The complexity of food and agricultural products continues to expand. Not so many years ago, food goods like breakfast cereals came in relatively few forms such as sugar coated or not, chocolate or fruit- flavor, etc. But today, multiple layers have been add- ed such as organic, natural, non-GMO, high-fiber, or locally produced. Being locally grown or organic does not confer any visual difference to a food item. Thus, consumers and food processors are required to trust in a variety of claims made by farmers, processors, and retailers about these attributes. At the same time, food supply chains have grown longer as more entities are involved in providing ingredients, in reforming products, and then shipping globally.

Managing supply chains for these complex goods and longer supply chains is more costly and difficult. Paperwork involved in international shipments can include hundreds of documents and approvals, cost millions of dollars, and still is not very useful in managing today’s fast-paced supply chains for differentiated and perishable products.

These complexities also create incentives and oppor- tunity for cheating. An analysis by Ferrantino et al (2013) estimated that improving border administration and transportation and communications infrastructure just halfway toward the global “best practices” would result in a 4.7% increase in global GDP and a 14.5% increase in exports. As supply chains get longer, the ability to monitor food safety and quality also increase. Hoffman et al (2012) estimated that the annual cost of food-borne illnesses in the United States from the 14 principle pathogens was $14.1 billion.

Technologies such as genetic modification, gene splicing with CRYSPER, precision agriculture, environmental and climate change adaptation, and shifts in global trade policy will all impact the availability of food goods of different types and from different production systems and locales. Managing these more complex supply chains will be one of the greatest challenges facing the food and agricultural sector as it tries to feed a burgeoning global population in the next 40 years. Providing more accurate, trustworthy, and real time product quality information for supply chain partners and consumers will be critical.

Fortunately, new technologies are emerging from the computer, internet and technology sectors that have great promise in meeting this challenge. Among these is block chain technology.

What is a Block Chain?

Block chains are not a new concept but broad awareness of the block chain technology is rather recent. Block chain technology was developed in the early 1990’s to prevent back dating of important electronic documents. However, it was not widely used until 2009 when the electronic currency, Bitcoin, was launched. Because no government or banking entity financially backs Bitcoin, the value of Bitcoin rests entirely on the block chain that validates each trans- action involving a Bitcoin. Without this block chain, there would be nothing to prevent “counterfeit” Bitcoins from being created and undermining the trust of consumers and businesses in the Bitcoin currency.

A block chain involves a sequence or chain of information that is sequentially altered or amended in a linear progression. Imagine a set of information that is established on the basis of a financial transaction or the production activities of a person or company. This block of information is associated with a code called a hash and if it is not the first block of information in a chain then it is also coded with the hash of the previous block in the chain. As this information is used in subsequent transactions or is passed along a supply chain, it acquires new information to create a new block. In the Bitcoin example, the new information regards payer and payee. When this new information is added then a new block is formed with a new hash but it also carries the hash of the previous block.

All well and good, but we read every day about large data networks being hacked so what stops a hacker from altering a Bitcoin to put it in their account or use it to buy something? To do this, the hacker has to not only alter the hash of the current block but all subsequent blocks linked to it in order to hide their crime. This is absolutely feasible with modern computers and so effective block chains contain something called “Proof of Work” that slows down the creation of new blocks and makes it far more difficult to tamper with a block chain.

The block chain approach to a supply chain hinges on the creation and evolution of a “digital ledger” of transactions, transfers of ownership or possession, monitoring of product quality measures, transformations of form, and production practices. These digital ledgers would be validated in many cases by electronic sensors (IoT devices) (IoT is “Internet of Things”) and the information would be transparent for all supply chain members including final consumers. In some cases, like production practices, third party validators would still be required but they would create blocks of information about farmer compliance. Furthermore, the digital ledgers would be rapidly searchable electronically for key information about products, quality indicators, and activi- ties that occur along the supply chain.

Block Chain in Food and Agriculture

Block chain technology has the potential to validate and maintain key information about food products and their ingredients as they pass through the complex food supply chain. Consider an organic corn tortilla that relies on production activities at the farm level and segregation activities during storage, merchandizing, transportation, and processing. A block (a genesis block in this case because it is the first in a chain) of information concerning the key production processes used to produce a “block” of organic corn is created at planting.

