1

Blockchain Technology in International Commodity Trading

Prithviraj Lakkakula1, David Bullock2 & William Wilson3

Corresponding Address:

Prithviraj Lakkakula

811 2nd Ave N.

Richard H. Barry Hall 500

Fargo, ND 58102.

Email: prithviraj.lakkakula@ndsu.edu

Selected Paper prepared for presentation for the RAP (Research And Practice) on

Blockchain Conference in Fargo, North Dakota, October 27, 2018.

Copyright 2018 by Prithviraj Lakkakula, David Bullock, and William Wilson. All rights

reserved. Reader may make verbatim copies of this document for non-commercial

purposes by any means, provided that this copyright notice appears on all such copies.

Please do not cite this document without permission from authors.

____________________________________

1Research Assistant Professor, Agribusiness and Applied Economics, North Dakota State

University (NDSU). 2Research Associate Professor, Agribusiness and Applied Economics, NDSU. 3University Distinguished Professor and CHS Chair in Risk and Trading, Agribusiness and

Applied Economics, NDSU.

2

Blockchain Technology in International Commodity Trading

Abstract:

A blockchain is a decentralized, public digital ledger that uses cryptology to record

transactions across computer networks to prevent records from being altered

retrospectively. We illustrate the impact of using blockchain technology on export/export

documentation costs in international commodity trading. Preliminary results suggest that

the costs related to accelerated transfer of documents from seller to buyer could be reduced

by 90%. Additionally, in case of soybean trade from Jamestown (North Dakota) to China,

the results suggest that using blockchain technology export costs reduced by an average of

2.3 cents per bushel (from $3.5677 to $3.5447). These results are significant for

agribusinesses and other agricultural stakeholders for evaluating the benefits of adopting

blockchain technology in international commodity trading.

3

1. Introduction:

Agriculture is unique in that most food products are perishable, requiring attention to

enable the efficient flow of the product in the agricultural supply chain from the

farmer/grower to the final consumer (farm-to-market). International trade in agriculture

makes the farm-to-market flow even more difficult. In addition to the significant costs and

losses that occur all along the agricultural supply chain, the scale of transactions is larger

because there is extensive documentation, in some cases the transactions are fungible

(tradable), and banking approvals are critical to the expeditious and efficient execution of

transactions.

Transparency, traceability, and efficiency are three important aspects in agricultural supply

chain. First, transparency is important because many consumers are interested in knowing

the source or origin of their food. Transparency decelerates the farm-to-market flow

because it takes time (days to weeks) to track a food product’s origin and other information

about the relevant parties in the supply chain of that product (Hackett, 2017). There is also

the added element of phytosanitary certification (in international trading of commodities),

which requires declaration of country of origin. In international trading, Maersk was one

of the first companies to test blockchain to track its shipments in coordination with customs

officials (Hackett, 2017).

Second, in some market’s traceability plays a significant role in the event of any

contamination of food originating from a certain location. For example, in April 2018 the

E. coli O157:H7 contamination of romaine lettuce led to the illness of approximately two

4

hundred people and five deaths (Phillips, 2018). It was several weeks before the Centers

for Disease Control and Prevention (CDC) found the source of contamination, which was

attributed to a farm in the Yuma region of Arizona (Centers for Disease Control and

Prevention [CDC], 2018).

Third, efficiency across the supply chain is key both in terms of minimizing losses of food

due to spoilage and minimizing the time required for the food product to reach the final

consumer. In the case of international trading, inappropriate documentation or any action

that forestalls efficient shipping and execution may result in additional costs, including

demurrage1 and penalties.

One method of accelerating the transparency, traceability and efficiency of the agricultural

supply chain is blockchain technology. A blockchain is a decentralized, public digital

ledger that uses cryptology to record transactions across computer networks to prevent

records from being altered retrospectively (McKinsey.com, 2018). Blockchain technology

has potential to be used in agricultural trade to make the information on the source of origin

as well as other characteristics of the commodity easily accessible to buyers, traders, and

other entities in the supply chain. A blockchain solution involves relevant participants,

including growers, first–buyers, intermediaries, exporters, bankers, and end–buyers. In the

food industry, the blockchain solution includes farmers/growers, food processors,

wholesale and retail outlets, and final consumers.

1 Demurrage is a fee that is paid to the owner of a chartered ship in case of a failure to load or discharge the

ship within the mutually agreed time frame.

