AgCast: Cryptocurrencies & Agriculture

When Bitcoin’s futures contracts opened trading on the Chicago Board Options Exchange in mid-December 2017, it lit the fuse on a surge in the cryptocurrency’s market value (which later backed off) and fueled a lot of speculation about how its new role in regulated commodity exchanges would change its perception in the world marketplace. The volatile move actually crashed a major financial exchange’s website because of the surge in interest and traffic. They must have missed Emily’s advice.

 

That speculation extended to the marketplace itself: What might cryptocurrencies mean to the world financial community? And, what about agriculture?

 

Digital Money… What?

Bitcoin and other cryptocurrencies are decentralized, digital-only monetary units. There’s nothing physical to a cryptocurrency; they’re digital assets that are transacted through networks of computers called blockchains. Because they’re decentralized, they can be used for global transactions and are not subject to regulation or oversight by a centralized banking entity like the U.S. Federal Reserve System. Transactions are overseen and carried out by “miners,” or network managers who have a financial stake in the overall system and who help keep the decentralized network connected. Here’s a more in-depth explanation of how cryptocurrencies work.

 

The fact that cryptocurrencies are transacted through deregulated, decentralized computer networks makes them “peer-to-peer” assets. Think Napster meets Bank of America. It’s a combination that has some people excited and others nervous.

 

Is This a Fad?

Supporters of cryptocurrencies say they’re the future of money, and speculate that every big bank in the world has likely begun doing its homework and started planning for the day when – not if – they become part of the mainstream financial world. They tout the low cost, efficiency and security of a deregulated, peer-to-peer system of transactions and how those qualities can open up new opportunities in the financial world.

 

But, detractors say there are just too many variables to make them a mainstream part of the financial system. The biggest rub lies in what proponents say is one of cryptocurrency’s biggest strengths — its lack of oversight as a deregulated currency system. And, though supporters say the digital currencies are more secure than traditional monies, there’s always room for anxiety in a world where hackers are often more than capable of ripping through digital security measures.

 

All arguments aside, the very fact that this technology exists and is already being used for some financial transactions around the world means it will likely have some kind of future, either as a currency itself or as the basis for a monetary system more palatable to the world’s traditional banking institutions and their customers.

 

Digital Currencies + Agriculture

There are already cryptocurrencies catered to agriculture. Agrolifecoin is touted as a “near-zero cost” payment structure geared specifically toward the global ag sector. Its lower cost and freedom from government intervention make Agrolifecoin a potentially huge mechanism for ag funding and payment distribution, especially in parts of the world where governments sometimes pry financial control from farmers.

 

According to the Agrolifecoin website: “Banking sectors in developing countries lend a much smaller share of their loan portfolios to agriculture compared to agriculture’s share of GDP. This limits investment in agriculture by both farmers and agro-enterprises. It also demonstrates that the barrier to lending isn’t due to a lack of liquidity in the banking sectors, but rather a lack of willingness to expand lending to agriculture. Government policies often prove to be ineffective and could in fact create impediments to offering financial services to the agricultural sector.”

 

Looking down the road, cryptocurrencies have the potential to touch just about every level of agriculture, from the overall marketplace to the farm level. From a broader market perspective, further digitization of the grain markets, for example, could expand the influence of algorithmic trading by streamlining and lowering the cost of the transaction process. The grain marketplace could ultimately become a network of software and machines that carries out trades and confirms transactions without a single human interaction. And, with cryptocurrency futures contracts being offered on financial exchanges, they are already becoming hedges for other commodities, making them a potential outside influencer of grain prices in the future.

 

That means you’re no longer trading grain – whether cash grain or on the futures market – yourself. You’ll have algorithms and software to not just execute grain trades based on your operation’s financial and cash flow needs, but doing so at a lower cost and delivering proceeds from sales to you immediately. Ultimately, once these needs are programmed into a system that accounts for not just finances, but crop yield potential, you’re essentially marketing grain as you produce it without even a second thought. So, the question becomes: What do you do with the time and energy you once spent on grain marketing?

 

A Different Kind of Application

On the field level, cryptocurrencies could mean lower-cost crop inputs. And, if you have a sudden need for a specific herbicide or fertilizer application and need to make the purchase quickly, a transaction via a peer-to-peer network versus a traditional bank or lender could help you secure that product in time to save yield by ensuring faster procurement and subsequent application in the field. Farm land and machinery that’s traditionally bought and sold via live or online auctions may see the exchange of cryptocurrency to fund those transactions become the norm, and that could cause long-term changes in buying habits for those big-ticket items among farmers.

 

If you’re an agribusiness who works in these markets, what’s it mean to your efforts to continue to reach and provide for your customers? Just like it has at other seminal junctures in ag’s evolution – think when the first tractors displaced horses and mules as the power trains for farms around the country – this technology will change not just farmers’ needs, but their expectations.

 

With a lower-cost, efficient system available for every transaction, from the farm’s fuel bill to the sale of an entire year’s corn crop, your customers will eventually expect a new higher level of efficiency and speed. With the ability to purchase, finance and secure a new tractor much faster than with traditional financing, for example, cryptocurrency will force traditional machinery and financing companies to keep up with that growing speed. Reliability will remain important, but reliability with speed and efficiency will become the priority for companies on whom farmers depend to do their jobs. And, if you can’t keep up with this increasing speed and efficiency, somebody else will.

 

The Good News

The good news for both farmers and agribusiness company leaders for whom cryptocurrency represents a lot of change is that any wholesale shift to it as the primary financial mechanism is a long way off. While the number of offerings – both in and outside of agriculture – will continue to grow, cryptocurrency will remain largely on the sidelines in production ag (besides as a market hedge) for the foreseeable future. It will take institutional change, likely in both the government and private sector, in order for cryptocurrencies to get a foothold in agriculture.

 

But, with the attention it’s gotten just in the last few months, look for the conversation to slowly grow in agriculture, meaning that one day, it will become important to account for cryptocurrency and all it can offer farmers in planning the future of your business. For now, staying nimble and making sure you’re ready to make those changes down the road should become part of that conversation.

 

 

 

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