Deregulation of the Australian grains industry brought many benefits to growers but there is one area in particular where growers have lost out: payment certainty. The reality is that today a grower has to manage not only production and pricing risks, but also payment or credit risk for which there is no practical, cost-effective offset.
Grain growers in Australia can lock in a guaranteed price, but they cannot easily guarantee payment. When growers deliver their grain, they transfer the ownership (i.e., title) to their buyer. Yet, because the exchange of the physical commodity and the transfer of payment are decoupled, farmers have no choice but to trust that their buyer will eventually honor the price and terms.
Payment terms are starting to trend downwards but in many cases growers still wait 30 days to be paid. In some cases, buyers may offer more favorable payment terms, therefore gaining a competitive advantage that enables them to offer lower prices. Combined with a grower’s inability to do ‘due diligence’ on a buyer’s credit-worthiness, the market has trended towards larger multinationals and incumbent players who growers feel offer less risk of default.
Growers are right to be wary.
The risk of the buyer defaulting is a real one: buyer and trader insolvencies occur every year, costing growers, local communities, and the industry hundreds of millions of dollars. Though it’s not easy to get concrete numbers, VFF estimates that in 2014 grain trade insolvencies directly cost growers $50M in Victoria which resulted in an estimated loss of over $125M in economic activity to local communities.
Forcing farmers to accept counter-party risk creates a ripple effect of inefficiencies and lost value for all participants along the supply chain, such as buyers, traders, logistics providers, and banks. Financial institutions lending to agribusiness price the risk of default higher because of the credit risk growers face when selling their grain. The lack of live grain buyer stock information also impacts on the interest rates charged to the industry. On top of the direct insolvency costs, the annual cost to the agri-sector is significant.
In addition to counter-party risk for growers and the cost to industry, there are two other key issues that we need to address to have a safe and trusted ecosystem for all participants:
- Inability to capture quality characteristics or establish provenance
- Levy and end point royalty collections have no certainty of payment, lack the data richness required, and in many cases are not automated
irst, there is limited means for capturing the quality characteristics of grain and the ability to establish provenance or chain of title is almost non-existent. This matters because downstream consumers already want quality assurance. And soon, traceability will be a basic market requirement.
Finally, other industry participants such as the Research & Development Corporations (RDCs), end point royalty scheme providers, and even bulk handlers lack certainty and automaticity of payment. In many cases, they lack even basic data on the payments they receive. This again is a significant opportunity for improvement. In the case of grains, growers contribute over $100M annually in levies without basic data such as who paid and for what commodity.
These and other data gaps must be overcome to meet community, and potentially government, expectations.
How can blockchain (and AgriDigital) help?
Blockchain can bring efficiency to transactions along the agricultural commodity supply chain. Further, the smart contracts capability of the blockchain can help growers get paid immediately and improve trade settlements. Together, this will save buyers time and money, de-risk financing for banks, and enable paddock to plate transparency for consumers.
A few specific benefits of AgriDigital’s agri-blockchains include:
- Real-time payment on title transfer
- Live position and mark to market reporting for inventory finance providers
- Simultaneous, secure payment for all parties with a claim on the proceeds
- The ability to capture provenance.