5

Many groups have explored avenues for blockchain technology in agriculture and food in

particular, in addition to numerous other products and markets. For example, in December

2017, the International Business Machines (IBM) Corporation, Walmart, Jingdong (JD),

and Tsinghua University collaborated to form a Blockchain Food Safety Alliance in order

to revolutionize transparency in the agricultural supply chain (IBM News, 2017).

This paper mainly focuses on the flow of grain & oilseeds and their contracts in

international trading. Specifically, our focus is on addressing inefficiencies in the grain

supply chain from the United States in which the seller is primarily an agribusiness firm

that operates in the United States while the buyer is an agribusiness firm that operates in a

foreign country.

In this paper, we describe the following topics. First, we discuss evolution of blockchain

technology since the introduction of Bitcoin (first cryptocurrency) in 2008 (Nakamoto,

2008). Second, we describe (potential) applications of blockchain technology in

agriculture. Third, we discuss in detail the supply chain of grain/commodity in the

international trade and how blockchain comes into play to reduce the inefficiencies in the

supply chain. Included in this discussion is the current efforts in specifying blockchain in

the international trading of commodities. Fourth, we discuss the limitations of blockchain

technology in the context of last mile problems and how to address each of the last mile

problems. Fifth, we discuss the potential benefits of using smart contracts (explained in the

next section), compared to traditional contracts, in international commodity trading using

a Monte Carlo Simulation model. Finally, we discuss some of the opportunities and

challenges to adoption of blockchain technology in this sector.

6

2. Overview of Blockchain:

A blockchain is a public digital ledger technology that is a decentralized (meaning many

computers [fully participating nodes] share a copy of the transactions as opposed to a

traditional centralized database), cryptographic (meaning transactions are verified

cryptographically), and immutable (meaning information is added to the chain in append-

only fashion) database (Burniske, and Tatar, 2017). While blockchain has multiple

applications, one of the most important ones is “smart contracts”. A smart contract is a

computer protocol used to digitally facilitate a contract in terms of its verification,

negotiation, or performance. It also allows transactions to be carried out and tracked

without the use of intermediaries.

Since its beginning in 2008, the applications of blockchain technology have evolved over

time. It all began with the digital currency experiment, Bitcoin, as the first application of

blockchain technology.

With increased understanding behind the technology of digital currency, more industries

have started exploring the blockchain technology. Given the success of Bitcoin, it is no

surprise that applications of blockchain technology have quickly spread to related fields,

including finance, banking institutions etc. Later, other industries, including healthcare,

agriculture, etc., began exploring the technology to improve business operations.

Applications of blockchain include “smart contracts”. The term “smart contracts” has been

in use since 1994 (Szabo, 1994), and has become popular because the blockchain

technology is useful for creating the digitalized contracts and helps streamline the contract

process by either eliminating or changing the role of intermediaries. Szabo (1994) first used

7

the term “smart contracts” in his classic article titled smart contracts. In the article, Szabo

(1994) defined the term smart contract as a “computerized transaction protocol that

executes the terms of a contract”.

In addition, there have been other major innovations surrounding the blockchain

technology, including addressing scalability issues and improving the consensus protocols

of mining involved for verifying the transactions in the blockchains. Our paper primarily

relies on the use of “smart contracts” blockchain in the context of international trading and

how it could reduce inefficiencies and benefit the businesses in conducting the settlements

and transactions.

3. Studies on Applications of Blockchain Technology to Food Industry and

Commodity Trading:

Of all industries in agriculture in 2018, the meat industry is in the forefront in the

application of the blockchain technology. For example, Cargill Inc. has implemented a

blockchain-based solution that allows buyers to trace the Honeysuckle White brand of

family farm-raised turkeys from farm-to-fork. This blockchain solution involved the

creation of a digital trail of activities involving farm’s location, images of turkey that the

consumer bought, along with the story of the farmer, who raised that specific turkey, for

buyers to trace the information of the turkey that they bought (Meatingplace, 2018).

Javier (2018) discusses how blockchain provides traceability of Auvergne chicken sold by

Carrefour through different data points entered at various stages of its supply chain,

including hatchery, producer, processor, and consumer. Due to tamper-proof ability of

8

blockchain technology, the accountability could be fixed in case of any adulteration of food

product (Javier, 2018).

