Binkabi Commodity Monday Weekly Newsletter #1 | View online

Commodity Monday

September 12

The promise of the blockchain technology

In its quarterly technology review, the Economist published a series of article examining the current status of distributed ledger technology and cryptocurrency markets now that the mania over bitcoin and blockchain has died down. In the above article, the practicality of blockchain’s use in enterprise solutions was called into question:

“Enthusiasts are also beginning to realise that even when a blockchain might be a suitable tool for the job at hand, they will still need to resolve the same sorts of problems as for any other big IT project. Proposing a new standard is the easy part. The point is to get everyone, including competitors with little love for each other, to agree on important details such as who will be in charge, how the system will be built, how data formats will work and what happens if someone wants to leave. As David Gerard, a blockchain sceptic, puts it: “Blockchains don’t solve the underlying problem of agreeing on what you want to do and how.” Applying blockchains to highly regulated industries such as finance, says Mr Brown at r3, means reassuring regulators that the systems can operate as planned, and that systemic risks can be minimised minimised.”

Binkabi’s view 

This viewpoint supposes that blockchain is angling to supplant a coherent and well-established system. However, in Sub-Saharan Africa’s agricultural sector, the existing trade procedures are dysfunctional and inefficient, reflecting highly fragmented value chains and poor infrastructure development. This system penalizes the sector’s main actors, smallholder farmers and commodity exporters, who are highly disadvantaged due to information asymmetry, leading to intermediaries who siphon off profits. The proliferation of paperwork and cumbersome export processes, which are par for the course in Africa’s commodity trading, are additional costs which are ultimately bared by smallholder farmers.
As smallholder farmers and commodity exporters have much to gain from trading on a digital ledger — and these actors have the support of African governments — they stand to benefit more from cooperation than opposition.

While this article did point out some real considerations over the adoption of blockchain by large companies, we find more reasons to be optimistic over the use of digital ledgers in Africa’s commodity trading than pessimistic.

South African Reserve Bank tests distributed ledger payment solution

South Africa’s banking regulator tested a blockchain-enabled payment solution which has produced promising results:"Project Khokha was launched to assess the performance, scalability, privacy, resilience and finality of a DLT solution under conditions as realistic as possible to those in the banking sector. It was designed, built and delivered in less than three months. The network was built on JP Morgan Chase’s Quorum network, using Istanbul Byzantine fault tolerance, Pedersen commitments and range proofs to deliver on the combination of scalability, resilience, confidentiality and finality.”

Binkabi’s view 
Contrary to beliefs, African regulators are open to exploring the use of distributed ledger technology. Given its success and limited downside risk, South African Reserve Bank’s Project Khokha could pave the way for other African countries to experiment with DLT solutions.

Cashew Crisis in Ivory Coast (video)

Ivory Coast, the world’s largest cashew exporter, has been hard hit with a crisis. Low prices, a wave of contract defaults, and a scarcity of international buyers have led to a cashew glut estimated at 160,000MT, roughly 20% of its total annual production.

Binkabi’s view 
West Africa’s cashew producers are facing a catastrophic crisis as cashew prices plummet to their lowest levels in six years. It’s a classic case of a boom-and-bust commodity cycle. Kernel buyers refused to continue to pay historically high prices after three years of a bull cycle, leading prices to plummet by over $400/MT. Ivory Coast, the world’s largest cashew exporter, is particularly hard hit. The price collapse has led to a supply glut of 160,000 MT upcountry and at port. Given the wave of defaults from Vietnamese cashew processors, a large number of Ivorian cashew exporters are likely to go bankrupt.

Given the lack of trust between West African cashew exporters and Vietnamese and Indian buyers and high price volatility, partly due to a lack of a futures market, cashew is a perfect candidate for using a blockchain-based solution. Cashew exporters and importers could surmount the trust problem by trading directly via a digital ledger-enabled platform. Counterparty risk is solved as the funds that are stipulated in the signed forward contracts are sitting in escrow via a local partner bank. Once the export documentation moves through the blockchain and the importer receives the bill of lading, the funds are released. Whether it is a bull or bear market, trading on the blockchain protects both exporters and importers from default.

Reintroduction of Commodity Marketing Boards sketchy on market efficiency concerns (Nigeria)

“The federal government is tinkering a return to a knitted trading system governed by marketing boards as part of its efforts to fill the vacuum in commodities price control and production adherence to quality standards. But stakeholders do not see this responding to the current demands of an efficient market. The structure, they believe, is antiquated for a. The article opens by writing:

There are some calls in Nigeria’s agricultural sector to reestablish marketing boards to control prices and improve quality standards.liberalised market and government lacks the infrastructural and financing commitment, if it's anything to go by."

Binkabi’s view 
In the case of Nigeria, marketing boards are largely a moot point. While boards have certain benefits, like controlling for quality standards, they have been largely ineffective in setting prices, with the exception of Ivory Coast and Ghana’s cocoa sectors. Instead, Nigeria should set up a commodity exchange, which is effective as a price discovery tool. A functioning exchange also encourages the development of infrastructure, such as warehouses, which is critical for improving crop quality.

However, Nigeria shouldn’t rush to adopt a centralized commodity exchange as past attempts have ended in failure. Nigeria can instead set up its own physical exchange but plug into a distributed ledger platform which provides a liquidity pool and global order book. This is a more sustainable and effective approach to solving the price volatility and poor quality that beset much of Nigeria’s agricultural production than instituting marketing boards.