Landmark EU law will ban the sale of goods linked to the destruction of forests, one of the causes of climate change
Coffee importers in the European Union are starting to cut back on purchases from small farmers in Africa and beyond as they prepare for a landmark EU law that will ban the sale of goods linked to deforestation, one of the causes of climate change.
Industry sources said the cost and difficulty of complying with the EU's Deforestation Regulation (EUDR), which comes into effect at the end of 2024, will have serious knock-on effects that could over time reshape global commodity markets .
Four companies have said they have halted coffee orders from Ethiopia in recent months, a decision that will have dire consequences for some 5 million rural families who rely on coffee farming. They warned that sourcing strategies adopted by companies before the law comes into force risk increasing the poverty of small-scale farmers and raising prices for EU consumers, while also undermining the EUDR's impact on forest conservation.
"I don't see a way to buy significant quantities of Ethiopian coffee in the future," said Johannes Dengler, an executive at German roaster Dallmayr, which buys about 1 percent of the world's exported coffee.
Because the beans it orders now could end up in coffee products sold in the EU in 2025, they must be EUDR-compliant, he said – even though the law's implementing acts have yet to be finalised.
Under the EUDR, importers of commodities such as coffee, cocoa, soya, palm, cattle, timber and rubber – and the products in which they are used – must be able to demonstrate that their raw materials are not come from deforested land, otherwise they face high fines.
Coffee major JDE Peets has announced it may be forced to cut some smaller producing countries from its supply chain as early as March if it has not "found and implemented a solution with them" by that date.
Deforestation is the second leading cause of climate change after burning fossil fuels.
The European Commission announced that it has launched several initiatives to help producer countries and smallholders comply with the EUDR, including one launched at COP28 where the EU and member states pledged €70 million to this end.
He added that some smallholders see the EUDR as an opportunity, especially if it is accompanied by EU support measures, as it will help them meet growing global demand for sustainably sourced products.
Tracking and tracing
The EUDR requires companies to digitally map their supply chains to the field where the raw materials were grown, which could potentially involve tracing millions of small farms in remote areas.
Furthermore, because companies often do not deal directly with farmers, they could rely in part on data provided by many local intermediaries, some of whom may also not have direct dealings or trust.
In some developing countries, patchy internet coverage makes mapping difficult, while traders and industry experts say disputes over land rights, weak law enforcement and tribal conflicts can make even searching for data on ownership of farms.
"Today nobody from Europe is interested in our coffee," said a representative of Ethiopia's Oromia Coffee Farmers' Union Cooperatives at a recent World Coffee Alliance webinar.
He said most Ethiopian coffee farmers have never heard of the EUDR and that even educated villagers would struggle to collect the required data in time.
Coffee generates 30-35% of Ethiopia's total export earnings, with almost a quarter sold to the EU.
“Coffee processing companies are moving to big rich Brazilian growers. It's really shocking,” said a marketer at a major coffee trading company.
"In dangerous countries, there are smallholders and middlemen who are illiterate – and we're coming at them with a law that even Europeans don't understand."
Upheaval in supply chains
But cutting out small-scale farmers or entire countries will not be feasible if they are major commodity producers.
Ivory Coast and Ghana, for example, produce almost 70% of the world's cocoa production, while 60% of coffee comes from Brazil and Vietnam. Indonesia and Malaysia grow nearly 90% of the world's palm oil, a product used in everything from pizza and lipstick to biofuels.
As a result, some major companies say they will redirect raw materials they cannot reliably trace in these countries to markets outside the EU, while shipping compatible goods to the EU.
Golden Agri Resources, one of the world's largest palm oil companies, told Reuters that "disaggregated supply chains will be required" to implement the EUDR.
To the extent that this strategy prevails, it will reduce the EUDR's impact on forest conservation, because raw materials would still be grown on deforested land, just not for EU consumption.
Meanwhile, compliance costs across the supply chain are expected to drive up food prices in the 27 EU countries.
Two of the world's biggest coffee traders, Sucafina and the Louis Dreyfus Company, have already entered into future sales contracts that include an EUDR premium, according to a source in a major commodity trading firm.
The European Commission has stated that the EUDR is not expected to lead to food inflation. He noted, for example, that while traceability has a cost, it will likely be offset as the law should reduce the number of middlemen in the market.
Source: OT