Amen and Ehmke (2018) lists various blockchain applications in agricultural supply chain,

including food traceability, tracking commodities and grain trading. More importantly, the

authors discuss how it may provide pressure agricultural cooperatives and private elevators

to embrace the blockchain technology and follow the pursuit of large merchandizers, who

are already pivoting towards using blockchain (Amen and Ehmke, 2018). Finally, the

authors claim that the late adopters of blockchain technology may be at a disadvantage as

they could have access to fewer markets.

In commodity trading, Belt and Kok (2018) takes a cautious approach of integrating

blockchain technology in international commodity trading. The authors particularly

mention two important considerations before adopting blockchain technology in

commodity trading. First, the value addition created due to the adoption of the technology,

and the initial cost that is incurred for adopting blockchain technology to the participants

of blockchain commodity trading. The authors primarily argue that the current information

technology (IT) infrastructure that is involved in international trading is already advanced.

Other applications of blockchain technology in agriculture include precision farming and

managing farm resources such as machine maintenance records, and quality control of

crops during different stages of crop growth until harvest (Schmaltz, 2018).

4. Supply Chain in Commodity/Grain Trade and Documentation Involved:

In this study, our focus is on the supply chain of grains in the context of international trade.

The international commodity trade from point A to point B is a tedious process with

9

multiple parties, documentation and certificates, transaction costs, time, and inefficiencies

involved at each point in the supply chain in addition to the bureaucracy of the banks and

certification agencies. Along the supply chain, proper documentation is required among

the different participants, including buyers, sellers, transportation and logistics companies,

financial (banks), and government (USDA/FGIS) institutions for the smooth flow of the

commodity from the seller to the buyer.

[Insert Figure 1: Typical Flow of Grain to Domestic and International Markets]

Figure 1 illustrates the typical flow of grain from a farmer in the United States to a

consumer in another country in the context of the international grain trade. Though the

focus of this study is on the international grain market channel, we include the domestic

channel as well, as the latter provides competitive pressure to the farmer. Depending on

the expectations for the price of grain, farmers either store their harvest in their own storage

bins or sell their harvest to local grain elevator firms. Depending on the grain demand in

the foreign market, an agribusiness firm, which typically owns an export elevator, contacts

the local elevator firms with a price quote. Depending on the contract terms, the

agribusiness firm (with an export elevator) agrees to buy grain from the local elevator firm.

After an agreement is made between the agribusinesses and the local elevator firms, the

grain is transported from the local elevator to the export elevator via rail or barge.

Depending on the contract between the agribusiness firms (seller at the port of exit and

buyer at the port of destination), the grain is loaded into a ship or a vessel.

[Insert Table 1: Responsibility of payment for different attributes of a transaction based

on sales contract.]

10

The contract between the seller and the buyer could be freight on board (f.o.b.), or cost and

freight (c.f.), or cost, insurance, and freight (c.i.f.) (more details on this later). Once the

grain reaches the port of destination, the grain is either sent to the local distribution centers

in a foreign country and finally to the end consumer or it is sent to processors before it

reaches the final consumer in a foreign country (U.S. Soybean Export Council, 2011).

The type of contract (f.o.b./c.f./c.i.f.) between the buyer at the port of destination and the

seller at the port of exit determines who covers the transportation costs of a ship/vessel.

For example, if the contract between the seller and the buyer is f.o.b., then the seller’s

delivery of the goods to buyer is completed when the grain is available to load at an agreed

time at the port of exit (Slabotzky, 1984). Therefore, in f.o.b. contracts between a seller

and a buyer, the buyer is responsible for transportation and marine insurance costs (Table

1). Conversely, if the contract between a seller and a buyer is either c.f. or c.i.f., then the

seller is initially responsible for transportation and marine insurance costs of the grain until

the port of destination (Table 1). However, eventually, the seller will incur both of these

costs from the buyer.

Finally, as shown in table 1, the costs of loading and discharging the grain at the port of

exit and the port of destination depends on the type of contract. In the case of f.o.b. sales,

the buyer is responsible while, in the case of c.f. and c.i.f. sales, the seller is responsible for

both loading and discharging of the grain.

In international trade, the buyer in a foreign country contacts a seller in the United States

with a proposal to buy grain, meeting specific requirements such as quantity of the grain,

description, price, delivery basis, time of delivery, and payment terms. Once both the seller

11

and buyer agree on the specification requirements, the seller sends a price quote with

similar specification requirements to the local elevator firms. In the meantime, the buyer

applies for a letter of credit (as per the payment terms in the contract) with a local bank

(also called the opening bank), which in turn contacts the bank in the United States (also

called confirming/advising/paying bank) with regards to the approval of the letter of credit

from the buyer (Slabotzky, 1984). The confirming/advising/paying bank confirms the

status of the buyer’s letter of credit to the seller. It is important to note that the opening

bank is associated with the buyer in the foreign country, while the

confirming/advising/paying bank is associated with the seller in the United States.

