The digitisation of agricultural supply chains has increased at a rapid rate, with more corporates and banks beginning to benefit from the efficiency gains that digital solutions offer. Even so, many aspects of the agricultural sector are beholden to legacy processes, with paperwork still being used in key steps of the trading cycle. At the recent Reuters Commodities Trading 2021 panel, our CEO, Carl Wegner, discussed how the adoption of new technology can make agriculture a more financially sustainable and inclusive industry.
Creating a common network
As trade becomes more globalised, the various processes underpinning the transfer of goods is also becoming increasingly complex. Banks and businesses must navigate a number of unwieldly steps throughout the lifecycle of a transaction, ranging from arranging shipment, insurance, finance, customs clearance, government health checks, and more. The result is that multiple parties are often involved in the creation, checking and double-checking of paper documents, which can take up to a week to complete.
“International trade is a very complex animal”, Wegner explained. “There’s the inspection, there’s the ESG requirements, there’s all these different components of it. And there’s the shipping, and no one can do everything. The networks that are going to succeed are the ones that work with specialist partners.”
Technology such as blockchain can bring trading partners closer together by bridging the ‘information gaps’ that often exist between them, allowing for frictionless communication between participants.
“Blockchain or distributed ledger technology is a very elegant way of managing data from multiple sources, since it can be synced in a way where each participant is seeing the same truth even if it is stored in different places,” Wegner explained. The result, as Wegner added, is that there are “less gaps in communication”. This means “banks can feel more comfortable because they’re following the transaction lifetime.”
The ability of banks to track and trace transaction data is particularly important in agricultural commodity trading, where the fragmentation of different markets and providers means paperwork is constantly moving back and forth.
As Petya Sechanova, CEO of Covantis, a post-trade digital platform outlined, improved visibility and efficiency have trickle-down benefits on the rest of the supply chain, opening up “new possibilities, new business cases, new users and open entry to new participants, both from corporates as well as banks.”
Fostering financial inclusion
The benefits of a common digital ecosystem extend to the accessibility of finance itself. Like other sectors, agriculture suffers from a significant finance gap of an estimated $170 billion per year. As a result, smallholder farmers are often forced to lower their productivity due to the unmet demand for finance.
To narrow this gap, the industry must find new ways of connecting agribusinesses to financial institutions and lowering the barriers to finance such as the cost of processing and risk management. Digital networks like Contour’s can help achieve this by simplifying the trade finance workflows between banks and corporates, enabling more digitisation, lower operational costs, and a better way to manage risk.
Digitalisation opens up “new possibilities, new business cases, new users and open entry to new participants, both from corporates and banks.” – Petya Sechanova, CEO, Covantis
“From the inclusion standpoint, smaller companies are frequently excluded because they don’t have a big enough balance sheet,” Wegner said. “But if you have electronic records of how they’ve worked with other partners, banks can use these data points to verify that the records are real and that they came from the stated location, making the checking and inspecting process far simpler. That’s going to give banks more confidence to not just provide better rates to the larger institutions, but finance more the smaller companies.”
Collaboration is key
While many digital solutions have existed for years, their wide-scale adoption across the agricultural sector is dependent on the collaboration between banks, businesses and fintechs.
“The networks that are going to succeed are the ones that work with specialist partners.” – Carl Wegner, CEO, Contour
“We have to mature the business models, the same way that we now mature the technology. With the technology now available, the challenge will be how can we collaborate and create new business models that are fully relying on collaboration,” said Andre Schneiter, CFO at COFCO International.
Schneiter cites the example of running educational programs with farmers and producers to “educate them on how they could benefit from the use of technology.” Such programs, Schneiter explains, will require an industry-wide effort.
“This is where we bring the whole industry to a different discussion on how the processes should be set up and how even the landscape of the business models and competitions will be set up. And this is to meet the very likely scenario in the next three to five years, where the technology will be fully available and mature,” he added.
Agricultural commodity trading is ripe for digitisation. As industries across the board begin to digitise their business models, agriculture must also evolve with this changing landscape to pave the way for a more efficient and sustainable future. With collaboration amongst business leaders, the path towards this digital era can be accelerated at least three-fold turning what was once a decade long journey into one that is rapidly accelerating.