Blockchain has become a pretty trendy word in the coffee industry, and along with it brings the hope of promising solutions and dangerous expectations. From certifications to direct trade and now to blockchain, it is seen as the next beacon of hope to ensure a sustainable coffee future. But before we get carried away, let’s take a look at what blockchain can and can’t do.
What is blockchain anyway?
There are a number of steps involved between coffee being sold by the farms and it arriving in the hands of a roaster, and eventually the consumer. Each actor would usually keep a record of their transactions in this process, and pass the information onto the next actor in the chain. Therein starts a very risky game of “pass the message”.
Blockchain uniquely collects all of this data into one database of verified transactions.
Each actor enters the data relevant to their transaction into a block, which is then linked to the previous completed block in the chain. Once data is entered into each block, it cannot be changed later down. This allows the blocks to then link together to form a singular, permanent record of all the inputted transactions. With this decentralised system, no one actor has control over the series of data points, so each transaction is verifiable against the data entered by other actors in the chain.
What problems in coffee does it look to address?
The coffee supply chain is complex, even through direct trade. While this facilitates several relationships that connect to deliver the end product, it lends itself to some challenges, a lot of which are derived from a lack of transparency and traceability.
Cost inefficiencies and unsuitable trade models
This complex network makes it particularly difficult to trace transactions back to their suppliers — an essential part of optimising the overall chain. Why is this important?
The intention is to conduct trade in a way that allocates the fairest income to producers. An avenue for this is through direct trade, but this is not necessarily the only way to achieve this. It is often the case that smallholder farmers have to go through intermediaries to manage the risks and costs associated with the export of their coffee, and equally roasters may need the same.
Price transparency allows actors at all points of the chain to understand how value is being allocated, and why. If we understand the costs associated at each point, supply chains can be evaluated to decide on an approach that is most suitable to producers and buyers. Without this information, how can we safely say that our buying choices are the best option for the producer? And are we able to legitimately report on social and economic impact?
But achieving price transparency in coffee isn’t as easy as it looks. A significant barrier to securing this is the manual documentation processes on each step of the journey. Usually transactions are recorded on paper receipts, via phone calls, or on invoices that show no breakdown on allocations to individual actors. This information is often passed on from one person in the chain to another, without verification from other actors involved.
These inaccuracies and inefficiencies present in accessing price breakdowns make it even more difficult to form a well-informed and trustworthy connection between all actors.
Disconnect from buyers and the market
The numerous connections building the chain also pose significant communication challenges from one end to the other — an integral factor in developing the long-term business relationships necessary for an economically viable model for all actors.
No suitable benchmarks
There is currently no industry-wide benchmark for specialty coffee that is independent of the commodity or C price. Basing prices on the C-market means that they remain volatile and extremely low since they are not connected to coffee quality.
In a market where less informed or disconnected farmers do not know the value or price of the crop that they are growing, there is greater space for exploitation. One of the opportunities with a transparent supply chain is the potential to improve access to market information — a step toward greater negotiating power for farmers.
How does blockchain come in?
Blockchain is seen as a tool to achieve this transparency and traceability that the industry is lacking. It digitizes the complex record-keeping process to create a singular, trustworthy ledger that can be used to assist decision-making by producers, buyers and consumers. While it has promising potential, we have to remember that it is still a tool. This means that blockchain is susceptible to misuse, and does not in itself guarantee all of the benefits of a fully transparent and traceable supply chain.
So let’s dive into some of the common misconceptions on blockchain:
Is blockchain synonymous with full transparency and traceability?
It is difficult to understand a full story without all the chapters, and in a blockchain scenario this is no exception. Blockchain technology is a means of achieving traceability, and securing the integrity of data recordings along the supply chain as it makes it virtually impossible to alter data down the line after it has been entered into the virtual ledger. In this way, prices paid at each point are accurate.
However, application of blockchain does not automatically ensure traceability. The traceability of your supply chain, using blockchain or not, is only as good as the amount of data inputted. Blockchain has no control over how this data is presented, who it is available to, and how much data is available to give context to this information.
We have seen many large players in the coffee industry adopt blockchain technology to trace their supply chains, but have we since seen improved open reporting on prices paid to farmers? Are customers in a better place to understand what a fair price is because of this technology?
Blockchain’s role here is to secure the legitimacy of data used for transparency and traceability. How this data is obtained and what is done with it is entirely in the hands of its users.
Is Blockchain the same as cryptocurrency?
Cryptocurrency is one of the applications of blockchain technology. As a secure ledger, it is a tool that makes cryptocurrencies possible.
But no, it is not in itself cryptocurrency and therefore using a blockchain platform does not imply that transactions are processed here through cryptocurrency.
Does blockchain imply that prices are easily accessible to farmers?
If the ledger is complete, it can allow farmers to access price data up to the consumer, giving an understanding of where their coffee goes and the margins of actors at different points of the chain, which can in turn facilitate more open negotiations.
This however depends on the ledger being complete, with accurate data recorded for all transactions, and in the end that farmers have been granted access to the ledger.
With the value of such a system depending heavily on the quality and quantity of data put into it, its success relies on digitised data collection being improved, and in some cases introduced, across the supply chain. We have to then ask whether such a demand, which is often time-consuming and costly, is realistic for producers. Would this be placing significant burden again on actors at origin to ensure traceability in our supply chain, and would this investment be sufficiently advantageous to them?