Sometimes, both the opening bank and advising bank could be one bank with an

international presence.

Once the confirmation of the letter of credit is established, the seller will be given a pre-

advice period of at least 10 days to make arrangements for loading the grain into the vessel

at the port of exit (Slabotzky, 1984). Ideally, it is advised that sellers should not start the

delivery arrangement before receiving confirmation of the letter of credit from the buyer.

The seller is responsible for obtaining various documents depending on the

grain/commodity, the port of destination, and type of sale (f.o.b./c.f./c.i.f.). In general,

shipping documents include weight and inspection certificates issued by a reliable third

party agreed upon by both the seller and the buyer, phytosanitary certificate, protein

certificate, and certificate of origin as specified in the standard contract language

(Slabotzky, 1984). Sometimes, the seller is also required to obtain a stowing certificate

before loading the grain into the vessel, although it is not mandatory to do so (Slabotzky,

1984).

12

[Insert Figure 2: Banks and Firms: Process of Obtaining Letter of Credit (LC)]

As shown in Figure 2, the typical process is where a buyer (Firm_B) applies for the letter

of credit with the local bank. After the approval of the letter of credit (LC), the opening

bank (buyer’s bank in the foreign country) contacts the advising bank (seller’s bank in the

United States) regarding the confirmation of the letter of credit. The advising bank serves

as a paying bank or confirming bank to the seller (Firm_S) in the United States. After this

step, the seller prepares the grain and gets it ready to load at the port of exit, depending on

the delivery period and the language of the contract terms between the buyer and seller.

It is important to note that for traditional bulk shipments on non-differentiated

commodities, the marketing system has evolved and is fairly efficient. Traditionally, the

predominant purchase was CAD (cash against documents), which was at the origin. The

CAD still applies in some shipments. Typically, in the case of CAD, documents have to be

presented to the bank to get paid prior to commencing to loading the grain.

More recently, the CAMR (cash against mate’s receipt) has evolved to be more common.

In case of the CAMR, the shipper gets paid upon the receipt of documents to the bank in

the importing country. Usually, the normal transit time for the load to reach the destination

is approximately 14 days. Typically, it takes one to two weeks for preparing documents.

However, the transit time from Brazil can take up to 3 months. It is possible that there could

be a degree of uncertainty on having documents ready at the time the vessel/ship arrives at

the port of destination. However, a seller can acquire a LOI (letter of indemnity) at a cost

which is an assurance that they can unload, and the buyer will pay, even though the

documents have not been ready to submit.

13

Blockchain has the prospect of reducing transaction costs, accelerating execution of

transactions, reducing risks to participants of supply chain, assuring time of delivery and

facilitating traceability. The marketing system is already fairly efficient in terms of

mechanisms that are used in trading to mitigate or assure that costs are efficient. A

challenge for blockchain in non-differentiated grains and oilseeds is that it will be hard to

lower costs when payment occurs, say in the case of CAMR, within 24 hours.

5. Blockchain Solution:

The process of obtaining multiple documents has evolved to be fairly efficient for many

shipments. However, there are significant lags in documentation, some risks, costs that

impact the value. In addition, as noted above, these costs and time lags are greater for more

differentiated agricultural commodities. In the case of grains and oilseeds, this is

particularly important for organic, non-GE (non-genetically engineered) and other

specifications that require additional documentation. Additionally, it may take lengthy time

(several weeks) to obtain the required documents. Of these documents, attention is placed

on issuing and confirming the letter of credit as it takes most time among the required

documents. The length of time for obtaining various documents is significant in the context

of agriculture for various reasons. For example, some agricultural products are perishable;

commodity prices are volatile, given the nature of agricultural commodities, which are

constantly exposed to contingencies in the weather and shipping; and transportation costs

related to delays in shipment are expensive. Importantly, most trading firms do not account

for costs of delay in the operating budgets. Therefore, any disruption in the supply chain

takes away the trading profits.