New blocks are created as new activities such as weed control, fertilization, harvesting, etc. are under- taken. Each block, including the genesis block, receives a hash. Subsequent blocks are also labelled with the previous hash to create the string of information about production activities that ensure the corn is organic when harvested and each subsequent block is validated by a peer network to ensure that no information is tampered with during the growing and harvesting period.

A new block might be created if the corn goes into on-farm storage to ensure it is segregated and not treated with pesticides. The next block would be created when the product is transported to ensure that it is not comingled with non-organic grain or otherwise contaminated and another when its ownership is transferred to a processor or merchandizer.

Every transfer and every step in transforming the corn into a tortilla will generate a new block that will receive a hash and contain the new information contained in that block about production, handling, and processing. Furthermore, all the information is vali- dated by observation or IoT monitoring devices. The information is recorded in the digital ledger such that when a consumer buys tortillas at the supermarket, they can scan a QR barcode with their smart phone. Consumers no longer need to vest trust in agribusiness, food processors and farmers. They vest their trust in the nearly tamper-proof block chain, the technology of IoT devices and third party validators.

The long supply chain of agricultural products, differences in product attributes, long periods of storage for some crops and perishability of others, and increasing consumer interest in production practices, food quality, and conservation give rise to many potential applications of block chain technology in agriculture. Below are just a few to ponder.

Traceability

Some larger retailers, processors, and exporters like Walmart, Louis Dreyfus Commodities, and Cargill have experimented with the use of block chains to increase both the quality and the rapidity of traceability in the food and agricultural supply chains. It has not gone mainstream yet, but the potential is starting to reveal itself. Not only can block chain increase the accuracy of claims about production and product attributes, but it can dramatically reduce the time it takes to search backward in the supply chain when problems occur.

The use of digital ledgers and real time quality measurement would likely reduce the frequency of such events. Imagine a shipment of lettuce, for example, with real-time temperature and humidity sensors or Phicrobe (see Applegate and Bae, 2018) sensors that deliver information about container temperature, humidity, and e.coli presence on a regular basis to a cloud-based digital ledger. In all likelihood, contaminated products will be intercepted before reaching consumers but in the rare occasion they do, traceability back to the source of the problem could be accu- rate and nearly instantaneous.

Problems in Agricultural Contracts

The so-called “hold-up” problem occurs when there are advantages for supply chain members to collaborate but due to the lack of trust, they do not. For example, it is impossible to determine upon inspection whether corn has been grown organically or not. Farmers may have to acquire specialized machinery for weed control and human capital for managing the fragility of an organic production system. Much effort gets expended to write contracts for such crops, but as the recent revelations about fake organic grain from eastern Europe demonstrates these contracts are necessarily incomplete and ultimately depend on trust.

Another possible adverse outcome is when the farmer produces the crop according to contract specification but is undercut by another producer who does not have a contract. The second producer will sell for any price above the cost of harvest. Because quality cannot be determined in real time and the product is perishable, the buyer can claim the contract grower’s product fails to meet quality standards and either rejects it and buys from the secondary producer or pays a lower price to the contract grower who has little recourse.

When specific attributes are required, modern food and agriculture functions with contracts. Bogetoft and Olesen (2002) suggest improved contracting in four areas: reducing the costs of risk and uncertainty; reducing the cost of post-contractual opportunism; reducing the direct costs of contracting; and using transparent contracts. Block chains can be easily de- signed to incorporate “smart contracts” in each of these. Smart contracts are simply computer code that resides within the block chain and determines whether the terms of the contract have been met at any given point along the supply chain. If some key procedure or attribute is not documented in the digital ledger then the next block in the chain is not creatable and the contract is not fulfilled.

If the smart contract is invalidated for some reason, what happens? A new block could be created that branches in a new direction. For example, while the corn may not be considered organic, perhaps it is still “natural” or “low input” or “conventional” and thus continues into a different supply chain that may also require some level of validation with a new block chain. Essentially a new block chain has been created at this point but uses the previous blocks and links up to that point as its beginning.

Commercial Grain Storage

Farmers often store some of their grain in commercial storage. Often they contract with a local grain elevator to store their grain for future delivery. While the vast majority of these contracts function well for both parties, fraud does happen and when it does can be devastating to farmers and to state indemnity funds that backstop violations. Most often fraud involves a grain storage entity under financial pressure that sells grain that was to be in storage. Doing so allows the storage entity to generate cash flow but is typically illegal under state statutes. Block chains could be developed to validate transactions and prevent a grain storage entity from selling grain that is under contract for storage and to ensure compliance with other legal requirements.

