Tokenizing agricultural trades will transform global food chains

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Agriculture, the foundation of human civilisation, is facing unprecedented challenges in the 21st century. With climate change threatening traditional farming practices and the global population expected to reach 9.7 billion by 2050, leading to a 51% increase in food demand, it is imperative to develop new and innovative solutions to help improve the sector.

Tokenization of agribusiness has emerged as a promising solution to many of its most modern challenges. Many tokenization projects have focused on fractionalizing illiquid assets, also known as real-world assets (RWAs), allowing buyers and sellers to transfer ownership more quickly.

However, there is a common misconception that tokenization is synonymous with fractionalization. Tokenization refers to the process of converting something of value into a digital token that can be used on a blockchain. For example, we could tokenize the Mona Lisa as an NFT and represent the entire artwork as a single digital token. Alternatively, we could tokenize and fractionalize the artwork and allow multiple people to own a portion of it in the form of an NFT.

These two approaches address different problems. First, tokenizing art as a single NFT takes care of the ownership of the asset and allows for easier transferability. You don’t have to put it on an auction house and pay exorbitant fees to lawyers to transfer ownership; you just need to transfer the NFT to transfer legal ownership.

Fractionalizing the Mona Lisa addresses the liquidity issues associated with the painting’s price. Since the Mona Lisa is worth hundreds of millions of dollars, fractionalizing it allows multiple people to purchase the stock and be invested in its future success. It also gives them the opportunity to easily buy and sell the asset.

We don’t need to tokenize the underlying assets in agriculture because they are already divisible; the holy grail is tokenizing the contractual agreements themselves. The benefits of tokenization for farmers are clear: instant conclusion of contracts, removal of unnecessary documentation, and a unified legal structure to the core trading process. Much of the current cost and friction in traditional farming systems is in transactions between jurisdictions: blockchain-based transactions will simplify this.

In the coming years, more marketplaces will leverage blockchain technology to tokenize agricultural trade. This shift is driven by the complexity of legal contracts that can be simplified through smart contracts. These contracts will unify and automate underlying processes, remove friction, and resolve issues efficiently, allowing farmers to focus on what they do best.

Challenges facing agriculture

The agricultural sector is fraught with inadequate and unfair challenges for stakeholders in the supply chain.

One study found that a four-pack of 350g supermarket burgers priced at £3.50 costs the cattle farmer as much as 90p but makes only 0.03% (0.1p) profit. In contrast, with similar costs, the processor makes ten times the profit (1p) and the retailer makes 70 times the profit (7p). This pattern is seen across the industry: the farmer gets 0.02p for a pack of soft cheddar, 0.01p for bread and just 1% of the retail price for an apple.

A major driver of profit inequality is the fragmented nature of supply chains that require multiple intermediaries. Blockchain applications streamline these processes by automating transactions and reducing friction with and for intermediaries, thereby reducing costs and increasing transparency. Furthermore, inefficiencies and lack of transparency in the supply chain can lead to disproportionate profit distribution, with farmers often at the head of the supply chain and bearing a disproportionate amount of risk for the reward they receive. This inequality highlights the need for improved market platforms and better support systems for farmers to ensure fairer profit distribution.

Solution through innovation

Tokenization of agricultural trade will play a key role in creating greater transparency and efficiency in the supply chain, ultimately providing farmers with a fairer share of the profits and cheaper products to end users.

The agriculture industry needs a blockchain-based marketplace for real-world assets to bring $2.7 trillion worth of agricultural trade onto the chain. Immutable ledger technology brings a layer of verified trust to a system that has used pen and paper for too long. For too long, settlements have relied on archaic banking channels, and access to markets has ultimately been fragmented by unnecessary additional hands.

A new blockchain-based system will allow transactions to be settled instantly, with only a 0.15% fee charged to each side of the transaction. This is in stark contrast to traditional systems where fees can be a few percentage points per transaction.

For example, Oldenburg Vineyards, one of South Africa’s largest wine producers, recently completed one of the first agribusinesses in Solana. Adrian Vanderspuy, owner and CEO of Oldenburg Vineyards, said:

“We have executed the first trade on a public blockchain and it is currently en route from South Africa to London. The funds arrived in our account in seconds rather than days and the fees were £5. We look forward to continuing our partnership and moving more of our shares onto the chain. This will help us reduce transaction and remittance costs and the time it takes to receive payments.”

Stories like the one above are just the beginning of the agribusiness revolution.

The road ahead

As we face the challenges of feeding a growing population, reducing food waste, and ensuring sustainability, tokenizing RWA transactions offers a compelling solution. By leveraging blockchain technology and its ability to provide decentralized transparency and reduce transaction costs, we can address the inefficiencies of traditional supply chain systems. This approach promises a new era of efficiency and accountability in agriculture, ultimately helping to secure a sustainable future for global food production.

Additionally, increased transparency is a key benefit of tokenizing agricultural trade. Blockchain technology ensures transparency throughout the supply chain by ensuring all transactions are recorded on an immutable ledger.

This can help reduce fraud and ensure that farmers and end users receive fairer prices. The primary attributes of blockchain—traceability, immutability, and provenance—encourage transparency in supply chains. Farmers urgently need these blockchain features to ensure they receive fair compensation for their work and continue their efforts to feed a growing global population.

Henry Duckworth

Henry Duckworth, a law graduate, is the co-founder and CEO of AgriDex International. He embarked on a unique journey that led to him becoming the youngest trader at global commodities giant Trafigura. He later set up desks for several hedge funds around the world, accumulating over a decade of experience in trading, hedge funds and new technologies. Through his work, he became fascinated by the revolutionary power of blockchain technology shortly after the advent of Bitcoin. Years later, he founded AgriDex International to provide digital marketplaces and supply chain information to all participants in the global food chain. It is the first agricultural RWA platform built on Solana. Through AgriDex, Harry leverages an innovative approach, seamlessly integrating blockchain technology in the background while providing a user-friendly experience.