When three Australian farmers intent on solving some of the agricultural sector's systemic problems established an agri-tech start-up in October 2015, they had the mandatory entrepreneurial vision.
Emma Weston and Bob McKay, grain farmers from Warren, NSW, and Ben Reid, who runs a mixed farming operation 340km away in Young, grew AgriDigital from a Sydney-based fin-tech incubator with a determination to make sure farmers get paid "for what they deliver when they deliver".
On-time payment is crucial, not only for the viability of farmers, but also for the communities around them, says AgriDigital CEO Weston.
Little more than a year after launch, the company's founders shot to global recognition for innovation, by executing the world's first live settlement for a physical agricultural commodity using blockchain technology.
This proof of concept event – when David Whillock, a grower from Geurie, NSW, delivered 23 tonnes of wheat to Dubbo's Fletcher International Exports – showed that distributed ledger technology may put pay to one of the sector's great gripes. Whillock was paid within an hour of delivery.
"Farmers bear a large share of the risk burden in the agricultural system, in terms of the counter-party risk when they sell to a buyer – and they are heavily exposed when you consider most only get paid once a year," says Weston, a former in-house counsel for the Australian Wheat Board, and alumna of AGSM@UNSW Business School.
"There may be a variety of people farmers can sell to, but they don't necessarily know [if] the buyer they are dealing with is going to pay them. Traditionally, they have just had to offset that risk and deal with it as best they can," she says.
'We wanted to preserve and authenticate ownership and have a secure immutable record of an asset through a supply chain' – emma weston
Every year there's an insolvency event in the grain industry that often runs to millions of dollars. Insolvencies saw Victorian growers lose $50 million in 2014, according to the Victorian Farmers Federation Grains Group.
Blockchain technology has the ability to show that buyers have the funds available to make a purchase. It has the benefit of transparency in that it records transactions in real-time that cannot be altered or deleted.
And blockchain users are guaranteed their transactions will be executed exactly as the protocol commands, eliminating the need for trusted third parties, and it's believed the technology's precision acts to deter fraudulent activity.
The banking industry is looking to blockchain as a means of cutting costs by eliminating the middleman. The Australian Securities Exchange will make a decision later in 2017 on replacing its present settlement system, CHESS, with a blockchain system making it a likely early adopter.
Blockchain enables real-time payments by embedding automated workflow processes through a network of participants, where the movement of the asset is automatically reconciled on each participant's ledger. 'Smart contracts' remove the need for authentication by authorities, such as financial institutions.
Secure immutable record
By the time AgriDigital had conducted its blockchain trial, the start-up had already gone part-way to addressing its core issue of ensuring payment with a "cloud-based multi-participatory commodity management platform" – another world first – to connect all participants in the supply chain from producer to consumer.
"We're connecting farmers, and buyers – who might be traders, end-use processors, feedlots, storage providers and logistics operators – and giving them one single view of the data, the asset," explains Weston.
It's about both transactional and back-office efficiency. "Traditionally, when a transaction takes place, both parties enter it into their systems. For example, buyers and sellers are both entering the same data and maybe their bank as well; all transactions have to be reconciled at some point."
After exploring a host of different technologies before building its platform, AgriDigital decided to try blockchain.
"We wanted to preserve and authenticate ownership and have a secure immutable record of an asset through a supply chain – and how it has been treated through that supply chain – and that's reasonably well dealt with by distributed ledger technology," says Weston.
Confidence comes from having "a good clean data layer on the movement of commodities through the supply chain".
It's still early days in blockchain's evolution, and Weston admits aspects of the technology remain "clunky".
While it has proved what's possible, AgriDigital is not using blockchain for settlements during its extended pilot phase, which will culminate in commercialisation just before Australia's October 2017 grain harvest.
For the initial proof of concept settlement, AgriDigital used a form of digital wallet, backed by traditional banking technology, in order to make a payment "that's accepted by the majority of people".
"There's a question of when blockchain will be an accepted technology for use by ordinary participants. We can do settlements on a blockchain now, but it's still probably two years off before we see commercial solutions that are not just in the cryptocurrency space," Weston predicts.
But she notes that while farmers may be perceived as conservatives, they're quick to adopt technology in business, particularly when it will make them money or save costs.
Weston says the company has been in a heavy development phase, focused on growing its team, now totalling 22, and its reach within Australia with around 5% of the Australian wheat crop now being managed by AgriDigital's tech products.
AgriDigital has also conducted a soft launch in Canada with a view to moving further into the substantial North American markets to balance seasonal fluctuations for the business.
Later in 2017, it plans to fix another problem for the agricultural supply chain by offering just-in-time finance using the commodity as underlying security for borrowing. The company also will move into the cotton and livestock markets.
In the interim, AgriDigital continues to experiment with blockchain, mostly in collaboration with others to understand its limits and constraints.
'The real power of the blockchain will be seen when we have more information that's captured without input from humans' – eric lim
Scalability for the "throughput" of high volumes of transactions on blockchain still needs work, according to Weston. Privacy is another concern.
"There are issues about the sort of data you can keep private. We think these are really important to understand before we take a solution to market," she says.
Blockchain has an obvious digital blind spot in its inability to capture input values, such as the quality and quantity of goods, says Eric Lim, a senior lecturer in information systems at UNSW Business School,.
In the case of agricultural commodities, the widespread growth of the 'internet of things' – cameras and sensors – to monitor the production, condition and location of goods will soon eliminate this blind spot, Lim predicts.
"The real power of the blockchain will be seen when we have more information that's captured without input from humans," he suggests. "The 'internet of things' promises to fill a gap to optimise blockchain."
Standardisation of processes for global trade and logistics also poses challenges. But in late May, 40 global banks engaged in the international R3 consortium, announced they would invest more than US$100 million to develop and test distributed ledger technology, which promises to help cut costs by standardising data and business processes for recording, managing and synchronising financial agreements.
Meanwhile, AgriDigital has its sights on the further potential delivered by the blockchain's clean data layers for end-to-end provenance in the supply chain.
Paddock-to-plate transparency plays well with the rise of the conscious consumer who wants to know where their food has come from and where it's been, be it fair trade, organic or from environmentally pristine places.
"Many buyers in our supply chain need to know how their goods are being produced, processed and transported – or they want to know. For some there are legal obligations, for example, that a good isn't produced using slave labour," says Weston.
"Supply chains have become increasingly long and complex and global – each organisation maintaining its own data set without much sharing, so all this siloed data impacts on what gets through to the consumer. We saw we could solve that problem."