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Wine Futures on Blockchain
How blockchain implementation can secure wine provenance and redistribute equity
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“Bringing an Old World tradition into the cutting edge world of blockchain”

Wine is an icon of sophistication and taste that has stood the test of time, appearing throughout history universally representing luxury, elegance, class and indulgence. Yet, as it remains fervently sought after by consumers and collectors alike, wine traceability and the industry as a whole suffers from one of the most inefficient markets and antiquated distribution models in the world.

Wine futures, or “En primeur” as it is natively known in France where it was pioneered, is a method of purchasing wines early while it is still fermenting in the barrel. The idea is to allow consumers and investors the opportunity to invest in fine wine at a fraction of a price before the wine is bottled. Payment and contracts are completed at an early stage, a year or 18 months prior to the public official release of the finished wine. You might think, what would be the benefit of buying wine en primeur?

Apart from ensuring that the cost of the wines may be considerably cheaper during the en primeur period, the benefits of purchasing wine futures are also in securing wines quantities, especially rare wines that are produced from renowned wineries in limited quantities. The wines most commonly offered en primeur are often famously from Bordeaux and Burgundy in France, although other regions in emerging wine markets are also adopting this practice.

The process is as follows:

In the spring after harvest, merchants and trade organisations will taste barrel samples of wine that are usually only 6–8 months old. Industry leaders and wine experts taste wine samples and provide a preliminary wine rating based on an expected future quality, once the wine has had time to mature and is released for public consumption. This is an entirely democratic system and an open market, so the price is directly correlated by the market and the movements of buyers and sellers.

Once the wine producer has completed the maturing phase of the wine, the owners will be notified that wines are ready for delivery — whereby consumers can choose to either consume or store their bottles. The usual practice for wine bought en primeur is to place them into storage holding or cellaring services.

As with any investment, there’s an element of speculation with purchasing wine futures. Those who invest in wine futures do so to secure high-quality wines at the best prices, but there is no guarantee that the value of these wines will increase or appreciate upon maturity. During the en primeur purchasing period, the profit margin made by wine merchants is minimal, but it does provide for a faster recuperation of costs and capital that can be redistributed towards new projects or other expenses.

Blockchain and the Wine Industry

The utilisation of blockchain technology works to tackle the inefficiencies inherent within the wine industry’s distribution model by enabling consumers to connect directly with wineries. Advanced packaging technologies also have a role to play, including emerging technologies that detect tampering, continually monitor environmental conditions such as temperature and humidity, and chemical sensors to assess food quality. In addition to wine, another example is harvesting and shipping oysters, abalone and salmon from Australia to Asia within 48 hours — an unbroken cold-chain is essential to the product.

Maintaining tight control throughout the distribution network is crucial to secure the value and quality of these wines, which is then reflected in the prices offered as a future. Wine suppliers need to find creative solutions to solve these problems and to find ways to connect and meet the thirst and demand of the ever-growing global middle class from emerging countries. However, these opportunities also present their own threats, such as the explosion of counterfeiters and black market sellers, a serious issue which can be alleviated if not eliminated by blockchain.

Utilisation of blockchain in the wine futures market would allow for the democratisation of a traditional system of trade only taking place between exclusive wineries and bespoke investors. Blockchain implementation would allow for a greater connection of smaller, less established wineries directly with consumers, encouraging increased involvement in the winemaking experience, and allowing for a deeper sense of trust and inclusivity between producer and buyer.

The removal of long-established barriers of communication can lead to a point where producers can have direct contact with any customer and can answer real-time questions regarding the condition, location, weather, et al of the wine future contract in question, while the actual wine is aging in a cellar. A system like this lets us drill down even deeper in the data where even the geology, local weather, data and time of picking takes place of the harvest is all available to discerning parties. This is priceless information can be sent out to clients and futures traders to provide stronger data guarantees and accuracy about the quality of wines they are dealing with.

Modern consumers want to know more information about everything in relation to the products they are purchasing. Investors have the exact same approach when they are considering to buy-in to an investment-grade wine future. As more intricate data is made available to the market, the greater the trust that is established.

Authenticity and Provenance

A wine’s provenance (where it came from) is generally difficult to trace once it has been sorted into bottles and purchased or transported into another buyer’s storage. Provenance is easier to attain if the intention is to consume the wine shortly after purchase, but if the primary purpose of the wine purchase is to be stored and treated as an asset to grow in value, then maintaining the wine’s provenance may not be as straightforward, while its importance increases.

