Tokenizing agricultural trades will transform global food chains | Opinion

Agriculture, the bedrock of human civilization, faces 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, driving a 51% increase in food demand, the development of new and innovative solutions to help improve the industry is imperative. 

The tokenization of agricultural trade 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), enabling buyers and sellers to transfer ownership faster.

However, there is a common misunderstanding that tokenization is synonymous with fractionalization. Tokenization refers to the process of converting something of value into a digital token usable on a blockchain. For instance, we could tokenize the Mona Lisa as an NFT, representing the entire artwork as a single digital token. Alternatively, we could tokenize and fractionalize the piece of art and allow multiple people to own a part of it in the form of NFTs.

These two approaches address different issues. The former, tokenizing the art as a single NFT, deals with the ownership of the asset and enables easier transferability. You don’t need to put it in an auction house and pay exorbitant fees to lawyers to transfer ownership—you simply need to transfer the NFT to transfer the legal ownership.

The fractionalizing of the Mona Lisa addresses liquidity issues associated with the painting’s price. Since the Mona Lisa costs hundreds of millions, fractionalizing it allows multiple people to purchase shares of it and be bound to its future success. This also provides them with the opportunity to easily buy into and sell out of the asset.

We don’t need to tokenize the underlying assets in agriculture as they’re already divisible; the holy grail is to tokenize the contractual agreements themselves. The benefits of tokenization for farmers are clear—instant settlements of contracts, the removal of unnecessary documentation, and a unified legal structure to the underlying trade process. A great deal of the current cost and friction in traditional agricultural systems is in transacting 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, which can be simplified through smart contracts. These contracts will unify and automate underlying processes, removing friction and resolving issues efficiently—this will enable farmers to focus on what they do best. 

The challenges facing agriculture

The agricultural sector is fraught with challenges that make it insufficient and unfair for stakeholders within the supply chain.

According to a study, a 350g four-pack of supermarket beefburgers priced at £3.50 sees the beef farmer incurring high costs of 90p but receiving a profit of only 0.03% (0.1p). In contrast, with similar costs, the processor earns ten times the profit (1p), and the retailer earns 70 times the profit (7p). This pattern is seen across the sector: for a pack of mild cheddar, the farmer receives 0.02p, for bread, 0.01p, and for apples, just 1% of the retail price. 

One major reason for profit disparity is the fragmented nature of the supply chains requiring multiple intermediaries. Blockchain applications are streamlining these processes by automating transactions and reducing friction for and with intermediaries, thus lowering costs and increasing transparency. Furthermore, inefficiencies and a lack of transparency in the supply chain can lead to disproportionate profit distribution, with farmers often at the beginning of the supply chain bearing a disproportionate amount of risk for the reward they receive. This disparity highlights the need for improved market platforms and better support systems for farmers to ensure fairer profit distribution. 

Solution through innovation

The tokenization of agricultural trade will play a crucial role in creating more transparency and efficiency in the supply chain. This will ultimately provide farmers with a fairer share of the profits and end users with cheaper products.

The agricultural industry needs a blockchain-based real-world assets marketplace to bring the $2.7 trillion agricultural trade on-chain. Immutable ledger technology brings a layer of verified trust to a system that has used papers and pens for too long. Settlement has relied for too long on archaic banking channels, and finally, access to markets has been riven by unnecessary additional hands.

A new blockchain-based system would enable instant settlement of transactions, with fees of only 0.15% for each side of the trade. This is in stark contrast to traditional systems, where fees can be several percentage points per trade.

For example, Oldenburg Vineyards, one of the biggest wine producers in South Africa has recently settled one of the first agricultural trades on Solana. Adrian Vanderspuy, owner and CEO of Oldenburg Vineyards, stated:

“We settled the first-ever trade on a public blockchain, and it is now on its way from South Africa to London. The funds came into our account in seconds rather than days, and the fees were £5. We look forward to continuing our partnership and bringing more of our stock on-chain. This will help us to reduce transaction and remittance costs, as well as the time it takes to receive payments.”

Stories like the above are just the beginning of the agricultural trade revolution.

The road ahead

As we face the challenges of feeding a growing population, reducing food waste, and ensuring sustainability, tokenizing RWA trades offers a compelling solution. By leveraging blockchain technology and its ability to provide decentralized transparency and lower the cost of transacting, 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, enhancing transparency is a key benefit of the tokenization of agricultural trade. Blockchain technology ensures that all transactions are recorded on an immutable ledger, providing transparency across the supply chain. 

This can help reduce fraud and ensure that farmers and end-users receive fairer prices. Blockchain’s primary attributes—traceability, immutability, and provenance—promote transparency in supply chains. Farmers urgently need these blockchain properties to secure fair remuneration for their work and sustain their efforts to feed the growing global population.