Historically, wholesale coffee prices have been volatile, fluctuating widely over time. In the past two years, coffee prices have dropped from a high of $1.55 per pound to a low of 87 cents. Currently, coffee is selling for 99 cents per pound.
The volatility in coffee has been hard on small-to-medium sized coffee farms in countries where there are few banking options and where growers often get paid prices that don’t reflect the market, according to Luis Macias, CEO of blockchain-based supply chain service GrainChain. The company is based in McAllen, Texas.
“When coffee farmers don’t have access to formal financial systems and formal contracts for purchase, they are the ones pushed down in the industry,” Macias said. “One of the larger focuses in the overall industry…is to find solutions to not only have more financial inclusion but enhance the ability for coffee producers to have a marketplace.”
GrainChain this week announced that its blockchain network is being piloted by roughly 10% of Honduras coffee growers, or about 12,000 farmers, with an eye on going into full production around April 2020.
The relationship between coffee and blockchain has been brewing for some time.
In March, Starbucks announced a “digital transparency plan” that would let it verify their coffee beans as 100% ethically and sustainably sourced, but it didn’t reveal what technology would enable the insights.
Then in May, Starbucks and Microsoft announced plans to develop a blockchain-based supply chain tracking system and mobile app that will allow consumers to track the supply chain journey of the beans they buy and the coffee they drink.
“There are quite a few initiatives involving the tracking of produce, in many different countries. Coffee alone has seen at least half a dozen initiatives,” said Martha Bennett, a vice president with Forrester Research.
Whether or not GrainChain can compete depends on the local ecosystem, who has the connections and the trust to convince the value chain partners to participate, and who’s already active with a network, she said.
“What’s not clear at this stage…is the degree to which these initiatives really need a blockchain. And none of them have so far gained traction,” Bennett cautioned. “The use case in principle is a good one, but I’ve yet to see a system that sees wide adoption and which is truly run as a shared system. And of course if the real issue is market structure – technology won’t solve that.”
Out of all the Central and South American coffee-growing countries, Honduras was chosen for GrainChain, Macias said, after a speech to the shareholders of a Honduran development bank prompted inquiries.
Honduras also has a large specialty coffee market, which commands higher prices and therefore affords farms the ability to maximize profits by cutting out middlemen. “We made several visits to analyze the market and decided it was a good fit,” Macias said. “What we’re really doing is integrating growers, exporters and buyers.”
Blockchain can create economic value that conventional IT-enabled business processes and models can’t, according to Gartner.
“Traditional centralized mechanisms for establishing trust, identity and payment were not built to autonomously handle microtransactions…in a distributed machine-centric environment,” Gartner said in an August report. “Combining tokenization with decentralization will enable enterprises to monetize such transactions. This internet of value will disrupt the digital giants’ and transnational corporations’ ability to control ecosystems and supply chains.”
If not already at the top, supply chains are at least one of the top use cases for blockchain distributed ledgers, according to Bennett. That doesn’t, however, mean blockchain is needed for success.
Bennett reiterated that while the benefits of blockchain to supply chains are “real and measurable,” much of that is attributable to simply digitizing paper workflows, “and that doesn’t need a blockchain,” Bennett said.
“It would be better, faster and cheaper with existing technologies. That said, you’ve got to start small. if you’re trying to introduce too much change at once, you’ll likely fail. But it does mean we have to wait and see how these projects develop,” she said.
Coffee farmers largely lack the money to roll out high-level technology to help modernize and secure business transactions. GrainChain, Macias said, provides an affordable way to implement those tools through micro loans that can be issued by banks to online digital wallets held by the growers. It also allows farmers and buyers to cut out brokers or middlemen to secure their transactions.
Insurance companies can also use GrainChain tools to simplify and automate the underwriting of farmer loans backed by banks and the federal government, the company said.
“Growing coffee is such a widespread process with so many variables that it has traditionally been impossible to get people on the same page, which lowers trust across the entire supply chain,” Francisco Fortin, general manager of Confianza SA-FGR, a large insurance provider to the agriculture industry, said in a statement. “With GrainChain’s blockchain platform, we can assure that all parties are able to participate in the product with much greater visibility and minimized risk through every step.”
GrainChain also gives growers the confidence to do business with entities outside their geographic area, thereby expanding business prospects, Macias added – something Garner’s report echoed.
“The range of assets that a business and their customers could trade [with] will vastly expand, and the number of counterparties a business could directly trade with will grow exponentially through the enablement of autonomous agents connected to the network,” Gartner said.
Currently, the participants in the blockchain include two of the nation’s larger coffee co-ops, three exporters, two major banks, an insurer and a national commodities exchange.
“All of these are positive members in the industry and they want to see positive growth in the industry. These participants see a serious issue that needs to be resolved and they’re all unifying on one platform to do that,” Macias said.
This is not Macias’s first foray into farm inventory management systems. In 2012, Macias also co-founded SiloSys, a mobile app that automates data input, eliminates manual weighing and documenting of agricultural yields and provides inventory and accounting records.
Last year, Medici Ventures, a blockchain accelerator and subsidiary of Overstock.com, announced it had purchased a $2.5 million equity share in GrainChain.
Based on the Linux Foundation’s Hyperledger Fabric blockchain, GrainChain has been in production for the past year and a half in Texas and Mexico, where it’s used to track and trace corn, soybean, sesame and sunflower seeds grown in Texas and Mexico. That network is being used by 2,000 growers in Texas and 1,500 in Mexico, according to Macias.
The GrainChain blockchain integrates IoT devices that reside in digitally-signed coffee scales, instruments to detect humidity, temperature, bean size and any unwanted chemicals.
“We also connect to different movement and capacity sensors,” Macias said.
By using Internet of Things (IoT) devices that accurately measure grain weight and quality, GrainChain eliminates the potential for human error or bad actors. The system also creates documentation to track harvests from farm to table, eliminating fraud, Macias said.
The blockchain will eventually enable consumers insight into the origins of their coffee and other metrics, such as whether it was sustainably and/or organically grown.
Copyright © 2019 IDG Communications, Inc.