Due to global demand that has far outstripped the industry’s ability to meet its needs, quality wines are becoming harder to source and acquire. According to a report published by Morgan Stanley, a global shortage of wine is imminent. Demand is already exceeding supply, and in 2012 the shortfall amounted to nearly 300 million cases. As more markets are opening up, allocations are becoming smaller, which contributes to greater prices.

Forty years of explosive economic growth has made China the second-largest economy in the world and helped create millions of middle-class households. The improvement of living standards comes with a change of lifestyle, and drinking wine has become increasingly popular and an aspirational item for consumption. According to the Research Report on Wine Import in China, Chinese imports of wine were worth $3.91 billion in 2018, up by 6.5% year on year. Additionally, China will become the world’s second-largest wine consumer by 2023 with a market value of $23 billion, according to VINEXPO.

Tackling the issue of wine counterfeiting with Blockchain

This explosive growth hasn’t come without its share of counterfeiters and malicious producers looking to capitalise on this upward trend. Counterfeiters have proved to be rather effective, as the Shanghai Police in November 2017 declared that they had seized 14,000 bottles of counterfeit Penfolds – Australia’s premium wine brand – worth over a million dollars USD. Government officials in He Nan Province have also confiscated and intercepted 50,000 fake bottles, worth over 2.8 million USD.

Wineries and distributors have taken various anti-counterfeiting measures to combat fraudulent sales, but few have proven effective. Be that as it may, even in this modern age many wineries and wine futures brokerage services are using archaic and outdated methods of tracing logistics and certifying the authenticity of produce. Blockchain utilisation in wine futures would look to take advantage of the strengths of blockchain, IoT devices, and mobile devices to keep track of the entire lifecycle of wine from the vine, barrel, distributor, to end users.

With consumer trust shifting from brands to products, brands are challenged not only to manage their performance but to link their efforts and investments to a single product. Trust and legitimacy have traditionally been established through industry certifications and industry-specific approval, which increasingly hold little meaning or value for consumers. This simply is just not good enough any more.

Blockchain technology acts as a perfect trust generator for different types of ecosystems. A blockchain system ensures the authenticity of data enabling trust among stakeholders who previously may be unknown to each other. Any attempt to manipulate products, existing data, or information within the distributed ledger is made impossible.

Studies have found that ex-Chateau auctions, where older vintages are stored and sold directly from the winery to collectors, garner anywhere from 50-100% more in price per bottle than the same wine that was held in a collector’s home cellar. Since much of the world’s wine futures are purchased as a future investment, tracking any given wine’s location, environment, as well as seeing how many different hands it has passed through is of utmost importance.

Buying from other collectors in a secondary market can’t ensure the proper storage and traceability of wine. The integrity of storage documentation becomes speculative at best, as any physical data can be manipulated and changed since only the seller has access to internal logistical information.

With the installation of smart IoT devices and an intelligent barcoding or QR system, the frontier of wine production allows for the tracking of wine at any given stage of production. Every movement of this production process is tracked and recorded on a distributed immutable ledger; from the moment the grapes are picked off the vine, casking conditions, logistatical movement, ownership and even delivery to the end consumer.

Implementation of IoT Devices

A wine’s unique history affects its value, and the counterfeiting of wine and forgery of documentation is a constant thorn in the pursuit of wine provenance. Market confidence and asset values can be enhanced by digitally storing information about a bottle’s transaction history, including origin, ownership and storage.

This information can be collected, verified and viewed by all market participants, and once this data is on the blockchain it becomes very difficult to change, fake or manipulate. The Internet of Things (IoT) has progressed substantially in the last few years thanks to the continuous advances in many areas such as miniaturisation and connectivity.

AgroTrak’s IoT and Blockchain solution

In close collaboration with our partner Advantech, one of the world’s largest and most renowned manufacturers of industrial computing and IoT solutions based here in Taiwan, we have developed a solution that provides a clear and in depth snapshot into the visibility of monitored crops.

Like any other agricultural crop, grapes need a certain amount of water and sun, and need to be properly fertilised to yield the ideal result. Depending on weather conditions and climate, our IoT devices can sense and trigger the ideal amount of irrigation and fertiliser needed to maximise the yield for crops, as well as assisting winemakers in predicting peak harvest times based on crop readiness.