It also depends on this information being shared openly with farmers, which is not a guarantee. The entity that sets up the blockchain decides how much data is shared and to who.
If a reliable record of prices paid by green buyers for a certain quality of coffee is available, farmers would be in a better position to understand what their coffee is worth and negotiate higher prices. Blockchain facilitates the recording of price data along the chain, but does not guarantee that it will be shared openly, as this comes with some risk.
There are the privacy risks associated with such transparent reporting. While some companies are comfortable with disclosing their price structure, some farmers may prefer not to have their total individual income reported. In the direction the coffee industry is taking to ensure sustainability, is this decision already being made for farmers?
But privacy is not the only challenge that supply chain actors have to consider when employing blockchain. Management of the risks and associated costs of data security is a significant and often overlooked component. The accuracy of data in a blockchain is protected by its permanence, but not ensured. This is still in the hands of the humans involved in collecting the data, negotiating contracts and inputting results within this complex network. From this enters risks of human error and fraud, both difficulties being tackled by larger blockchain users in present day. An important question arises on who will manage this risk, hold accountability for wrong data inputs for which the consequences are not insignificant, and be responsible in the event of manipulation from outside actors?
Even when accuracy is maintained, there is also the risk of data being interpreted wrongly, especially when a heavy focus is placed on certain price data, but without full context. The price of a coffee for example, while having significant importance, is not the only important indicator of impact. A high farm gate price is great, but how much of a farmer’s coffee is being purchased? Is there already a competitive market for that coffee? Is the buyer committed to purchasing that coffee long term? And so, price transparency can be a great resource to hold the industry accountable, but it can easily provide a false sense of impact, or lead into mis-matched expectations between buyers and producers, if considered without full context.
Does it guarantee full price transparency to customers?
Context is not only important when farmers and the market interpret data, but equally critical for customers in a time when transparency is increasingly adopted as a marketing tool.
A completed ledger could inform consumers of the price paid to farmers for coffee, and hold companies accountable for the impact claims that they make, but this is only possible if information is reported in a transparent way, with context, and if consumers know how to interpret this data.
Is it really valuable to say we pay $X for our coffee? Who was this paid to? Does it effectively describe how much really goes to the farmer, how much is otherwise available to that farmer for their coffee, or how much value is allocated to other actors along the chain and for what services?
There is no standardized process in handling transparency in the coffee supply chain, even through blockchain, which is important to keep in mind when interpreting the data presented.
Is blockchain a trading platform?
One application of blockchain is to support coffee trading and sourcing platforms, but blockchain itself is not a coffee marketplace. It stores and verifies the data entered for each transaction, but is not yet ready to facilitate payment, nor does its application imply that producers are openly provided with a connection to potential buyers.
Blockchain has the capacity to do this well in sectors, such as finance, that are fully digitised and standardised however specialty coffee lacks standardised units whose values are clearly defined and well-understood. This is being approached through different initiatives, but we have to first define how value would be allocated to “digital coffee” across the industry, before we can make use of blockchain to form a digital exchange.
In another capacity, blockchain is increasingly adopted by a number of coffee trading platforms to promote verifiable transparency, however there are some limitations to this. For platforms that do not handle the logistics of the coffee sale, often the only price data available is the FOB price at origin (free-on-board: the price onboard the shipping vessel at the port of export) and the price paid by the buyer. Yes, these prices are accurate and verifiable, but are not nearly enough to paint a clear picture of the value allocations to all actors in that chain. This leaves a large data gap in the supply chain once again, to be manually filled in by the buyer.
Is blockchain the next revolutionary solution?
It can be part of it, but this relies on some stars aligning, namely:
Open access:
An open access blockchain platform that is accessible to all actors along the chain of that transaction, and by the wider market, would provide a wealth of information for establishing a price benchmark for farmers, buyers and customers.
Collective action:
To form a complete ledger, with enough price data and context to address supply chain efficiencies and representative price benchmarks, participation from all market actors, and those involved in their respective supply chains, is essential.
Accessibility to all actors:
Collection and digitalisation of all the data necessary to form a comprehensive database incurs time and cost to everyone in the supply chain. Who foots the bill for this? Is its adoption accessible to small and large businesses in the industry?
Interest:
To successfully apply blockchain, we have to understand whether it is feasible and worthwhile for the farmers that it intends to benefit. Otherwise, we are at risk of making the same mistakes of previous “sustainability revolutions”, with farmers forced to follow the decisions of the market and suffer the brunt of the losses when effects don’t match expectations.
Blockchain is a powerful digitalization tool that can be used in the essential modernization of the coffee supply chain and its somewhat antiquated data handling methods. It can provide trustworthy data to make a more open and accessible market possible, but its application does not directly lead to this.
There is a lot of work to be done in digitising our supply chains first, in improving data collection, management and sharing, and these issues won’t be solved by blockchain. Rather, using the technology as a band-aid only sets its application up for failure, creating yet another promise to sustainability that falls short of expectations. To prevent this, it is in the hands of those who collect and own this data to action the changes necessary to create the openly transparent marketplace we all aim for.
