European consumers could experience ‘greenflation’ once the EUDR takes effect
Image: Rainforest Alliance/Mohsin Kazm
The European Union Deforestation Regulation (EUDR) could cost EU consumers up to USD $1.5 billion, as new sustainability rules are set to impact global commodity supply chains, according to a new GlobalData study.
The EUDR aims to cut greenhouse gas emissions and help limit biodiversity loss by influencing global action on climate change targeting commodities linked to deforestation. The EUDR will come into force from December 2024 to June 2025 and goes much further than previous regulation on this issue by outright banning materials linked to deforestation and applying to the entire value chain. The EUDR covers products made or derived from cattle, oil palm, rubber, soya, wood, cocoa, and coffee, if they are sold in the EU. The regulation must be followed by any company involved in the value chain of these commodities at any point, whether inside the EU or not.
Under this regulation, companies must prove that none of their product’s components, ingredients, or production processes have contributed to deforestation. The onus will be on companies to prove that not only their product, but their product’s value chain is deforestation-free.
Under the EUDR companies that trade in these commodities and their derived products in the EU market or that export them from the EU will need to follow mandatory due diligence reporting of the goods and supply chains they wish to trade in and demonstrate that their products are not linked to deforestation, or to forest degradation through, such as the expansion of agricultural land. The regulation will require companies and industries in countries that supply the EU to transition to a sustainable, deforestation-free supply chain and legal agricultural value chain if they wish to trade in the EU.
Agribusiness consultants at GlobalData, a data and analytics company, estimate that EUDR compliance premiums for companies operating in the supply chain for just two of the targeted commodities, oil palm products and their derivatives (such as crude palm oil (CPO) and palm kernel oil (KPO)), and rubber could be in excess of $1.5 billion* alone. GlobalData analysts believe that while companies operating in these supply chains will be able to absorb some of the costs themselves a good proportion of these compliance premiums are likely to be passed onto EU consumers in the form of food and drinks and product price increases.
GlobalData’s new study, EU Sustainability Regulations: How the EUDR and other Sustainability Regulations will impact consumer markets, explores some of the EUs key sustainability regulations focusing on the aims of the EUDR and the compliance challenges ahead for farmers, companies, and manufacturers trading in the commodities targeted by the regulation. The study also looks at what the EUDR could mean for the global supply chain of the target commodities, the potential impact on consumer markets and pricing within the EU and how the EUDR could affect the EU’s future competitiveness with China.
Food and drink categories likely to be most affected include coffee, chocolate, soy-based meat alternatives, and products containing palm oil, in addition to personal care products such as shampoo. The GlobalData study finds that operational costs for coffee suppliers will increase and the risk of sanctions for importers will become real. Many coffee suppliers save money by sourcing from multiple growers. This will become more expensive under the EUDR as each one will require GPS-based tracking and traceability protocols.
According to the study, the additional administration required by producers of coffee, cocoa, soya, and other products covered in the EUDR will add significant costs to smallholder farmers. Furthermore, the study reveals that governments in producer countries will likely have to step in to support them, noting that “this is already happening for cocoa farmers in West Africa and coffee farmers in South-East Asia. The EUDR will specifically impact agricultural practices in places like South America, sub-Saharan Africa, and South-East Asia as the industry looks to avoid its impact being classed as ‘deforestation’ by the EU. This will include more ‘agroforestry’- planting crops amongst other plants and trees.”
“The aims of the EUDR are understandable and cutting greenhouse gas emissions and protecting biodiversity is essential. However, there could be some disruption ahead,” said Fred Diamond, senior food & beverages consultant and analyst at GlobalData. “The extra demands of the EUDR could lead some commodity suppliers in what the EU terms ‘third countries’ to move away from the EU and increase trade with countries that impose fewer regulatory requirements such as China.”
Diamond further noted that the gap between big and small companies could get wider as larger companies are more able to shoulder the additional regulatory burden. “The exact impact on consumers will depend on a variety of factors, including how companies choose to respond to the regulation, the extent to which the regulation is enforced, and how much assistance EU member states are willing to give to supplier countries to help them align with the new rules. However, with recent news reports confirming that the world’s top climate scientists expect global heating to go well beyond the current 1.5C target, sustainability regulation associated with cutting greenhouse gas emissions, such as the EUDR which targets deforestation, remains an urgent priority for the planet,” he said.
To read GlobalData Food & Beverages Consultant’s new study EU Sustainability Regulations: How the EUDR and other Sustainability Regulations will impact consumer markets in full, click here.
*The $1.5 billion EUDR compliance premium figure is based on GlobalData Agribusiness consultants understanding of current commodity pricing and the likely impact of increased costs of EUDR compliance on the supply chain of these commodities. However, the company recognises that EUDR compliant commodity premiums are still being agreed confidentially between buyers and sellers so some uncertainty remains over the final numbers.
- Vanessa L Facenda, editor, Tea & Coffee Trade Journal.
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