14

In our example of international grain sales, the settlement between the buyer and seller is

completed when the seller’s bank is credited with the money from the buyer (buyer’s

bank/the opening bank), and when the buyer obtains the commodity from the seller. The

reconciliation process comes into play in verifying 1) whether the letter of credit is in line

with the sales contract, 2) whether the commodity obtained by the buyer is as per the

specification requirements, and 3) whether the commodity reaches the buyer at the

requested delivery date.

For the settlement, reconciliation, documentation, and inefficiencies involved in the above

transaction, as well as to access the information in (almost) real-time between the buyer

and the seller, a “smart-contract” (Ethereum blockchain) involving all relevant participants

could be beneficial. The relevant parties in the proposed blockchain include agribusiness

firms (both buyer and seller), the Federal Grain Inspection Service (FGIS), shipping and

logistics companies, financial institutions such as banks (associated with both the buyer

and the seller), oracles2, local elevator firms, etc. Therefore, the intended blockchain in our

case is a permissioned blockchain.

In international grain sales, a blockchain solution involving all relevant participants could

be an effective solution that benefits in minimizing the inefficiencies in the system. The

blockchain solution particularly reduces transaction costs, risks, and time for the settlement

of transaction between the buyer and seller.

2 A blockchain oracle is a trusted third party whose responsibility is to provide off-chain data onto the

blockchain.

15

Blockchain technology has the ability to reduce transaction costs in international trading.

For example, the courier fees for sending the documents to the issuing bank so that buyer

could access the documents before taking the cargo into his possession at the port of

destination. The blockchain solution with smart contracts could reduce these transaction

costs by providing accessibility of documents to the participants of the blockchain in almost

real-time. It is important to note, although blockchain technology results in acceleration

of obtaining the required documents, the banks still could charge same fees that they used

to charge traditionally.

Time for settlement of transaction between the buyer and seller is reduced. For example,

in early January 2018, a first international soybean trade was conducted in a blockchain

platform among different participants including Louis Dreyfus Company (LDC) [the

seller], Shandong Bohi Industry Company [the buyer], and banks (Reuters, 2018). The

participants of the blockchain realized that the time taken to process the documents was

reduced by five times (Reuters, 2018). The LDC indicated that they reduced their costs by

25–30% by using blockchain platform for conducting soybean trade. Presumably, these are

costs related to documentation, and those that facilitate payments, although the source of

these costs savings was not indicated. Major benefits of using blockchain-based platform

versus the traditional international trading, involve digitization, automation, real-time

accessibility, security, and quick payments.

In blockchain technology, the last mile problem is usually referred to as the disconnect

between online and off-line events. While using blockchain to solve a business problem in

order to improve efficiency does not always necessarily involve the elimination of

intermediaries, the roles of the intermediaries could be changed based on how well they

16

can adapt to the blockchain technology. Some intermediaries survive, while others are

eliminated or replaced by others.

The use of smart contracts based on blockchain would be helpful in obtaining required

documentation only after addressing the last mile problems. Addressing the last mile

problem is the key for improved efficiency in the supply chain system. In the case of the

international trade grain supply chain, the potential last mile problems include 1) timely

delivery of the grain to the intended party, the buyer, and 2) delivery of the commodities

as per the specification requirements of the buyer. The first last mile problem of timely

delivery could be solved by effectively monitoring the offline events through IoT (Internet

of Things) devices such as sensors placed at various locations all along the itinerary of the

ship that carries the commodity. The second last mile problem could be solved by a

blockchain oracle (trusted third party) to test the commodity e.g., Standard Global Services

(SGS), (at both the port of entry and the port of destination) for meeting specification

requirements agreed upon in the sales contract/purchase order.

6. Illustration of Blockchain Solution Using Monte Carlo Simulation:

In international trading, blockchain technology brings about lower costs, risks, and added

value. The technology provides lower costs in terms of improving efficiency, lower

transaction costs, and improved access to information without a centralized authority.

Value addition comes from the quick movement of documentation and commodities

without delays at the port of destination due to improved access to information about the

commodity for the customs and immigration.

17

To provide perspective on the prospective cost savings due to blockchain, we provide two

illustrations in this section. First, the cost savings due to more expeditious shipping of

documents and payment. Second, we illustrate the impacts of reduced time and risk of

documentation using a Monte Carlo Simulation model of the soybean supply chain from

Jamestown (North Dakota) to China.

