Original article from Eurofinance published on 4th July 2019 by Ben Poole.
“The value of an average container shipment costs around $300,000, some $2,000 of which comes from the physical movement of documents, which for us is a huge cost”, says Nitin Jain, Head of Treasury & Capital Markets at Agrocorp International, speaking at the EuroFinance International Treasury Forum in May.
A $3 billion global agri-commodity trading and processing company, Singapore-based Agrocorp has been in the commodities business for the past 30 years. To tackle the costs and lack of visibility associated with manual and paper-based processes in its supply chain, the company recently began working with service providers to leverage an enterprise-wide distributed ledger technology (DLT) solution.
“Initially we thought the value of DLT was in the traceability, as our business moves into more niche and specialty commodities”, said Vishal Vijay, Agrocorp’s Head of Business Development. “Our customers are keen to know where things are sourced from so it was a way to get information on the supply chain, as well as an understanding on the processes and farming practices that produce the product”.
The company worked with DLT Ledgers, a startup in Singapore that builds blockchain-style solutions using the open source Hyperledger framework. It also brought in its supply chain finance bank DBS, whose APIs allowed Agrocorp to implement the platform in its supply chain.
The distributed nature of the solution means that no party has centralised control over the platform. Agrocorp quickly found that customers were willing to pay a premium for the added value of that traceability, and were pleasantly surprised to also receive a positive reaction from their bankers.
“Banks are very interested in the traceability – particularly given the fines that banks have received for essentially financing flows they didn’t know too much about”, notes Vijay. “They are very keen to get a handle on the supply chains that they are financing, and we’ve had even more interest in what we’re doing with blockchain from our bankers than from our customers”.
Moving transactions to blockchain
Agrocorp’s trade finance technology project started in earnest some 12 months ago, and the company has already processed around 50 transactions on the platform.
“The 50 transactions we have already processed has a total value of about $100 million, approximately 3% of our total flows of $3 billion, and this number is going up”, explains Vijay. “A lot of our container traffic, as well as traffic that requires pre-shipment financing, goes through the solution because of the enhanced level traceability that they required”.
Today Agrocorp’s business consists of 90% bulk shipments and 10% container shipments, but in transactions terms both sides of the business account for around 50% each. While the container shipping activities are beginning to switch to the DLT platform, the company’s bulk vessel transactions are mostly yet to get the same treatment, as Vijay explains:
“We are still working on how to do this with the bulk shipments, particularly with any transactions that involve letter of credit confirmations and discounting. For those large ticket size transactions, banks and customers still need the comfort of physical documents”.
Despite this, the company is already benefitting from the trade finance solution in terms of the cost savings that digitisation offers over manual paper-based processes. Other savings have also become apparent to the treasury team.
“Moving onto the electronic systems has helped us to leverage smart contracts and smart documentation, and we are able to access earlier financing from banks as the documentation flow is much closer to real-time”, says Jain. “With the first 50 transactions that have been made on the solution, the use case is that we could potentially reduce our financing costs by at least 15-20% by using technology”.
Through the platform, Agrocorp is able to offer its supply chain real-time updates on commodity prices and delivery information, as well as trade financing approval for orders from around the world. The decentralised nature of DLT also lets the company offer a more seamless and secure transfer of goods ownership and payments than was previously possible. By implementing the trade finance solution, the company has been able to reduce its average working capital cycle by about 20 days.
“We are also seeing indirect benefits of the solution since it went online”, says Jain. “Traditionally there are a lot of costs related to operations. Typically a member of staff would have to manage the entire document flow for each trade transaction. With the platform, we can streamline that process in a way that frees up resources”.
With the trade finance solution up and running, Agrocorp has already identified other ways that it could use DLT to its advantage. The first of these should be online later this year.
“Even though we are currently working on implementing a treasury management system, one thing that we want to do is to integrate risk management into the enterprise DLT platform” Jain says. “This is around three or four months down the line”.
The second item of interest is something for the longer-term, as the treasury team is watching the DLT-based corporate bonds scene with interest to see how it develops.
“Wall Street typically issues $3-4 trillion of bonds, but there is a lot of slippage between the investment managers, the asset managers, the pension funds and the retail investors” Jain notes. “We are watching this space – if the time is right and the technology is right, then we can use it. Being in Singapore, we can access investors across the globe”.
For now, however, the company is focused on expanding the percentage of its trade transactions that use the trade finance DLT solution.