A grain storage block could be created when grain is placed in storage and future sales would create a new block in the chain. Regulatory agencies will be able to validate these future blocks because the digital ledger will facilitate more rapid and verifiable over- sight. The validation would include linkages to the previous blocks as well as to the total inventory of grain at the storage facility. All of this would happen in real time and prevent the falsification or delays in processing of regulatory paperwork that typically underlies fraud in these cases.

Conservation and Habitat Markets

Consumers and interest groups increasingly desire changes in the way agricultural products are produced with respect to conservation, habitat preservation, and sustainability. Farmers respond by saying “if consumers are willing to pay for it, then we will produce it” while interest groups contend that farmers are not doing enough to protect important habitat or reduce adverse effects on biodiversity related to their field practices and land use.

The Conservation Reserve Program (CRP) is a market where farmers with approved fragile lands bid for the government to buyout crop production on those acres. The problem is that the limited government funds do not go very far toward establishing wildlife habitat incentives. At the same time, it would be difficult or impossible for a farmer to obtain higher prices for products produced on a farm where they did sustain wildlife habitat.

What is needed is a market for conservation or habitat preservation. Principally, because it is difficult to pair the limited number of parties willing to pay for such practices with the farmers who are willing to accept those payments. There are two impediments. The first is that the numbers of buyers may be small or individually unable to pay for large tracts of land in habitat preservation. An individual may have sufficient funds to purchase only one acre of habitat but it is unlikely that a farmer is willing to maintain such a small area for a reasonable price. The second is that the buyers and sellers of habitat preservation are like- ly to be in different geographies where they are unaware of each other and have no ability to validate each other’s commitments.

Block chain technology could create a direct market for conservation activities or habitat preservation. It would be a sort of private CRP market – perhaps the government could even create and organize it but private funds would drive its operation and create the boundary on its size. This creates a platform in which individuals with limited means can aggregate their funds to offer more appealing and larger opportunities for interested farmers. Environmental interest groups could also bid in such a market as a means of aggregating individual interests. Again sensors, satellite or other imaging, and IoT devices can be used to validate compliance and performance to make sure that farmers are meeting their obligations. At set points during the year, new blocks of compliance in- formation would be created and validated in real time in transparent electronic ledgers. Farmers would not be able to substitute failed acres due to late planting or weather events for the committed acres (unless allowed in the contract) and would have to validate the establishment of habitat plants rather than a weed patch.

Who Pays for the Block Chains?

Which supply chain participant (farmers, processors, retailers, or consumers) will bear the greatest portion of the added costs? As noted earlier, there is substantial hope for reducing transactions costs with the use of block chain technology. In order for block chain to be adopted, these cost reductions plus the increased willingness to pay by consumers must exceed the cost of implementation.

The economic rule is that the entity or person with the fewest options pays the greater share. In the very short run, farmers have few options. Once a crop of a particular type is planted or animals are bred, there is little that the farmer can do other than market that crop or animals. On the other hand, when consumers go to the supermarket they have many alternatives for their food dollar. If the price of pork is high they can buy beef, chicken or some other protein source.

This means that generally farmers have probably been bearing a greater share of transactions costs in the supply chain in the short run. Processors and retailers generally lie somewhere in between farmers and consumers. Thus, reducing transactions costs with effective block chains should benefit farmers relatively more than other supply chain participants in the short run although all parties must be compensated initially for the investments in technologies that they must make. Notice the emphasis on short-run. Adoption of block chain and the associated costs is likely to turn into a break even proposition for farmers over time, but it will also become a requirement for participating in the market. Thus, early adopting farmers may get the benefits for a short while but longer term can expect participation in block chains to become a contract requirement.

What are the Benefits of Block Chains?

Block chains could provide consumers and processors assurance that the products and goods they are buying actually have the attributes they are willing to pay for. Many of these attributes are not visible such as organic, natural, humanely raised, antibiotic free, etc. and so block chains provide a nearly tamper- proof mechanism to validate product claims. There are two economic benefits. Consumers should be willing to pay more to have these assurances and successful block chains are expected to reduce costs. These gains will be distributed to the farmers, processors, shippers, and retailers in the value chain to offset their cost of block chain implementation. Consumers may also benefit from the production of new goods that would have been too difficult to provide without sophisticated validation technology like block chains.