6.1 Reduced time for Documentation:

One of the important sources of savings due to blockchain technology for bulk

commodities is the more expeditious payment. This would be due to being able to distribute

the multitude of documents nearly in real-time, as opposed to international courier. The

documents include bills of lading, phytosanitary certificate, certificate of country of origin

etc. The costs of documentation typically in the range of 7–10 cents per metric ton. Thus,

for a 55,000 metric ton shipment, the costs of documentation would be between $3,850 to

$5,500.3

[Insert Table 2: Cost of documentation and savings due to more expeditious

documentation]

Blockchain technology would not reduce these documentation costs as these are procedures

that would continue to be required and provided. Specifically, blockchain could trigger a

faster payment. Conventionally, agencies prepare documents and send them by

international courier, which can take between 7 to 10 days. Payment is made after the

documents are received by the bank associated with the buyer in the importing country.

3 Most commonly used shipment size for commodities is called Panamax, which usually has the capacity to

carry up to 55,000 metric tons of shipment (U.S. Soybean Export Council, 2011).

18

However, under blockchain, in concept, the documents would continue to be prepared, and

would be confirmed through smart contracts, which could occur in real-time and take as

little as one day as opposed to 7–10 days.

For illustration, below is an assessment of the cost savings due to blockchain, specifically,

by getting paid in 1 day instead of 10 days. International trading with blockchain

technology trading improves value addition in international trading in three aspects,

including reduced costs, reduced risks, accelerated execution of transactions. Traditionally,

it takes about 7–10 days to ship documents to the buyer’s bank before the payment is made

to the seller. The use of blockchain technology for trading eliminates the need for this 10-

day courier period as buyer’s bank can access the documents in almost real-time. Faster

execution will approximately reduce the costs by $0.54 per metric ton or approximately

$29,756 per 55,000 metric ton shipment.

Based on the results, the biggest source of cost savings is due to quicker settlement between

a buyer and a seller. The cost savings were found to be approximately $0.54 per metric ton.

In international commodity trading, the advantages of using blockchain platform are

limited due to the fact that current systems already exist that provide a fairly efficient

mechanism except in a few instances where it needs improvement. However, using

blockchain technology would be useful in case of heterogenous or differentiated

commodities where traceability could be a huge advantage.

6.2. Reduced time and risk of export documentation in soybean shipments:

For illustration of the benefit of using blockchain platform in international commodity

trading, we conducted a Monte Carlo simulation of cost and time variables related to

19

soybean export shipments. We included five basic activities in our analysis (country

handling, rail shipment to Pacific Northwest export port, export documentation, export

loadout, and ocean shipping), each modeled with three different scenarios (minimum,

likely, maximum) using PERT distribution. In addition, we included ten basic cost

categories related to the activities and each was modeled with a minimum, most likely, and

maximum cost per bushel of soybeans using a Triangular distribution. We simulated the

model under two scenarios: 1) a traditional (base) case without blockchain, and 2) an

alternative case with blockchain. We assumed under the blockchain scenario that the time

required for preparing export documentation would be reduced by a factor of five (i.e., 1/5

of the base case time parameter).

The base case activities and costs are shown in Table 3 along with the distributional

parameters for the minimum, most likely, and maximum values. Each function was

modeled as a risk distribution. Under the blockchain scenario, only the time parameters for

the export documentation activity are changed with the parameters taking on 1/5 of the

base case values.

[Insert Table 3: Comparative Analysis of Base Case and Blockchain Scenarios: Export

documentation time and interest rate costs.]

Preliminary results indicate that the total time for the shipment (including documentation)

to reach destination could be reduced by an average of 16.5 days (from 40.2 days to 23.7

days) due to the implementation of a blockchain platform to streamline export

documentation. The export cost (both direct and time) under the blockchain scenario

declined by an average of 2.3 cents per bushel (from $3.5677 to $3.5447). Additionally,

20

implementation of blockchain reduced the 5% VaR (95th percentile) of total export costs

by 2.6 cents per bushel (from $4.5809 to $4.5540).

Adoption of blockchain ultimately depends on the interest by parties along the supply

chain, including farmers, handlers, exporters, banks, inspection agencies, and

buyers/distributors. However, if large merchandizers use blockchain technology for their

business operations, then other entities of supply chain may not have choice to their

business traditionally as they risk losing out the markets.

7. Conclusions:

This paper discusses the blockchain-based solution to improve efficiencies in international

grain sales. In international commodity trading, there are already fairly efficient

mechanisms for settlement between a buyer and a seller. However, the blockchain

technology could be beneficial in accelerating the execution of the settlement. Preliminary

results suggest that using blockchain technology in international commodity trading would

decrease approximately $29,756 per 55,000 metric ton shipment.

