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Developing story – EU Deforestation Regulations
Regulations Tabs-05

Kate Monteiro, Director of Sustainability

(5 minute read)

Unsurprisingly, deforestation has been on my mind a lot recently. In April, the EU formally adopted their long-awaited anti-deforestation regulation, the EUDR. After several weeks of additional work, the regulation is now official and the 18-month clock for compliance has started. For most of us, we have until December 30, 2024 to establish our compliance.

As of today, you can include me in the camp of optimists – to a degree.

Depending on your perspective, or your role in the supply chain, you’ll either be welcoming in the regulations as generally positive, necessary and overdue, or you might be of the view that they are troubling and in their current propositions, lack a variety of clarifications. You’d be right to be sitting somewhere in the middle.

One recent notable voice of trepidation was raised from the ICE themselves, the market through which all arabica coffee is traded worldwide. Following a press release in late June in which they announced the launch of their own traceability service, they published a white paper outlining their concerns. Rightly so if you consider that ICE arabica stocks are held in bonded (pre-import) warehouses, where they can sit for years (what happens if they’ve been in the EU years before EUDR became a reality?). They concluded that “the implementation of (EUDR) will be most successful if it takes into account the specificities of trade in the individual commodity markets”, while adding the caveat that, “Otherwise, disruptions will occur which will not only cause harm to farmers at origin, EU operators and EU consumers, but that will limit the ability of the EU to impact the goal of curbing deforestation and forest degradation”.

But who takes the hit on the cost? Plainly, it cannot be farmers and producers. But the pressure these costs will apply to margins across the supply chain will almost certainly apply indirect strain to farmgate pricing.

On the other end of the spectrum, one recent post from the Initiative for Agricultural Supply Chains was sunnily titled, “Good news for forests around the world: EU deforestation regulation is coming”.

As of today, you can include me in the camp of optimists – to a degree.

This long brewing regulation has brought the conversation about deforestation’s contribution to climate change at a critical (albeit extremely overdue) time, and there is much in it that is, on the face of it, progressive and good in spirit and intention. It is designed to insist on increased collaboration between members of the value chain to safeguard some of the world’s most valuable remaining ecosystems. By knitting this aspiration into the thrust of global commerce, it has become impossible to ignore. If the old adage “what’s monitored is managed” is true, we might hope that with the imminent roll out of EUDR the decline of global deforestation will follow. What’s more is that we could be witness to the happy side effect of achieving traceability to farm level across the industry. At a time when consumer demand for information of this kind is growing, the benefits of reaching this goal at scale are huge. If traceability is the first step toward economic transparency, then this has the potential to meaningfully advance conversations on farmgate pricing. So far so good.

However, executing an approach of this kind will require first addressing several major obstacles facing value chain members at both ends, and overcoming them early, if the whole enterprise is going to achieve both its moral and practical aims in a way that reassures those feeling justifiably concerned or sceptical.

Here’s what I see as the first set of things for the EUDR to deal with from the outset.

There are serious expenses tied to many of the possible solutions being discussed. Drafts of the regulations have consistently stated a requirement that imports be supported by a due diligence statement that illustrates that the commodity is not linked to deforested land, via the presentation of GPS coordinates and/or a polygon (perimeter map).

The sheer labour investment needed to walk and record maps of every coffee farm out there is staggering, almost inconceivable. Furthermore, many of the current tools on the market come with significant price tags. This is just scratching the surface. What happens if four exporters purchase from the same group of farmers? In the absence of pre-competitive collaboration, the possibility of quadrupling the efforts (and costs) needed for all four to achieve compliance with the regulation becomes quite real.

But who takes the hit on the cost? Plainly, it cannot be farmers and producers. But the pressure these costs will apply to margins across the supply chain will almost certainly apply indirect strain to farmgate pricing.

It is common for smallholder farmers to live on the land on which they grow coffee. How do we grapple with the fact that EUDR could create a scenario in which a farmer’s private data, likely housed in multiple platforms, may need to cross multiple hands before import? Complying with GDPR, the EU’s data privacy regulations, requires respecting the farmer’s right to request that their data not be shared or may be easily removed. They must have a straightforward means to do so.

I also have a growing concern about farmers’ rights to their own data. If a customer records their polygon, the farmer should be provided a copy of that data simultaneously. In absence of this (or a pre-competitive collaboration), a farmer’s EU customer base might be constrained to whomever has gathered the data, which might constrain how much the farmer can earn.

Many origin countries have their own legislation for what is considered legal or illegal deforestation in that country. What happens when a national definition or law conflicts with the EU’s? In a recent discussion on the topic hosted by the GCP (Global Coffee Platform), one representative for Brazil’s coffee industry pointed out that Brazil allows for legal deforestation, through which a small percentage of forested area upon a property is permitted to be removed in the context of regulated land management. Respecting the context of colonialism, how do you communicate to a farmer – a native expert in environmental stewardship – that to maintain their business prospects, they are now additionally required to comply with not just national law, but those of a foreign power to protect their future livelihood?

The EUDR is expected to formalise what it considers to be countries of high, medium and low risk. Presumably, bringing in commodities from countries flagged as high risk will require greater levels of scrutiny, due diligence, and the additional labour and costs to facilitate those. However, where two origin countries, one high risk and one low risk, can produce coffees of similar qualities and profile, demand will be naturally biased toward the country with the least red tape. Plainly, farmers in high-risk countries stand the chance of being cut out of markets through no fault of their own. At the time of writing, the EU has yet to publish their guide on implementation or the map which will dictate which origin countries will be deemed “high risk” for deforestation.

In short, the industry is still missing many of the fundamentals needed to make progress towards its shared sustainability goals. So why do I still consider myself an optimist? Because while we are going to need to overcome all of the above challenges, quickly, for EUDR to become a net positive, there are things on the horizon that are giving me hope. One, there is a large number of voices calling for pre-competitive collaboration: coming together on a single platform to crowdsource polygons, enhance farmer privacy, and share data in an efficient way. As members of GCP, Falcon is one of these vocal advocates. Two: free and open-source options for EUDR compliance may be on the horizon. While INA’s INATrace may not have EUDR capability until sometime in 2024, it’s something to keep a close eye on for long-term, cost-effective compliance.

Lastly, there has been some indication from the EU that the discovery of an instance of deforestation may not restrict farmer market access with the finality that concerned parties worry it will. In an FAQ document published by an EU Commission on June 29th (see link below), they stated that, “if the affected forest is allowed to regenerate, it would not be deemed deforestation, and an operator could source wood from that forest once it has regrown.” While this response was using wood as the commodity and it only discussed forest regeneration (as opposed to the human-driven reforestation), I remain optimistic that due diligence that contains remediation or explores partnerships on reforestation may be an option, should farmers wish to entertain it. I look forward to further clarification from the EU in the months ahead.

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FAQ from the EU Commission: