The financial industry is in the middle of what is perhaps the most disruptive and revolutionary paradigm shift in modern history since the transition from gold to bank notes as a medium of exchange. This piece of technology seeks not only to disrupt the functioning of the banking system and inherent institutions, but above all to render the status quo obsolete. The innovation in question of course is block chain technology. Investopedia defines block chain technology as “… a digitized, decentralized, public ledger of all cryptocurrency transactions.” The block chain digitally records transactions and stores them in an encrypted bundle of data, which is then linked to another block containing data from a previous transaction. The amalgamation of these blocks forms an impenetrable but transparent network of interconnected data commonly referred as block chain.
The inception of block chain is something of an urban legend, often shrouded in a thick veil of mystery and speculation. What we do know, however, is that it emerged after the 2008 global financial meltdown, and is thought to have been a direct response to the growing mistrust of banks and other financial institutions that had ushered the world into the worst fiscal crisis since the Great Depression. The most famous use of block chain is Bitcoin – the decentralized cryptocurrency whose value has arithmetically increased to staggering heights over the past five years, having recently surpassed the value of gold in real terms. Fortunately, the incredible capacity of block chain is not only confined to Bitcoin. The technology has a wide array of uses, many of which have a great potential to solve fundamental global issues like social inequality and equitable wealth distribution.
The Eastern Cape is home to 7 605 248 sheep, accounting for 39% of all sheep in South Africa, higher than any other province. This means that, for every 10 sheep in the country, 4 are in the Eastern Cape. Naturally, this also makes the province the largest producer of wool and mohair. In 1999, an estimated 100 000 wool farmers in the Eastern Cape produced approximately 220 000 kg of wool valued at R1,5 million with a total stock of about 3 million sheep. However, through various intervention initiatives – thanks to a collaboration between the National Wool Growers Association and the Department of Agriculture, Forestry and Fisheries – this figure had increased to 3.8 million kg of wool produced, valued at R137 million by the end of 2016. At the same time, average rural household income had risen to unprecedented levels, whether or not this is correlated with a similar surge in wool revenue, is debatable. Needless to say, it falls short of realizing the full potential of wool production in the Eastern Cape. This deficit is due to a host of constraining factors which include but not limited to:
- Lack of private land tenure, restraining private incentive for development, such as infrastructure for production, management, and marketing.
- Lack of individual financial means for development (including lack of collateral for loans).
- Poor genetic quality of sheep.
- Poor nutrition of sheep, mainly resulting from continued overgrazing of communal land (read: tragedy of the commons).
- Lack of business knowledge and technical skills amongst communal farmers required for wool sheep farming.
- Low wool production per sheep and per unit of rangeland area.
- Inferior wool quality.
- Inefficient shearing process, poor wool classing, and unacceptable packing of wool.
- Unsatisfactory market access.
- Very low income from wool, resulting in little incentive to invest in wool farming.
The last point in particular is of critical importance, and dare I say arguably the most constraining and value-inhibiting factor in the production and subsequently marketing of wool by communal farmers. Unlike their commercial counterparts, communal wool farmers sell their produce at the farm gate to individual traders who, because of market information asymmetry, are the main price setters, often subjecting farmers to humiliatingly below-market prices. The individual wool brokers then transport the wool to the auction site in Port Elizabeth where it is classed, baled, and eventually sold at inflated prices. The brokers, although incurring no significant costs, are winners in the wool production value chain, while communal wool farmers merely pick what is left of the crumbs.
Thankfully, I have discovered the solution that would put an end to this systematic exploitation of communal wool farmers – block chain technology. You might be scratching your head and wondering how a decentralized cryptocurrency ledger could be used to balance the scales and unlock value for farmers. Well, the following is just a few ways in which digital transactions through the block chain network may advance the wool supply chain and finally unlock value for communal wool farmers.
- Transparency – The block chain will allow wool farmers to keep track of their transactions and contractual obligations with buyers, suppliers, as well as other stakeholders in the value chain in order to enhance accountability. The immediate benefit of this is that it minimises fraud, maximizes transparency, and ensures that each link in the supply chain is satisfied, and distribution channels streamlined further.
- Smart contracts – Smart contracts are self-adjusting digital contracts stored in each block along the block chain network. They define all the conditions upon which contractual agreements are met. One such contract is the Ethereum block chain. Through Ethereum smart contracts, wool transactions will only be processed when all the terms and conditions stipulated in the contract are met. For example, if the contract specifies that the final price received by farmers is flexible and reflects current global wool prices, brokers will not be able to undercut farmers because, for the transaction to be successful, this condition must be strictly met.
- Data Analysis – The most important use of block chain technology is data monitoring. An opportunity exists for wool farmers to store data relating to total wool yield, fibre diameter, wool class category, age, gender, as well as well weight of sheep shorn, and finally, sheep breeding cycles on the block chain network. This information, when stored and locked in the block chain, will be of enormous value when making strategic farming decisions in the future.
- Products Tracing – Block chain will make it possible for wool farmers to trace the journey of their produce along the supply chain through the shared ledger, in turn it will also makes it possible for consumers to precisely locate the origin of the wool, essentially strengthening supplier-consumer relations. Furthermore, through block chain, manufacturers in China (where a significant proportion of SA wool is exported) can skip all the bureaucracy in the supply chain to directly communicate with farmers within seconds, whether they are in a small village in Cofimvaba or the outskirts of Barkly East.
The most pivotal principle underlying the competitiveness of any commodity is the inherent opportunity cost of producing that commodity. In turn, opportunity cost is a function of the level of technology used in production. The assumption here is that if a commodity takes more time (due to, say, inadequate technology) to be produced, then the opportunity cost of this commodity will be much higher, therefore diminish its position along the competitiveness hierarchy. However, I am of the view that competitiveness should not be entirely restricted to the production link along the supply chain. It should also take into consideration the degree of transparency in the transaction process, flow of information, as well as the time it takes for the commodity to travel from farm gate to the final consumer. There are very few, if any, tools in the world that can achieve all these simultaneously while unlocking enormous value for the most important players in supply chain. Block chain technology is by far the most effecient.