Using blockchain technology in international commodity trading will have greater benefits

if traded commodities are differentiated. For example, the blockchain technology will have

a greater benefit of traceability if the traded commodities are organic or non-genetically

engineered or glyphosate free.

In general, blockchain may or may not be applicable in international grain trading. The

greatest source of value in non-differentiated commodities is the ability to expedite

21

payment. Typically, it may take about 10 days to ship documents compared to accessing

the documents in almost real-time or at most one day in blockchain employed transaction.

For a typical shipment, this translated to about $0.54 per metric ton or $29,756 per 55,000

metric ton shipment.

However, the value largely depends on the specification requirements of a sales contract.

If it is non-specific and highly homogenous using common/standard

certification/documentation processes, use of blockchain may have little value. As

commodities become less homogenous, and /or require special

certification/documentation, and/or if the ingredient is subject to food safety (traceability)

recall, and/or part of integrated supply chain, blockchain may have greater applicability.

Adoption of blockchain ultimately depends on efforts by parties throughout the supply

chain to adopt blockchain, including farmers, handlers, exporters, banks, inspection

agencies, and buyers/distributors. Its value is comprised of elements of transaction costs

including reduced costs and risks and accelerated execution of transactions.

22

References:

Centers for Disease Control and Prevention (CDC). (2018). Accessed from

https://www.cdc.gov/ecoli/2018/o157h7-04-18/index.html

Phillips, K. (2018). Five dead, nearly 200 sick in E. coli outbreak from lettuce. And

Investigators are stumped. Accessed from https://www.washingtonpost.com/news/to-your-

health/wp/2018/06/02/five-dead-nearly-200-sick-in-e-coli-outbreak-from-lettuce-and-

investigators-are-stumped/?utm_term=.cb9b38262bf3

Slabotzky, A. (1984). Grain contracts and arbitration: for shipments from the United

States and Canada. Lloyd's of London Press.

Burniske, C., & Tatar, J. (2017). Cryptoassets: The Innovative Investor's Guide to Bitcoin

and Beyond. McGraw Hill Professional.

IBM News. (2017). Walmart, JD.com, IBM and Tsinghua University Launch a Blockchain

Food Safety Alliance in China. Accessed September 25, 2018 from https://www-

03.ibm.com/press/us/en/pressrelease/53487.wss

Hackett R. (2017). Why Big Business is Racing to Build Blockchains. Fortune Magazine

(September 1, 2017 issue with title “Blockchain Mania!). Accessed September 25, 2018

from http://fortune.com/2017/08/22/bitcoin-ethereum-blockchain-cryptocurrency/

Schmaltz, R. (2018). Blockchain is Coming for Agriculture and You Might Not Even

Notice. Accessed September 25, 2018 from https://agfundernews.com/blockchain-is-

coming-for-agriculture.html/

Javier, LA. (2018). Yes, These Chickens Are on the Blockchain. Accessed September 25,

2018 from https://www.bloomberg.com/news/features/2018-04-09/yes-these-chickens-

are-on-the-blockchain

Amen, T., and Ehmke, T. (2018). Blockchain: Change is Coming to Agricultural Supply

Chains. Accessed September 25 2018 from https://www.cobank.com/-

/media/files/ked/general/blockchain-report-may-2018.pdf

Belt, A., and Kok, S. (2018). A Reality Check for Blockchain in Commodity Trading. The

Boston Consulting Group. Accessed September 25, 2018 from https://www.bcg.com/en-

us/publications/2018/reality-check-blockchain-commodity-trading.aspx

U.S. Soybean Export Council. (2011). How the Global Oilseed and Grain Trade Works.

Accessed September 25 2018 from https://unitedsoybean.org/wp-

content/uploads/2013/07/RevisedJan12_GlobalOilSeedGrainTrade_2011.pdf

23

Reuters. (2018). U.S. Soy Cargo to China Traded Using Blockchain. Accessed September

25 2018 from https://www.reuters.com/article/grains-blockchain/u-s-soy-cargo-to-china-

traded-using-blockchain-idUSL8N1PG0VJ

Meatingplace. (2018). In Blockchain We Trust (?). Accessed September 25 2018 from

http://library.meatingplace.com/publication/?i=492119#%22issue_id%22:492119,%22p

age%22:30

Szabo, N. (1994). Smart Contracts. Accessed September 25 2018 from

http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTw

interschool2006/szabo.best.vwh.net/smart.contracts.html

Nakamoto, S. (2008). Bitocin: A Peer-to-Peer Electronic Cash System. Accessed

September 25 2018 from https://bitcoin.org/bitcoin.pdf.

