Senior Director – Technology Innovation
FOR MOST OF us, the unassuming word blockchain has become subsumed within the showboat antics of its red-carpet-savvy customer, cryptocurrency. But Blockchain—the technology—has been praised for its ability to facilitate a traceable, immutable supply chain record, allowing end customers to feel confident that their morning coffee, say, is guilt free in terms of child labor or other abhorrent practices. Unfortunately, says David Gill, Senior Director of Technology Innovation at Heifer International, and a member of its experimental “Heifer Lab,” that guarantee often doesn’t go quite far enough.
How does Blockchain technology work, and why is it so perfect for cryptocurrency?
Let’s start with what a blockchain is. In its simplest form it is a chain of blocks linked together by cryptography. Each block contains information and a reference to the previous block, which makes it possible to detect if a previous block has been tampered with. In the cryptocurrency use case, a blockchain is used to hold the transaction ledger, typically in public view and deployed on peer-to-peer networks with a protocol that eliminates the need for a master record keeper. Therefore, no one can cheat the system and spend the currency multiple times.
The way Heifer International employs Blockchain seems a far cry from how the Crypto Bro’s use it. Tell me about your work with this technology.
So for us, Blockchain starts with and revolves around farmers. We focus on the supply chain of smallholders selling to a cooperative, and then the cooperative to its buyers or other distributors in a value chain, up until the point of departure from origin. Since a blockchain enables traceability, many organizations use it for supply chain safety, helping mitigate against food contamination outbreaks (e.g. pinpointing exactly where an e.coli outbreak in romaine started and which batches were affected) or helping a brand tell compelling origin stories.
But what Heifer International is focused on is ending poverty and hunger while caring for the Earth. We want to ensure decent producer livelihoods and overall agricultural sustainability—economic, social, and environmental. That fundamentally starts at the farm level and ripples out from there. It requires information to flow bidirectionally, from farmers into supply chains and from supply chains back to farmers. If farmers’ production costs are higher than its market value, or what they’re able to negotiate, that’s not profitable. Realistically, it perpetuates poverty cycles rather than ends them. From that lens, the more traditional uses of Blockchain don’t help close the income gap at the first mile.
That’s generally what happens in the coffee and cocoa markets for smallholder farmers. Market demands, coupled with production realities, means farmers are often losing money or at best breaking even. The way trade is conducted in these kinds of volatile commodities means a living income is impossible without pricing reform. One of my colleagues here has been working on a white paper about the farmgate price of coffee, overlaying costs and output with a living income benchmark to understand what farmers must be compensated for their products in order to earn a sustainable living income. The model allows us to get very supply chain specific, which is where the critical intersection of traceability and transparency comes into play—where the potential of Blockchain really starts to bloom.
The farmgate being where the farm ends and the supply chain starts?
Yes, the price that the farmer sells it for. Not the price the cooperative sells it for, or what’s on the end-buyers’ contract (all of these making up the FOB price, of which the farmgate price is only a percentage). Put another way, it’s how much a farmer is putting in his or her pocket from a sale, after the raw materials leave their hands and move to the next link in the value chain. Like any type of information system, a blockchain depends on the information that’s in it. And until a price and other things are required, how are you going to know that the farmer is able to make ends meet? How can you make sustainability claims, that inherently imply farmers’ economic sustainability (i.e. “ethically sourced,” “fairly traded”)? It allows buyers to set the terms and definitions of what’s ethical, fair, or sustainable for farmers without any need to qualify those claims against how much they actually paid or how that’s relative to a living-income-based price. But what happens in the industry is, you’ll see a large corporation that wants to participate in one of the supply chain networks, yet they don’t want to include price. They want to be able to say to their customers, “This lot came from this farmer. Get to know this farmer.”
So their customers feel good knowing the provenance of the coffee they’re drinking or the melon they’re eating. But they still may not know whether the farmer is able to survive.
Right. The blockchain record is an enablement technology for how transparent you want to be. The battle is transparency, and that’s really a challenge to solve because we’re asking for transparency that most companies aren’t willing to provide.
That tells you a lot, does it?
It can, I agree. But a lot of companies argue that the price they pay for raw materials is a business trade secret, which is kind of weird if you think about it. These companies are buying a commodity and there’s a commodity price that’s on the open market. In this situation, I think it’s telling that they’re afraid transparency is going to open up their financials for someone to see what their internal cost is. People can already see the commodity price is $2/lb and the 12oz coffee they just purchased was $16. The jury’s still out on how much of that is the real reason. However, these companies will often require full transparency from farmers and cooperatives; they want to know everything, from production costs to agronomic data. But then that information flow doesn’t go both ways (back to farmers) or all the way through (to consumers). So these companies essentially can utilize
Blockchain to access all the information, and then parse it out as they see fit. With data being so valuable, that information asymmetry has real financial implications.
So Blockchain itself doesn’t inherently make the world safer and better.
It doesn’t necessarily make the world safer and better, but it does have that potential. Let me explain why. In any business, one of the things that you need to accomplish is to diversify. One challenge for smallholder farmers/cooperatives is finding buyers, instead of just having one buyer. Because when you have only one buyer, all of your eggs are in one basket. Not only do you lack leverage to negotiate price, you also don’t have the income diversity to mitigate demands or changes from that single buyer.
There are a couple of things that Blockchain technology does to help with that. One is establishing a public record of the quality of your product. So, if you’re a high-quality producer and you can demonstrate the quality of your production in an immutable record like a blockchain, then you’re in a better position to court other buyers; in doing so, you can usually ask for a better price because of your higher quality. There’s enablement there.
There’s also enablement of a track record of delivering X volume of coffee to supplier X when you’re talking to other suppliers. “Yes, we can supply that,” you can say. “The farmers we work with have been doing this volume and, as you can see, the volume’s increasing. We have the supply.” So, it’s an enablement in that respect as well. And when you’re in a public blockchain, other buyers can more easily find you. There are those aspects to enablement that the fundamental technology provides. But, as with any technology, it’s just the technology. It’s non-sentient. How that technology is used is the difference between making the world better and safer vs. just making certain actors better and safer.
Blockchain is a means to the end; it is not the end itself. Having an immutable record is a good thing. Your productivity being in public view is very useful, because the cooperative can say, “Here is how you find us in the blockchain. You can go verify for yourself what we’ve done.” That expands beyond volume to areas like social services, ecosystem services, quality specifications, and on and on. Being able to verify is critical. It is enabling, but the key is knowing how to deploy it. It’s the business behind deploying it that is just as important.
You’ve talked about big companies touting all the data points of their product’s supply chain. But what about consumers? Apparently, more and more of them are saying they feel strongly about the source of their morning coffee.
It’s true, a lot of companies seem to be dipping their toe into it. Consumers—their customers—are saying they want to know where their coffee comes from. The industry appears to have interpreted that to mean that consumers want to see the farmer, to know whose farm their coffee came from.
But if you really listen to the consumers, they’re saying, “I want to make sure that this value chain is equitable and the farmers are getting their share just like everyone else along the value chain.” I really think that’s what the consumers that are vocal about this are saying and it’s a problem that won’t be solved with marketing.
Seeing the farmer and making sure the farmer is whole are two very different things. And viewing the situation through the lens of a development organization—I’m in my sixth year working for Heifer International—it’s very apparent to me that the transparency of whether or not the farmer is able to make ends meet is the most important question. And not to get weighed down in a whole bunch of politics, but if you really want to solve the problem of people uprooting their lives to move to a different country for more opportunity, there’s a place and a way that you can solve it: create the conditions for them to build a business that guarantees a sustainable living at home.