How can small holder farmers benefit from a digital token?
If you are a coffee drinker then you’ve probably enjoyed the produce of a small holder farmer in a developing nation. Likewise for chocolate. They are the origins of a number of important food supply chains yet they live a precarious existence, vulnerable to many environmental, political and financial threats. Can the advanced technology of digital tokens alleviate the farmer’s situation? Read on as we discuss the possibilities.
The Challenges Faced by Small Holder Farmers
Small holder farmers worldwide face a number of challenges. They lack income diversity and are often dependent on the income derived from a single crop. They experience poor economic geography including small market size and large distances between internal and export markets. Their agricultural environment is degrading with poor soil quality, pests and crop disease all acting to reduce yields. Climate change brings extreme weather conditions of drought and flood and directly affects crop viability. Farming communities experience a lack of suitable infrastructure such as financial services, technology services, transport and processing facilities and are severely impacted by international commodity price volatility(1). The many and varied challenges they face result in a precarious existence that is vulnerable to environmental, political, and economic shocks.
The Digital World
Digital technologies are a hallmark of the Fourth Industrial Revolution (World Economic Forum 2021). They have transformed much of modern societies with lightening velocity and have created extraordinary wealth, concentrated in select parts of select countries. However, their low cost, quick delivery and universal access point of a smartphone also make them a great tool to address many of the challenges faced by the poor farmer.
Blockchains and the digital tokens that run on them have taken center stage for the attention of modern economies. Their unique characteristics of immutable record keeping, decentralized community structures, transparency and ability to engender trust among large communities have opened a portal to innovation, limited only by the imagination. Tokenization is the process of representing some “thing” as a digital token so that it can be easily valued, acquired, stored, traded, identified, tracked, located, etc. That “thing” might be a physical asset such as a farming crop, a service such as financial service, a carbon credit or even non-financial assets such as impact, natural capital and data. As you can see, it’s only limited by the imagination.
In the context of the small holder farmer, a digital token represents inclusion. Inclusion into the markets that power modern economies and that are essential if farming communities are to break the repressive cycles of precarity. Consider a situation where a digital token is accepted and trusted within a farming community. Members of the community are happy to trade the digital token and the value of a token is understood and agreed. It can be accepted by the farmer when selling their crop to the local producer organization or to purchase medicines at a pharmacy or pay for their children’s school fees.
As token transactions are recorded on the blockchain, the farmer’s financial activity can be used to justify a microloan for buying higher grade seeds or hiring farming machinery. More transactions builds a stronger history and the farmer now becomes a prospective client for farm insurance to protect against the threats of drought, floods, pests and disease. Digital tokens can be stored and secured in a digital wallet which represents a means of savings and keeps cash out of the household where it can be easily spent. The wallet and token balance allows farmers to transact on digital markets that they were once isolated from. They can access markets in the next geographic region where vendor competition is higher making seed prices lower than their local physical markets and where a greater number of farming products and services are available. Through this increased economic activity, the farmer improves their income, broadens their options and reduces some of their risks.
The benefits of digital tokens to power a local farming community are strong but they can also be used to transfer value over larger scales. Global remittances are estimated to reach $930 Billion in 2026 with fees for some Sub Saharan countries past 20%. Digital tokens are finding a place here to dramatically cut fees, reduce transfer times to almost zero and to allow direct transfers to individuals instead to through banks and institutions. In these situations, where a digital token spans economic regions, its value is stabilized and it provides a hedge against inflation in countries where the economy is more volatile. Governments have also found uses for tokens in distributing humanitarian aid quickly and easily and there are more than 80 national governments investigating the case to implement a central bank digital currency (CBDC) to sit alongside, or replace, the national sovereign currency.
The concept of tokenization is being explored for many use cases. The value of data is constantly being realized and farmer data is a valuable commodity to governments, development organizations, agri-business and farmers themselves. The value of this data can be accounted and a fair share passed back to the originator via a digital token. Impact tokens represent the positive social and environmental impact of specific activities and are in focus for impact investing organizations(2). Carbon credits can be tokenized and traded on decentralized exchanges (Dex’s) and thereby extending carbon markets to all regions of the globe. This notion opens the avenue for small holder farmers to add a carbon crop to their existing crop and diversity their income. There are challenges to overcome with the cost of measurement, but that is another blockchain story.
With only our imagination limiting the opportunities to tokenize and trade, all societies can share in the benefits of blockchain and digital tokens. Let’s hope small holder farmers can be included in those.
Written by: Mark Tsang, AgUnity Head of Data
(1) FAO Paper. Available here.
(2) Impact Tokens — A blockchain based solution for impact investing. International Institute for Sustainable Development. Available here.