In the late 17th century, the Dojima Rice Exchange in Osaka, Japan, revolutionized trading by introducing the world’s first commodities futures contracts. Today, rice is at the heart of another commodities shake-up: the arrival of blockchain.
“The rice trade today is burdened by delays, high processing costs and fraud. And the biggest loser is usually either the farmer at the beginning of the chain, or the buyer at the end of the chain,” says Stephen Edkins, founder and CEO of blockchain-enabled trade platform Rice Exchange.
In 2017, Edkins, a British entrepreneur, developed the idea for Rice Exchange with co-founder Frank Gouverne, who has been a rice trader for more than 30 years. “We needed to bring the rice trade into the digital age,” says Edkins.
According to Rice Exchange, 48 million tons (mt) of rice are traded every year. More than a billion people depend on it for their livelihood, and for some 3.5 billion it is a staple food. Consumption is expected to outstrip production by 2.5mt globally in 2021, and by 1.7mt in developing countries, where according to the OECD’s FAO Agricultural Outlook 2018-2027 it is the second-most consumed agricultural crop after maize.
“Rice is the biggest single food item globally,” says Edkins. “If you can solve the problem for rice then that’s a big piece of the job done.”
The demand for sustainably produced rice and specialty varieties, such as wild rice, is increasing.
The idea for Rice Exchange emerged when Edkins and Gouverne were working together on a project for rice farming in Africa. They encountered challenges that they realized are inherent to the way rice is traded. Rice is vital to food security, which means its trade is distorted by government intervention, trade tariffs and subsidies. It is also saddled with supply-chain inefficiencies and – crucially – a lack of transparency and traceability, which can lead to contractual breaches and insurance claims.
Transparency through technology
The demand for sustainably produced rice and specialty varieties, such as wild rice, is increasing, according to Edkins, and Rice Exchange is working with brands and distributors to build functionality on the platform that helps them to guarantee the provenance of the different types of rice.
“You need to have a proper way to track that rice,” he says. “We know that buyers of rice are prepared to pay more for sustainably produced rice. A lot of demand for this is customer-driven at the moment: there are European brands and some larger suppliers who are now committing to only buying rice grown in a sustainable manner.
“People are not just buying long-grain, white rice anymore; they want to have a choice of different rice. These sell for higher prices, but each time you buy one of these varieties, you want to know that you’ll get what you paid for. It comes back to having transparency in the supply chain.”
Traceable, sustainable, desirable
Without transparency or traceability, the two ends of the chain are operating in the dark. “How do buyers and sellers find each other?” asks Edkins. “And how do they both verify that the other party is trustworthy? And then how do they verify whether the actual delivery of rice is what was negotiated?”
A common example of fraud is fake or manipulated documents that lead to losses that are not covered by insurance. Variants such as fragrant rice can differ in price dramatically, and one type of rice cannot be substituted for another. Many international trades end up in an insurance claim, and on average, rice traders lose between 0.25% and 2% per cargo, on top of the additional time it takes to process each insurance claim – up to one month, according to Rice Exchange.
Another reason to improve transparency is the growing emphasis on sustainability. Today’s consumers demand a clear view of where their food comes from, and are increasingly likely to support companies that can prove their ethical worth.
The start-up works closely with organizations that certify rice farms to create modern supply chains with better accountability. One partner is the UN’s Sustainable Rice Platform (SRP); sellers of rice with this certification can showcase it on the platform.
Big companies want to invest because they recognize that this is the beginning of a larger trend toward the use of blockchain in commodity markets.
“Rice Exchange’s innovative approach to rice trading offers unprecedented market access for small-scale rice farmers, and offers buyers and consumers in destination markets more choices for sustainable procurement,” says SRP Coordinator Dr Wyn Ellis. “By creating new market interest and reducing transaction costs for buyers, trading via the Rice Exchange will help to incentivize adoption of climate-smart sustainable best practice by rice smallholders.”
For Rice Exchange, achieving that supply-chain transparency and unlocking the extra value means exploiting blockchain technology. The platform uses Hyperledger, a private network developed by a consortium of technology companies, including IBM and Fujitsu, and supported by Microsoft.
The technology allows for the integration of the wide range of parties involved in every trade, and this in turn reduces risk. That value chain includes service providers: banks, inspection companies, shipping companies and insurers that offer services to traders, buyers and sellers. Reducing risk enables these market participants to offer more competitive price quotes.
Growing the platform
A month after an initial $300,000 seed round in January 2018, Rice Exchange began to take shape under the guidance of CTO Don Oparah, a computer scientist and blockchain expert.
Then Edkins and his team began to showcase a minimum viable product, which demonstrated the industry appetite to their corporate partners. Much of their marketing strategy was built around social media – primarily LinkedIn and Facebook.
Rice Exchange raised another $1 million at the end of 2018, and is currently in the middle of another larger raise. Pilot testing on the platform started in July, with a full launch expected in the fall of 2019, but several of the early adopters have already used it to conclude trades.
“The response has been very rapid because you’re talking about big companies,” says Edkins. “They want to invest because they recognize that this is the beginning of a larger trend toward the use of blockchain in commodity markets.”