Insight: Coffee firms turning away from Africa as EU deforestation law looms

Golden Agri-Resources

19/12/2023 06:10

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      Ethiopian farmers' orders drying up ahead of new law
-sources
    

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      Such unintended impacts could in time reshape commodity
markets
    

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      Law forces firms to prove their imports don't harm forests
    

  
    By Maytaal Angel and Dewi Kurniawati
       LONDON/JAKARTA, Dec 19 (Reuters) - Importers of coffee
to the European Union are starting to scale back 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 the
destruction of forests, a cause of climate change.
    Industry sources said the cost and difficulty of complying
with the EU Deforestation Regulation (EUDR), which comes into 
    force late in 2024, meant it was already having unintended
impacts that could in time reshape global commodities markets.  
    Four cited a drying-up of orders in recent months for coffee
from Ethiopia, where some 5 million farming families rely on the
crop. They warned that sourcing strategies being adopted by
companies in advance of the law risk increasing small scale
farmer poverty and raising prices for EU consumers, while also
undermining the EUDR's impact on forest conservation. 
    "I see no way of buying significant quantities of Ethiopian
coffee going forward," said Johannes Dengler, an executive at
German roaster Dallmayr, which buys about 1% of the world's
exported coffee.
    Because beans he orders now could find their way into coffee
products sold in the bloc in 2025, they must be EUDR-compliant,
he said - even though implementing acts for the law have yet to
be finalised.     
    Under EUDR, importers of commodities like coffee, cocoa,
soy, palm, cattle, timber and rubber - and products that use
them - must be able to prove their goods did not originate from
deforested land, or face hefty fines. 
    Coffee major JDE Peets  JDEP.AS  said it might be forced to
exclude some smaller producing countries from its supply chain
as early as March if it hasn't "found and implemented a solution
with them" by that date.
    Deforestation is the second leading cause of climate change
after burning of fossil fuels.  
    The European Commission said it has several initiatives to
help producing countries and smallholders comply with the EUDR,
including one launched at COP28 where the EU and member states
pledged 70 million euros ($76 million) to that end.
    It added that some smallholders see the EUDR as an
opportunity, especially if 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 down to the plot where the raw materials were grown,
which could potentially involve tracing millions of small farms
in remote regions.
    Moreover, because companies often don't deal directly with
farmers, they could be relying in part on data provided by
multiple local middlemen, some of whom they also might not deal
with directly or trust.
    In some developing countries, patchy internet coverage makes
mapping difficult, while traders and industry experts say land
rights disputes, weak law enforcement and clan conflict can make
it dangerous to even seek data on farm ownership, 
    "Nowadays from Europe no one is interested in our coffee," a
representative from Ethiopia's Oromia Coffee Farmers'
Cooperatives Union, told 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.
    "Roasters are moving to big rich Brazilian farmers. It's
really shocking," said a trader at one coffee trade major.
    "In risky countries, there's smallholders and middlemen who
are illiterate - and we're coming to them with a law that even
Europeans don't understand." 
    
            
    SEGREGATED SUPPLY CHAINS
    But cutting out small-scale farmers or whole countries will
not be feasible if they are major commodity producers. 
    Ivory Coast and Ghana, for example, produce nearly 70% of
the world's cocoa, while 60% of coffee comes from Brazil and
Vietnam. Indonesia and Malaysia grow almost 90% of the world's
palm oil, a commodity used in everything from pizza and lipstick
to biofuels.
    As such, some major companies say they will redirect raw
materials they cannot reliably trace in those countries to
non-EU markets, while sending compliant goods to the EU.
    Golden Agri Resources  CAGR.SI , one of the world's largest
palm oil companies, told Reuters "segregated supply chains will
be required" to implement the EUDR. A source at palm oil major
Musim Mas concurred.
    To the extent this strategy comes to dominate, it would
lessen the EUDR's impact on forest conservation because raw
materials would still be grown on deforested land, just not for
EU consumption.
    Compliance costs throughout the supply chain are meanwhile
expected to raise food prices in the 27-country EU. 
    Two of the world's largest coffee traders, Sucafina and
Louis Dreyfus Company (LDC) have already locked in future sales
contracts that include an EUDR premium, according to a source at
a commodities trade major.
    LDC and Sucafina declined to comment.
    The European Commission said the EUDR is not expected to
drive food inflation. It noted, for example, that while
traceability has a cost, this will likely be offset as the law
should reduce the number of intermediaries in the market.

    
  
    SAVING FORESTS?
    EUDR is a particular challenge in major cocoa-producing
countries.
    Half of Ivory Coast's crop, for example, is sold by local
intermediaries and thus difficult to trace. Grown mostly for EU
consumption, it cannot be completely redirected to Asia as
chocolate is less popular there.
    But slashing purchases from intermediaries is also tricky,
traders say, not least because Ivorian authorities force them to
buy 20% of their beans from this local supply chain.  
    "That's where the authorities come in. They have to
guarantee that supply, but they're not," said the global head of
cocoa at a top global agri-commodities trade house.
    The problem for Ivory Coast is that 20-30% of its cocoa is
grown in protected forests by nearly one million people. Denying
them their livelihood could cause social unrest, while
relocating them is unfeasible without major funding and support.
    Abidjan is as a result considering reclassifying its
protected forests, sources said, prompting the EU to publicly
call on the country to desist.
    "Where do you relocate the community, with what resources?"
said Renske Aarnoudse, senior programme manager for cocoa and
forests at the non-profit IDH. 
    She said the EU should accept an Ivorian plan to reclassify
as agricultural land some areas where forests are already
heavily degraded.
    "These areas are virtually zero forest by now, and would
probably benefit most from conversion to smallholder-owned
agroforestry holdings," Aarnoudse said. 

  ($1 = 0.9163 euros)
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Value of countries' beef, coffee, soya, palm oil, cocoa, timber
trade with EU    https://tmsnrt.rs/3REGbiY
Selected countries impacted by EUDR    https://tmsnrt.rs/3uRzroR
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Additional reporting by Julia Payne in Brussels; Editing by
Catherine Evans)
 ((maytaal.angel@thomsonreuters.com; 00442075429105 ;))