lead to greater financial
thereafter. One example is a group of Dutch inclusion and stronger business development.
7 The banks include: Deutshce Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit.12
Payments that DLTs could reduce banks’ infrastructure
costs for payments, securities and regulatory
Financial transactions, such as payments compliance by US$15–20 billion a year by 2022
to and from farmers, traders, processors (Belinky et al. 2015). In 2013, BitPesa launched
and exporters for goods and services, or a DLT-enabled payment service that serves
loan disbursements and repayments, are African and international businesses to make
the most common type of agricultural value payments to and from Africa and facilitates
chain services. For many agricultural value approximately US$20 million of transactions a
chain actors, financial transactions are month (Aglionby 2018). In September 2016, a
overwhelmingly cash-based. The process of group of some of the largest banks in the world
handling, delivering and collecting cash is created the first interbank group to facilitate
slow and expensive and is subject to risks real-time global payments using DLTs, in this
such as theft and loss (Mattern and Ramirez case using the Ripple blockchain (Treacher
2017). Digital payment services have already 2016).9 Other financial institutions have begun
proven to reduce costs and risks from cash- using the Ripple blockchain to facilitate
based transactions, while also generating data instantaneous remittance payments (Ripple
on value chain actors’ cash flows which can 2017). Similarly Nasdaq and Citigroup recently
be used to assess credit risk. For example, launched a new integrated payment solution
the digital payment venture called M-Pesa to enhance liquidity in private securities and
has already shown that mobile money can for global payments by using a DLT powered
provide a simple way of transferring money, by Chain.com (Nasdaq 2017). These examples
which leads to greater access and utilisation of from retail banking indicate the real potential
financial services for more successful business of the technology, which can also be applied
development. There are now more than 30 in agricultural finance. DLTs have the potential
million M-Pesa users in 10 Africa countries to provide even greater financial inclusion
(Krishnakumar 2017). However, DLTs present for MSMEs and low-income countries, and to
an even greater opportunity for frictionless enable agricultural value chain actors to save
and real-time payment services. and invest more in their businesses.
A number of financial institutions are testing Agricultural insurance
proof of concepts and already using DLTs for
payments.8 For many firms, their interest in Agricultural insurance is a risk management
DLTs stems from the opportunities to reduce tool to help stabilise farm income and
friction and costs (Tapscott and Tapscott investment in the event of losses, due to
2017). Digital payments are still relatively natural disasters or low market prices. These
slow and expensive and use a centralised tools cushion the shock of income losses to
data model. Bypassing existing intermediaries help farmers initiate crop production after a
with DLTs can provide significant savings for bad agricultural year and spread the losses
both consumers and financial institutions. over time to enable continued investments in
A report by Santander InnoVentures claims agriculture. Agricultural insurance products
8 Financial institutions have made significant investments in DLTs. Visa, Nasdaq, Citi and other industry players invested
US$30 million in Chain.com, a blockchain developer platform (Shin 2015). Ripple, an enterprise blockchain solution for
global payments, is backed by Santander InnoVentures and other major financial institutions (Elison 2016). Another
major blockchain technology called Ethereum launched an initiative in 2017 (to improve standardisation and scalability
of its blockchain technology for enterprises) with 116 members, headlined by JP Morgan Chase, Intel and Microsoft
(Shin 2017). Distributed ledger solutions are being developed for a range of financial services such as moving value
through payments and remittances, trading value in financial assets, and insurance. The benefits of distributed
ledgers for financial services will certainly trickle down to financial institutions focusing on agriculture value chains.
9 Including Bank of America Merrill Lynch, Santander, UniCredit, Standard Chartered, Westpac Banking Corporation and
Royal Bank of Canada.Agriculture 13
are often unavailable in developing countries supply chain actors. By eliminating the need for
and in particular for smallholder farmers. For human intervention to assess insurance claims,
smallholders, this is due to the high costs of the process becomes simple, transparent and
verifying loss claims in geographically dispersed efficient. Smart contracts would remove the
areas, the relatively small size of individual risks of fraudulent claims and corruption from
policies and the limited understanding of insurance providers, as the terms of insurance
insurance providers of the agricultural risks policies would be unable to be tampered with
for smallholders (Mattern and Ramirez 2017). once agreed upon. Even data collected at
For farmers that have access to agricultural weather stations could be registered on a DLT
insurance, policies are paper-heavy and to ensure its integrity. The automation from
rely on substantial manual labour to verify smart contracts would drastically reduce the
claims, which ultimately increases the cost of cost of insurance policies for both consumers
insurance. and insurance providers. The reduced costs
and risk for insurance providers would allow
Digital technologies provide the possibility to them to provide insurance to more farmers. For
address some of these challenges by enhancing farmers, the disbursement of pay-outs would
actuarial estimates and reducing the cost of be virtually instant. The data captured by the
delivering and monitoring insurance products. DLT throughout the whole supply chain would
In the case of weather-indexed crop insurance, allow farmers and insurance providers to better
for instance, mobile phones allow consumers assess risk and provide more accurate insurance
to be geotagged, which (in combination with policies to reflect the farmers’ situation.
automated weather stations and satellite
imaging) eliminates the need for insurance A few companies are utilising DLTs to roll out
providers to conduct in-field loss assessments agricultural insurance products. A Swiss-based
(Mattern and Ramirez 2017). In combination blockchain start-up company called Etherisc
with smart contracts implemented by a DLT, is building a platform that uses DLTs to bring
insurance claims and pay-outs would become crop insurance to developing countries, in
completely digitised and automated. For particularly in Africa (Krishnakumar 2017).
example, a smart contract could be used to Autonomous insurance network, Aigang, and a
issue and auto-execute the settlement of a drone imaging business called Skyglyph have
weather-indexed crop insurance policy for a partnered to develop an autonomous crop
farmer. First, the insurance provider would insurance product using drone hardware, GIS
develop a digital contract of the insurance software, the blockchain and smart contracts
policy for the farmer. In the event of a weather (Staras 2017).
shock such as flooding that destroys the
farmer’s crops, an automatic payment would Agricultural credit products
be released to the farmer on the blockchain,
if the actual quantity of rainfall indicated The main impediments for financial institutions
by the meteorological station surpasses the to provide MSMEs with credit products are the
predefined measurement of rainfall and time cost of servicing remote areas, the lack of data
period in the smart contract, bypassing the to assess the creditworthiness of applicants or
need for administrative tasks and verification of collateral (Mattern and Ramirez 2017). The
by insurance companies. This example would integration of agricultural supply chains into
hold true for other weather indexes that DLTs could provide financial institutions with
serve as a sound proxy for crop loss, where rich data on the operations of farmers and
other parameters, like temperature, wind and other value chain actors which is needed to
sunshine, among others, could be measured. provide numerous financial services, such as
direct credit or warehouse receipts. By moving
Smart contract-enabled agricultural insurance to a DLT system, a small-scale farmer or agro-
on a DLT would provide better insurance processor will be able to build a digital identity
coverage for a greater number of farmers and which records their physical assets, such asYou can also read
