By John Snell
Blockchain is the new buzz word; everyone is talking about this panacea for all business ills, and yet the reality is less than promised for this Bitcoin-inspired wizardry.
No one is disputing the value of a shared ledger or its ability to deliver comfort where trust is in short supply but blockchain technology alone does not further the cause for the tea supply chain.
To achieve that an additional verification (V2) is required. The combination of blockchain and a V2 smart contract creates full traceability, transparency, and the potential for conveying gateway criteria throughout the commercial passage from bush to cup. This over-simplistic statement needs more than just a pretty infographic to gain the support of jaded tea farmers, producers, and upwards in the chain.
Let’s see what we can do to bring context to the hype.
Firstly, what could we possibly be dissatisfied with?
• The inequality (perceived or otherwise) of disbursement of funds from the consumer purse down the supply chain.
• The effectiveness of certification programs in protecting the industry and consumer from supporting socially unjust or environmentally untenable production.
• The traceability of tea from shelf to source
• The transparency of trade
• Protecting terroir from downstream market practices
• Fulfillment of USDA’s food safety requirements for less hassle than it apparently looks like today
All of these are possible through a variety of mechanisms but a shared ledger and (V2) contract view enables:
• Reliably and securely execute agreed terms between two parties, removing the need for third-party centralized system to execute contracts.
• Total visibility to all movements of a product
• Immutability that ensures historical clarity and openness
• The setting up of criteria to be met, within this view, that requires satisfying before further processes can occur
• Concurrent view and approval of all participating parties that criteria have been met.
Blockchain is not cheap
Blockchain is not simple to install or integrate into existing systems. There is a myriad of different offerings out there and not all are created equal.
At the highest level, you have the choice of public, consortia, or private blockchains which are simplistically described as:
• Everyone can see and use it (as with Bitcoin)
• A chosen group of companies or individuals can use (reflects the reality of our trade), or
• Only those within a company or single group (suitable for a complex internal structure, ie a bank).
Here we assume a supply chain consortium of producers, exporters, importers, packers, retailers, certifiers, and banks. They have been chosen because they are all involved in the supply of product from “origin x” to a consuming country.
Let’s assume that we are signatories to the memorandum of understanding (MoU) for a living wage in Malawi, an Ethical Tea Partnership (ETP) initiative seeking to raise tea worker earnings. Currently, the method for assuring this involves many steps and a lot of trust. A verified cost of production must be ascertained and the proportion of this, paid for labor, must be confirmed. The gap between current wage rates and the living wage must then be calculated and the difference applied to a formula to define a minimum price, ex-factory, for a particular tea.
This requires the producer to be open about his grade production, his return from each grade/month (as seasonality and demand play into return), his borrowing rates, and his input costs (field and factory).
Further upstream, it requires the exporter to show costs to operate, the expense of containerization, shipping, legal costs and overheads (which may include processing prior to export).
The packer may have pre-requisites to export, such as chemical residue analysis and micro testing, to satisfy more stringent US Department of Agriculture Food Safety Modernization Act (FSMA) regulations. These are costs that few downstream know are valid.
The importer will need access to the documents to customs clear the goods and the onward costs at the destination port, maybe additional. The importer may deliver the goods and finance these for some time at a finance rate that is neither available to or communicated down the supply chain.
The packer/seller of this tea has a myriad of costs including packaging materials, fixed costs, packing costs and the costs of sales, and general and administrative costs (SG&A), to name a few. As a branded company, advertising costs and as a publicly listed company (PLC), returns to shareholders which are non-negotiable.
All these are realities of business, no one suggests that they can be avoided but the communication of them as requisites of the transaction from grower to teapot builds acknowledgment and trust which are the foundations of true partnership. If that is all that blockchain can do for the tea industry then the writer would argue that that is emphatic and enough to make the industry healthier and more efficient.
Inherent benefits
Consider the impact to a farmer who gains insight to the costs of business that shifts his focus from one of blame for the precipitous nature of his enterprise to one of acceptance that he must effect change, identify his model’s shortcomings and rectify them.
Imagine the retailer with the ability to see the downstream impact of his, at first blush, responsible procurement practices. It is unconscionable that, armed with a definitive sustainable price for the Farmer that that would not be his negotiation floor; if not he risks brand health, equity, and public outcry.
Blockchain enables access to all partners in a supply chain at the same instant; offering relevant aspects to all, aiding simultaneous recognition of needs up and down the contract flow.
Potential remedial action for identified needs could include:
1. Immediate floor pricing being employed by the retailer and demanded of their supply chain.
2. Scrutiny applied to all contract service costs within the supply chain to look for inefficiencies
3. An investigation into farmer comparative yields and costs with a view to optimizing performance to change the equation.
The initiative for this type of partnership is hard to encourage in a marketplace where market support is not guaranteed but support becomes a reality as one is invited into a blockchain consortium; the membership is in itself an investment to work together and investment (in all forms) is attracted to commitments.
From the point of view of verified sustainable agriculture (the business of certificates), there is also potential merit. Rather than an expensive and convoluted series of usage and premium documentation, the whole transaction and collection process could be conducted seamlessly through blockchain.
Imagine a social premium being delivered directly to source, in fact to a farmer (not necessarily prescribing this) as soon as a till transaction for a product was registered; this requires other technologies developed over time but smart contracts can do this and could transform premium payment schemes to an efficient, trustworthy vehicle for change. Further and to comfort the naysayers, smart contracts could be designed to halt payments to farmers/producers that do not meet criteria required; this could be the posting of an audit result by a third-party or the registration of intermediate surprise audits (to ensure compliance between registered audits) but are rarely carried out.
Let’s also consider the value of blockchain access for FDA clearance and FSMA compliance; the ability for all product information, origin, test data (LIMS), routing and supply chain partner information to be available, in real time, and with proven immutability, must be relished by an authority with such a large mandate. The ability, too, in the event of a mandatory recall to be able to identify all uses of a food lot within seconds from a single source should relieve the administrative burden on both government and industry.
The downside
Before we shout yippee and contact our nearest blockchain provider, let’s consider the downside of such a tool and, in particular, that of consortia BC design which is like a private club, you have to be invited to join and that brings us back to age-old discussions about two-tier industries and the possibility that Producers may be steered down focused routes to market which could limit their ultimate potential in favor of dependable frequency of trade or be left out entirely. The success lies, in where along the supply chain, the blockchain consortia is built and with what primary purpose.
The subject of consortia design, with a specific focus on the where and the how will be covered in a future article.
Blockchains don’t eliminate trust but they minimize the amount of trust required from any single actor in the system by distributing trust among different actors in the system via an economic game that incentivizes actors to cooperate with the rules defined by the game.
In a centralized system, we rely on a single third-party to act as an intermediary, such as a bank when the buyer pays the vendor, however, in a decentralized system, our trust is placed elsewhere, namely in public-key cryptography and a consensus mechanism.
We need to think carefully, as an industry, how we deploy this wunderkind, it could deliver us from energy expenditure on generic trust and task in order that we can focus on delivering tea, the hero crop, to the world.
John owns NMTeaB from which he divulged the secrets of his 35 years in tea and sustainability.