Where are the benefits to farmers? Often farmers feel frustration with new technologies like block chains because it is difficult to connect adoption to higher product prices or lower costs. It is possible that properly designed block chains could result in lower record keeping costs and other transactions costs to farmers. If consumers demand block chain assurances then a benefit to farmers of adopting them is simply access to the market.

There is always the risk that a party in a contract will not perform. This is called counterparty risk and block chains may reduce or eliminate some of these risks. The development of new agricultural products is littered with stories of broken contracts. Farmers can seldom match the volume and scale of their contractual partners in the processing and retail sector. Farmers may work in a contract for several years but face competing farmers producing the specialized crop without any contract. Processors looking for the opportunity to lower costs search their contracts for loopholes to invalidate their previous contracts – unless of course the contracted farm is willing to accept lower prices. Litigating such disagreements is costly and time consuming. Generally, the farm does not have the legal resources to fight such battles and even if they prevail, the final results may not provide a significantly better outcome than the option to sell at lower prices. Block chains could provide real time independently verified information about the quality of the product and the degree to which terms of the contract have been met. Block chain based contracts using IoT devices and other verification technologies would virtually bind the processor or retailer to fulfill their contractual obligations to the farm and eliminate current season counterparty risk. Of course, subsequent year contract renewal risk would remain.

Society also can benefit from block chains because they provide more latitude for farmers, processors, and countries to capitalize on comparative production and processing advantages. Consumers can trust in the block chains and not worry about driving by the local farm to assess whether it is fulfilling its prod- uct claims. Transparency and simplicity of block chain based digital ledgers can create increased trust as well as cost savings.

Conclusion

Block chain technology takes advantage of improvements in computer computational capacity, the broad distribution and access to computers, electron- ic monitoring devices, and the wide use of the inter- net in our modern society. It represents a tamper- proof and transparent method of validating product claims when they are not visible to consumers and/ or food processors. It does however require trust in the technology.

Consumers would have access to QR barcode information by smartphone that allows them to explore the product claims and their validation at each step in the value chain. Other participants in the value chain such as farmers and processors gain greater assurance that contract obligations are met whether that be in terms of quality and quantity guarantees or in payment. Government regulators, supply chain partners, and interest groups would find the real time trusted information valuable in assessing compliance with rules and commitments.

We outlined several applications of block chain technology to food and agriculture. Namely, real time traceability, food safety validation, smart con- tracts, markets for conservation land uses, and commercial grain storage regulation. Many other potential applications exist.

Upcoming innovations such as genetic modification and gene splicing promise to bring even greater specificity to food and agricultural products. The demands for segregation of these products in the supply chain as well as validation of product quality and attribute claims is only going to grow in the future. In order to meet these challenges and to capitalize on the opportunity they represent methods such as block chain technology will be necessary.

 

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References:

Applegate, B. and E. Bae. (2018). “Technology turns smartphones into on-the-spot detectors for foodborne illnesses, other dangerous contaminants,” in Purdue Today, May 15, 2018, https://www.purdue.edu/newsroom/releases/2018/Q2/technology-turns-smartphones-into-on-the-spot-detectors-for-foodborne-illnesses,-other-dangerous-contaminants.html accessed on June 12, 2018.

Bogetoft, P. and H. B. Olesen. (2002). “Ten rules of thumb in contract design: lessons from Danish agriculture,” European Review of Agricultural Economics, 29 (2): 185-204.

Ferrantino, M., T. Geiger, and M. Tsigas. (2013). “The benefits of trade facilitation – a modelling exercise,” in Enabling Trade – Valuing Growth Opportunities, Bain & Company, and World Bank, World Economic Forum, Geneva, http://reports.weforum.org/global-enabling-trade-2013/appendix/ accessed on June 12, 2018.

Hoffmann, S., M. Batz, and J. G. Morris Jr. (2012). “Annual Cost of Illness and Quality Adjusted Life Year Losses in the United States Due to 14 Foodborne Pathogens,” Journal of Food Protection 75(7): 1291- 1302.