McKinsey.com. (2018). Blockchain explained: What it is and isn’t, and why it matters.

Accessed September 30 2018 from https://www.mckinsey.com/business-

functions/digital-mckinsey/our-insights/blockchain-explained-what-it-is-and-isnt-and-

why-it-matters?cid=podcast-eml-alt-mip-mck-oth-

1810&hlkid=c214cc7cde004d7ebe7b01fc3623e2eb&hctky=10466981&hdpid=9e2457da

-f35a-496e-ad5f-3f92321d2977.

24

Figure 1. Typical Flow of Grain to Domestic and International Markets.

25

Figure 2. Banks and Firms: Process of Obtaining Letter of Credit (LC).

26

Table 1. Responsibility of payment for different attributes of a transaction based on sales

contract.

Attributes of a Transaction f.o.b. c.f. c.i.f.

1). Arranging a vessel at the port of exit Buyer Seller Seller

2). Marine Insurance Buyer Buyer Seller

3). Import License Buyer Buyer Buyer

4). Costs of moving grain at loading and

discharge points

Buyer Seller Seller

Source: Compiled by authors using information from Slabotzky (1984)

Notes: f.o.b. is freight on board, c.f. is cost and freight, and c.i.f. is cost, insurance and

freight.

27

Table 2: Cost of documentation and savings due to more expeditious documentation

Value of Commodity Cents/Bushel Dollars/MT

Futures 850 312

Basis 50 18

FOB 900 331

Ocean Shipping and Handling 35

Cost and Freight (C & F) 366

Total Value per 55,000 MT Shipment ($) 20,113,280

Interest (%/Year) 0.06

Interest on C & F ($/Year/MT) 22

Interest on C & F ($/Day/MT) 0.06

Interest on C & F for 10 Days ($/MT) 0.60

Savings ($/MT) 0.54

Percent Savings (%) 0.90

Savings ($/55,000 MT Shipment) 29,756

Cost of Certification:

1). $0.07 Per Bushel (0.07×55,000)

[$/55,000 Shipment]

3,850

2). $0.10 Per Bushel (0.10×55,000)

[$/55,000 Shipment]

5,500

28

Table 3. Comparative Analysis of Base Case and Blockchain Scenarios: Export documentation time and interest rate costs.

Base Case Blockchain Case

Cost Attribute Cost ($/Bu.) Time (Days)

Time (Days)

Most Likely

(Min, Max)

Sim. Cost Most Likely

(Min, Max)

Sim. Time Sim. Cost Most Likely

(Min, Max)

Sim. Time

Handling Charge 0.25

(0.10, 0.50)

0.28 3

(2, 4)

3 0.28 3

(2, 4)

3

Primary Market

Value

0.0003

(0.0002, 0.0004)

0.0003 5.5

(4, 7)

5.5 0.0003 5.5

(4, 7)

5.5

Secondary Market

Value

0.1254

(0.1254, 1.1486

0.2993 0.2993

Tariff Rate 1.6872

(1.5656, 1.7876)

1.6801 1.6801

Demurrage 0.0208

(-, 0.0312)

0.0173 0.0173

Fuel Surcharge -

(-, 0.2788)

0.0929

Export

Documentation

- - 25

(18.75, 31.25)

25 - 5

(3.75, 6.25)

5

Export Handling 0.10

(0.08, 0.12)

0.10 2

(1, 3)

2 0.10 2

(1, 3)

2

Export Demurrage 0.0036

(-, 0.0054)

0.003 0.003

Ocean Shipping

Costs

0.3486

(0.3486, 2.4087)

1.0353 13

(12, 15)

13.17 1.0353 13

(12, 15)

13.17

Direct Costs ($/Bu.) 3.5116 3.5116

Interest Costs ($/Bu.) 0.0561 0.0331

Total Costs ($/Bu.) 3.5677 3.5447

Total Time to

Destination (Days)

- 40.17 23.67

Notes: Cost ($/Bu.) is same for both the scenarios (base case as well as blockchain case). Only change is in time of export documentation. In case of the base

case, we assumed that if it takes 25 days for preparing documentation, then it takes only 5 days in case of blockchain scenario. That is, a blockchain case equals a

1/5 of the base case time parameter.