What the European Regulation on deforestation-free supply chains means for the global coffee industry

EU Deforestation Regulation

What the European Regulation on deforestation-free supply chains means for the global coffee industry and why there’s no turning back.

When the European Parliament and the European Council of the European Union provisionally agreed on a new regulation on 5 December 2022 to ensure supply chains remain free from processes and products that cause deforestation, it was a strong signal to the world that it is determined to address global deforestation.

“Today’s political agreement on the EU’s deforestation law marks an important turning point in the global fight against deforestation,” said Frans Timmermans, Executive Vice-President for the European Green Deal in a press statement.

“Combatting deforestation is an urgent task for this generation, and a great legacy to leave behind for the next.”

Virginijus Sinkevičius, Commissioner for Environment, Oceans and Fisheries added that to succeed, it would “build efficient and close cooperation with both consumer and producer countries to ensure a smooth process”.

Industry groups had been involved in the development of the Regulation since 2019. Further drive to the initiative was undertaken at the COP26 climate conference in Glasgow in November 2021, when the European Union, along with more than 140 other countries, pledged to halt deforestation by 2030.

Once adopted and applied, the new law will ensure that goods such as coffee, palm oil, cattle, soy, cocoa, timber, and rubber, that are placed on the EU market, will no longer contribute to deforestation and forest degradation in the EU and elsewhere in the world.

These commodities were chosen on the basis of a thorough impact assessment identifying them as “the main driver of deforestation” due to agriculture expansion.

According to the European Commission, the hope is that this new regulation will stop a significant share of global deforestation and forest degradation and reduce greenhouse gas emissions and biodiversity loss.

The Intergovernmental Panel on Climate Change estimates that 23 per cent of total anthropogenic greenhouse gas emissions between 2007 to 2016 come from agriculture, forestry, and other land uses.

The Food and Agriculture Organization of the United Nations estimates that 420 million hectares of forest were lost to deforestation between 1990 and 2020, and that the world lost around 178 million hectares of forest cover in the same period of time, which is an area triple the size of France.

It’s for these reasons and many others, that the time has come to act.

The black and white

Given that the EU accounts for one third of world coffee consumption, virtually all of which is imported, says Anthony Woolich, regulatory partner at HFW lawyers, and a member of the City of London Law Society’s Committee on Commercial Law, this new Regulation will have “wide-reaching impacts across the industry”.

“Brazil and Vietnam together account for over half of the EU’s coffee imports,” he says.

European Commission’s spokesperson for the environment, Adalbert Jahnz, says companies placing relevant commodities and products on the EU market will be required to put in place and implement due diligence systems to ensure that only deforestation-free – produced on land that was not subject to deforestation after 31 December 2020 – and legal products, according to the laws of the country of origin, are allowed on the EU market.

While the regulation is an opportunity to enhance trade in deforestation-free products and boost opportunities for sustainable actors around the globe, Jahnz says traders and roasters buying direct will have to go through three key steps as part of their due diligence systems:

  1. Collect information on the commodity, quantity, supplier, country of production, evidence of legal harvest, etc.
  2. Use the information gathered under the first step to analyse and evaluate the risk of non- compliant products entering the supply chain. For example, on the plots of land used for producing the commodities.
  3. Take adequate and proportionate mitigation measures in case you find risk under step two, to make sure that the risk becomes negligible.

The Regulation is not expected to enter into force until mid-2023. Large companies will have a further 18 months before they have to comply with the Regulation’s requirements, while small and medium-sized enterprises will have 24 months.

No easy feat

Jahnz says a key and challenging requirement for companies will be obtaining geographic coordinates of the plots of land where the coffee they place on the market, was produced.

“Using geolocation coordinates is the simplest and most cost-effective way of obtaining the necessary geographic information for EU Member States’ competent authorities to be in a position to check whether products and commodities are deforestation-free,” Jahnz says.

He says information on the plot of land or farm where the commodity has been produced allows for the use of satellite images – widely available and free-to-use digital tools – to check whether a product or commodity is compliant or not with the deforestation-free requirement of the proposal.

HFW’s Woolich says that it’s important not to understate the challenges involved in ensuring traceability, adding that the requirements under the Regulation to provide precise geographic coordinates are “very specific”.

“Furthermore, the mixing of coffee from different farms will create a risk that coffee produced on deforested land could be introduced. It is expected that satellite imagery will be used to monitor deforestation patterns,” Woolich says. “It is also worth noting that it will be incumbent on those seeking to sell coffee in the EU, rather than the farmer, to prove that it is not produced on deforested land. This still leaves a big challenge of tracing a coffee harvest back to a particular plot of land, especially in a supply chain with multiple levels between the farmer and the importer.”

Carolin Ehrensperger, Head of Sustainable Business Unit of Neumann Gruppe GmbH in Hamburg, Germany, the holding company of Neumann Kaffee Gruppe, says currently, for conventional coffee, however, this level of traceability does not exist. While satellite images are widely available, tools that reliably detect deforestation are not.

