Cash flow is king for independent farmers operating with thin margins and wide exposure to a variety of risks, from economic downturns to inclement weather.
But the process of getting paid from corporate customers like elevators — companies that procure bulk field crops — is neither fast nor straightforward.
There are risks on all sides of a B2B transaction in the agriculture industry. Goods must be closely evaluated for quality, a process that can be slow and severely delay the release of funds. Too often, disputes arise between what parties agreed to, and what transaction actually occurred, resulting from discrepancies in product cost or quality.
And amid this complexity, as farmers struggle to accelerate cash cycles, the trade finance that would traditionally support a seller's cash flow is often unavailable as traditional financial institutions struggle to underwrite such a high-risk industry.
For farmers in both developed and developing markets, this financial friction can threaten the survival of their businesses.
"There is a common denominator across all regions and socioeconomic scale: Liquidity is important when it comes to farming," said GrainChain CEO and Co-founder Luis Macias in a recent interview with PYMNTS. "Harvest season is usually when farmers spend their capital, and timely payments is crucial, but the time to get paid is extremely varied depending on who you're selling to. Even the best payers can delay payment."
Farming's Cash Flow Bottlenecks
While delayed B2B payments can be a challenge for any industry, the farming sector faces particularly challenging bottlenecks. The process of grading crops based on quality, size, content, presence of foreign materials and other factors tends to take several days or even weeks, holding up payment.
With multiple parties involved in a single transaction, including farmer, buyer, broker and bank, transmitting the proper information and ensuring contractual agreements are adhered to with regard to product quality and price can further prevent the flow of capital.
According to Macias, the traditional financial services ecosystem is unable to address this complexity, especially when purchases are made across borders.
"Depending on the country they're from or their credit level, usually a buyer has to pay up front and essentially trust the brokers they work [with]," he said.
Farmers struggle with foreign exchange fluctuations, while buyers struggle with obtaining costly letters of credit, and everyone faces friction in verifying documents and products to facilitate payments.
Traditionally, buyers will be forced to wire the money and simply hope that they receive what they paid for, while farmers must trust they get paid for what they provided.
Looping In The Banks
GrainChain is one of several FinTech firms wielding blockchain to streamline financial transactions in the B2B space, using smart contracts to streamline both B2B payments and trade finance, as well as promote transparency and trust across all parties involved.
The platform integrates a proprietary digital token dubbed GrainPay that is automatically escrowed based on the smart contract. Those coins are transferred to a farmer's account, and that farmer can then transfer the GrainPay to fiat currency and deposit it into their bank account on the same day. The buyer, meanwhile, immediately obtains the certificate of ownership.
The use of smart contracts is key to ensuring transparency and trust, which is not only critical to facilitating B2B payments, but also in enabling financial institutions (FIs) to more effectively connect farmers to trade finance.
Macias pointed to the challenge FIs traditionally face in financing this industry, highlighting the company's work in Honduras.
"Financial institutions were having trouble disbursing funds to individuals because they don't understand farming," he said. "If a bank has an agricultural department, it's very minimal, and they don't want to take the risk."
With banks pulling back from the sector, farmers cooperatives have turned to operating as banks to lend money to farmers, a process resulting in high interest rates to cover overhead costs.
Mitigating Risk With Blockchain
Blockchain's ability to promote trust, efficiency and accuracy in B2B payments and trade finance through the use of tools like smart contracts and digital tokens means farmers, buyers and FIs can mitigate risk. But for traditional institutions operating with decades-old infrastructure, understanding the security of blockchain can be difficult.
According to Macias, once banks begin to test the waters, they quickly acknowledge the value of the tool. In an effort to further strengthen GrainChain's security value proposition, the company recently announced its migration from Hyperledger to the Assembly blockchain platform operated by Symbiont.
"For all of the different ecosystem players coming onto our platform, privacy is always a key consideration," Symbiont's Dan Truque told PYMNTS, noting that Symbiont was developed in response to direct feedback from FIs prioritizing security, privacy and the ability to scale. While GrainChain was not initially the target use-case for Assembly, Truque noted that the financial friction of farming makes the sector a prime opportunity for the blockchain platform.
"All payments, the transactions between the ownership of the grain getting switched for the token, all of that happens in secure channels, and only the parties involved in the transaction can access that information," he said.
With FIs craving automation, and with farmers and their buyers seeking greater efficiencies, both Truque and Macias agreed that blockchain has the potential to transform the flow of cash in the agriculture arena and beyond, although it may take some time.
"I do feel this is the future not only for B2B payments, but for contract management and trade finance," Macias said of the opportunities in blockchain and smart contracts. "The only thing that's holding back this future is scalability. The use-cases are there, but if you can't take it to scale, you can't take it every day."