The advantage of deploying a cluster of IoT devices can result in healthier crop yields, reduce wastage, and have an improvement in overall operational efficiencies and costs. This information is live and available instantly or a can be set to prompt producers at certain levels or intervals.

IoT devices and sensors installed onsite at the wineries can better inform wine producers about their grapes and overall health of their wines whilst they ferment in their barrels. Installing solar-powered sensor platforms, placed throughout each vineyard and are designed to measure a variety of environmental factors, including air humidity and temperature, soil humidity, and solar intensity, are must haves for wine futures markets to guarantee quality and origin.

A further iteration of our solution can allow producers to have access to remote monitoring of the vineyard and the ability to predict how and when to use resources. The sensors can be submerged one to two feet below the ground to monitor soil moisture and can precisely monitor the health and conditions of the vines. IoT devices can be scanned by the distributor to instantly access details such as the name and location of the vineyard, mode of transport of each batch of wine for processing and delivery, and fertilisers used to grow the crops.

Smark Cork technology and fermentation provenance

The introduction of a smart corking system during fermentation process could monitor the structural health, the ullage (mass of wine left in the barrel after taking into account loss from evaporation), room temperature and the level of light inside any given wine cask.

The advantage of this smart cork is that it allows winemakers to monitor, in real-time, the status of each wine cask so that in the event that an anomaly is detected it can be resolved immediately.

Moreover, abnormal parameters such as acidity in the liquid or incorrect environmental conditions can be detected in time before the wine loses any desired attributes, potentially salvaging the entire outcome from ruin. Wineries can now keep a close watch of the conditions of their wines as they are aging, allowing the wine to reach its full future quality and value when reaching maturation.

New levels of accessibility available to investors and consumers can also be achieved as all this information is then made available to the public or within a permissible blockchain, where the conditions of the wine can be made visible to any discerning consumer.

Bottle Tokenization and traceability

The final and most forward leaping idea in the utilisation of wine futures on the blockchain is the tokenization of wine futures. Tokenization allows for trusted and permission-less selling and trading of wine futures on a transparent and secure blockchain. Moreover, registering the released wines on a blockchain lets wine enthusiasts know that the bottles they purchased are authentic. This brings consumers in direct contact with wineries early in the winemaking cycle, and providing greater cash flow for wineries throughout the process.

Each bottle will be uniquely tokenized with its own non-fungible token. A non-fungible token is a special type of cryptographic token which is unique and not interchangeable for other tokens. In this use case, tokens are not interchangeable and each coin is designated to one very specific bottle of wine whose ownership is determined by the owner of the coin. Having a self-executing smart contract capability on the blockchain acts as a decentralised system for agreements between logistics operators, insurance providers, buyers and sellers. This is made possible by the utilisation of the ERC-721 open standard on the Ethereum blockchain and other comparable schemes and systems.

These tokens will also provide a model for collecting supply chain data and a mechanism for automating order inventory, procurement, and other processes. However, tokenization of produce is not just limited to wine. It is transferable and scalable to other industries as well, tokenizing other fresh produce such as fish, meat, eggs, milk, and eggs is in the cards as well — though each item has its unique challenges.

What we are envisioning is a platform to trade futures whether it be a primary market of wineries offering to sell their wines to investors, or a secondary market where consumers and investors are trading between each other. By using smart contracts for cost-effectiveness and increased efficiencies, blockchain can be used to include such data as traceability, authenticity, transparency, trade, origin, and opinion.

Through enabling wineries to easily offer wine futures directly to consumers, wineries can also better forecast the sales of wines and success of vintages, and ask consumers directly for their feedback in efforts to build a community around wine futures in a truly international direct-to-consumer futures program.

In the future, it won’t just be wine investors who will be able to collect and trade their wine futures. The same technology used to tokenize wine can be implemented for other investment class assets, ranging from fine art, jewellery to property deeds and more. These owners will be able to crowd sell their possessions and raise funds for their projects by offering digital tokens for public crowdsale. How these physical assets are handled can be tracked through IoT devices whose readings can be fingerprinted on a blockchain.

Tokenizing the future of wine allows for trusted and permission-less selling and trading of wine futures on a transparent and secure blockchain. Moreover, registering the release of wines on a blockchain ensures the authenticity of purchased bottles. In the past, buyers and suppliers would have to take the word of wineries and producers. Trust was implied that the wines purchased were the genuine article expected. Now, with IoT devices and blockchain, trust is not just implied — it is also guaranteed.

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