“At the moment, no coffee map exists that would tell us where coffee was grown before the cut-off of 31 December 2020, and no tool that would reliably detect coffee or deforestation as defined by the EU regulation. This means even with high quality geolocation data on farms, deforestation events can’t be detected with certainty,” she says.

European Regulation
A key requirement for companies will be obtaining geographic coordinates of the plots of land where coffee was produced.

“The most widely used tool, Global Forest Watch, relies on tree cover loss, not deforestation. This leads to many false positives requiring costly manual checking of information including on the ground visits. Systems are especially bad at identifying agroforestry systems and renovation is often tracked as deforestation. Even for more advanced algorithms, that come at a cost, reliably detecting deforestation in the tropics remains challenging.”

Given that coffee is still often grown in remote and difficult areas to access, Ehrensperger says that for many farmers, especially if they produce small volumes, it is still more efficient to sell their coffee to a middleman passing by, instead of spending hours or even days travelling to the next purchasing point by an exporter.

“Beyond this issue of traceability, farmers don’t necessarily have access to technology to map their farms’ geolocations. Boundaries and ownership may also not be clearly defined. Aspects on data protection remain open, as well as what a plot of land is according to national laws. National solutions to this issue may arise.”

While there may be a few grey areas to overcome, Ehrensperger says roasters will be obliged to undertake due diligence under the regulation.

“Operators and traders, including roasters, will be held accountable in case deforestation was detected on the plots where their coffee came from. Sanctions include confiscation of the coffee and can lead to penalties of at least 4 per cent of turnover, as well as temporary exclusion from trading/selling in the EU,” she says.

Traceability: the price we pay

Compliance with the regulation will make coffee exports into the EU more costly. The Impact Assessment backing the proposal estimates that the costs of compliance for companies are significantly lower than the expected benefits. However, guaranteed expenses include the cost of geolocation data, the expense of information sharing systems and traceability and monitoring systems at origin.

“Depending on how easy it will be to shift the coffee from the origin to other markets, these costs will be forwarded to buyers’ increasing prices or will have to be subsumed by producers locally, reducing

the price they receive for coffee even further and making alternatives to coffee more attractive – a threat to attractiveness for coffee farming further contributing to concentration in the industry we’ve seen for decades,” Ehrensperger says.

HFW’s Woolich says the countries which will find the new regulations challenging are those where the industry is dominated by smallholder farmers rather than large, mechanised farms, with better access to technology and resources.

“Brazilian agriculture is dominated by these larger farms, for whom compliance will be easier than countries whose coffee industries are mostly made up of smallholders, such as Vietnam, Colombia and East African countries,” Woolich says. “Because the EU is such a large market for coffee, representing approximately 50 per cent of worldwide coffee imports, there are only limited opportunities for producers to shift to supplying non-EU countries. So, Brazil, which is already the world’s largest coffee producer, is likely to become even more prominent globally.”

Vinicius Estrela, Brazil Specialty Coffee Association (BSCA) Executive Director says smallholders may struggle with additional costs to ensure traceability and monitoring in the coffee value chain, but that Brazil is in a strong position to adapt to the changes.

“Brazil represents a low risk level as a coffee origin, considering the main producing areas [has been] consolidated for decades. Also, Brazilians are subject to the federal forest code, one of the most advanced ones in the world,” Estrela says.

Ehrensperger adds that indirectly, a shift in trade patterns may occur, depending on the complexity of the value chain and farm structure.

“More advanced economies are at advantage to ship to the EU, while coffee from less advanced economies, with less structured supply chains and countries with higher deforestation rates, will be shipped elsewhere,” she says.

“Proofing a non-negligible risk and implementing mitigation measures is also easier in closer supply chains with long-standing relations. This model is currently seldom practised by larger roasters, as their key focus is on keeping the taste the same every year and prices stable, which may require shifting in origins/regions due to climatic conditions.”

One step forward

The good news is, that for all commodities, there are already producers and operators who have best practices in place that ensure deforestation-free supply chains and many countries have traceability systems. They are models others can learn from, such as Nestlé who has already pledged to eliminate deforestation from its coffee supply chains by 2025. Meanwhile, for those which have taken little to no action to date, there is work to be done.

European Commission’s Jahnz says there is a strong EU commitment to step up its engagement with partner countries, consumer, and producer countries to address deforestation and forest degradation.

“Partnerships and cooperation mechanisms by the EU and its Member States will support countries to address deforestation and forest degradation where a specific need has been detected, and where there is a demand to cooperate,” he says. “For instance, to facilitate compliance with the Regulation for companies/smallholders, or to help partner countries meet their international commitments on halting deforestation, such as under the Glasgow Declaration or the Sustainable Development Goals.”

This article was first published in the March/April 2023 edition of Global Coffee Report. Read more HERE.

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