Why isn’t there an “Ebay for agricultural commodities”?

Well, many would respond with “there is!”

There are actually several online exchanges for agricultural goods such as grains, hay, inputs, meat, and others.

However, most of us have never heard of them, because they still make up only a tiny fraction of the overall transactions that take place at the producer level.

CLARIFICATION: Using some metrics, I’m sure some of these platforms consider themselves to be very successful. I’m using the metric of percent of transactions happening on the exchange for my definition of success here.

The internet has been around for DECADES now. Farmers and agribusinesses have proven they are willing to adopt new technology if it improves their business. I do not believe we are just observing slow adoption here.

In fact, there are some massive barriers to overcome that make agricultural commodities very different from products that are widely sold over the internet today such as books, clothes, groceries, and other consumer goods. I’ve listed two of the major barriers below.

I recently spoke with Emma Weston of AgriDigital about how their digital platform is solving for these types of issues. I highly recommend that you listen to the full episode here:

(Listen to the full interview here or find the “Future of Agriculture” Podcast on any podcast player)

Counter-Party Risk. Buying bulk agricultural commodities are not like buying shoes or books. There are a lot more variables in play such as quality, exact quantity, variety, farming practices, ripeness, freshness, and on and on and on. For these reasons, payment is often made once the shipment is received and the exact quantities and quality standards are assessed. This means that title/custody of the physical product is exchanged BEFORE payment is made. And usually that payment is in quantities of tens of thousands of dollars or more. You can imagine how unsettling it might be for a farmer to invest everything they have into a crop just to give it up to someone who “promises” to pay them. This only happens when a great deal of trust is established. It is very unlikely for that level of trust to be reached online, even if you do have a “5 star rating”. The risk of dealing with someone who doesn’t pay you is simply too high. It could put a farmer out of business, not to mention the loss of money to their banker or other financial backers. Also, in the event of a dispute over quality or quantity, it is nearly impossible for the good to be returned because either it has already been consumed, it is spoiling, or it’s logistically impossible to load a return shipment with the exact quality and quantity that first arrived. The Downside to Transparency. Is transparency always good in supply chains? What if it removes “middle men” market participants? Transparency is great in a lot of ways, but can also take away from both competition and liquidity. In theory, getting rid of a “middle man” leaves more value to be captured by producers and consumers. But, what can also happen is a producer can limit their options to just a few buyers which have little incentive to pay up competitively or to buy when they don’t need the commodity. This is problematic. Also problematic is that many market participants have a vested interest in resisting transparency. If you cannot get these participants to use an online exchange it becomes very difficult to gain the critical mass for the platform to become valuable.

Factors like the two mentioned above create resistance to the idea of moving an agricultural supply chain onto an online exchange. So why would anything be any different with blockchain-enabled applications?

To the first point, AgriDigital is mitigating counter-party risk through the use of smart contracts. Essentially, a producer can verify the terms in which they will be paid AND confirm the money exists in a digital wallet of the buyer before making the delivery. Also the exchange can happen simultaneously with physical delivery. This is all theoretically possible without blockchain, but what would be missing is a universal source of truth about the transaction to build the trust by multiple parties that don’t know each other.

Also, the shared ledger of the blockchain allows for financiers to be directly involved in the transaction. Using the custody of the products as collateral right up to the point when money is exchanged.

This ability through blockchain technology to freely exchange value simultaneously with physical commodities could be a game-changer.

The transparency piece becomes a little more complicated. Emma and I discuss this on the interview, but leave the resolution open-ended. What really needs to happen is the information needs to be selectively shared on a “need-to-know” basis. So that, for example, a company could buy from a farmer and pass along all the information about that commodity to their customer without passing along the details of exactly who their farmer is. The consumer needs to trust all of the information about the product without necessarily knowing how they can by-pass all of the supply chain participants. I don’t think it’s far-fetched that will have this capability in the near future.

Emma brings up a great point that middle-men that operate as simply intermediaries between buyer and seller probably should be concerned, but MANY of these market participants are actually offering real value. This value may come in the form of storage (a place to unload during harvest as an example), liquidity (a source to buy/sell when a primary vendor/customer is not in the market), risk management, value-added processing/packaging, etc.

In these cases, the market could be fully transparent but they still serve a very useful purpose, even if they are considered “middle-men”.

As always, blockchain is NOT a panacea. However, I think there are clear reasons as to why it can solve problems that have prevented the further digitization of agriculture.

I encourage you to listen to the full podcast episode with Emma Weston from AgriDigital here: