The future of finance in LatAm & the Caribbean

From the field to blockchain: Tokenization as a tool for agricultural credit

Oct 31, 2022

By Antony Pinedo

The digitalization of commodities such as soybeans represents an opportunity to modernize agricultural financing an offer a more secure collateral. It’s a potential market being developed by Agrotoken in Argentina and one that has caught the eye of Banco Santander in Argentina

 

Blockchain and the tokenization of agricultural assets have the potential to expand access to farm credit for  by allowing growers to use their crops as digitalized, portable collateral they can store on their smartphone.

It’s a technological innovation designed to provide financial solutions for a sector that has traditionally been complex, sensitive, prone to climatic shocks and long production cycles. These characteristics often result in  a shortage of liquidity and informal financial transactions, making it difficult for producers to access the traditional banking industry.

The concept is based on a key premise: tokenizing raw materials mitigates the risks that agricultural financing represents for banks and fintechs. The contents of silos, such as soybeans, corn or wheat, are converted into tokenized, traceable and tradable virtual assets that can be listed on investment platforms and used as collateral. Employing blockchain also creates transaction histories and therefore makes it easier to determine a producer’s financial profile.

Eduardo Novillo, CEO and co-founder of Agrotoken, an Argentine fintech that is digitalizing agricultural commodities, explains how the system works.

“The producer cedes the charging rights to Agrotoken, which issues the tokens. Now you have the grains on a phone or on a credit card — instead of them sitting in a deposit in your town — and you can spend them anywhere in the world,” he tells iupana.

Each token represents a ton of grain that the producer has sold and delivered to a middleman. In exchange, the producer receives a commitment to purchase part of the harvest, which represents real value for them.

Global consulting firm PwC supervises the trade to ensure that the number of tokens issued doesn’t exceed the amount of grain in the deposit. Agrotoken prices are based on three indices compiled by the Matba-Rofex Group, which operates the Argentine Cereal Exchange, and that reflect the value of soybean, corn and wheat in real time.

In November, the first agrotokens available to investors will be listed on the Ripio crypto exchange in the form of a grain-backed stablecoin.

Novillo says more than US$30 million have already been traded; and in a recent transaction, the equivalent of 0.021 tons of corn was sold under an agreement with Visa.

“We turned a fixed asset such as grain, which is in a silo or in a field somewhere, into a financial asset,” emphasizes Novillo.

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Santander trusts agrotokens

In March this year Agrotoken formed an alliance with Banco Santander to offer loans to farmers.

“We did all the development of the token as a loan guarantee […]. We passed all the European compliance in order for our token to serve as a guarantee, and so that a producer can go to Banco Santander and request a loan,” says Novillo.

Historically, banks have provided limited solutions for agricultural financing. In 2019, agricultural loans in Latin America and the Caribbean represented just 6.1% of total credit, according to data from ECLAC, FAO and IICA.

Novillo says he is in advanced talks with other banks in Argentina and Brazil about providing financing for farmers. “Traditional banks have a guarantee that they did not have before; a perfect guarantee that does not produce bad debts or arrears,” he says.

Santander says that using blockchain technology to create new business is a new experience and sees potential for further growth.

The use of blockchain in agriculture has made greater progress in Brazil, although mainly for crop traceability, such as in the case of the Gavea commodities exchange. ZurichBank and Agrolend are among the companies exploring the use of technology to modernize agricultural financing in Brazil.

“Technology can open up new credit opportunities. This gives rise to the possibility of more diverse interest rates for the producer,” Vítor Uchôa, founder and CEO of Gavea, said in September.

Agrotoken, for its part, also aims to establish a presence in Brazil. The following step will be a pre-A series round of funding, says Novillo.

He believes the company is not only helping farmers but has also uncovered a profitable business model. For each token transfer, it charges a fee of between 0.5% and 1% of the cost of the grain at the time of the transaction. “We are targeting the large volume of movement of these fees,” the executive says.

According to Novillo, investing in agricultural commodities is a way to protect against the inflation and CURRENCY? devaluation that afflicts many LatAm countries.

“[An agrotoken] is a currency protected by a real asset and will always be protected by an underlying asset; by what is behind the token, which is food. And until humanity disappears, people will need to eat,” he adds.

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