Coffee companies are moving away from Africa as EU deforestation legislation looms

Coffee importers to the European Union have begun withdrawing purchases from small farmers in Africa and beyond as they prepare for a landmark EU law banning the sale of products linked to climate change-related deforestation.

The cost and difficulty of complying with the EU Deforestation Regulation (EUDR), which comes into force in late 2024, already has unintended implications that could reshape global commodity markets over time, industry sources said.

Four cited a drying up of orders for coffee in recent months from Ethiopia, where about 5 million farming families depend on the crop. Resource strategies adopted by companies ahead of the law risk increasing the poverty of small-scale farmers and raising prices for EU consumers, while undermining the EUDR’s impact on forest conservation.

„I don’t see a way to buy Ethiopian coffee in significant quantities,” said Johannes Dengler, an executive at German roaster Dallmeyer, which buys 1% of the world’s exported coffee.

Since the beans he is ordering now could find their way into coffee products sold on the block by 2025, they will need to be EUDR-compliant, he said – though he has not yet finalized the steps for legislation.

Under the EUDR, importers of products such as coffee, cocoa, soy, palm, livestock, timber and rubber – and the products that use them – must prove that their products do not come from deforested land or face heavy fines.

Coffee major JTE Peats said it may be forced to cut some smaller producing countries from its supply chain as early as March if it „does not find and implement a solution with them” by that date.

Deforestation is the second leading cause of climate change after burning fossil fuels.

The European Commission said it has several initiatives to help producer countries and smallholders comply with the EUDR, including one launched at COP28 in which the EU and member states pledged 70 million euros ($76 million).

Some smallholders see the EUDR as an opportunity, especially if accompanied by EU support measures, to help meet global demand for sustainable sourcing products.

Tracking and tracing

The EUDR will need to digitally map their supply chains to the land where raw materials are grown, including tracing millions of small farms in remote areas.

Also, since companies often do not deal directly with farmers, they may rely in part on data provided by many local intermediaries, some of whom may or may not be trusted directly.

In some developing countries, patchy internet coverage makes mapping difficult, while traders and industry experts say land disputes, weak law enforcement and clan conflicts make even searching for data on farm ownership dangerous.

„Right now nobody from Europe is interested in our coffee,” a representative of Ethiopia’s Oromia Coffee Growers Cooperative told a recent World Coffee Alliance webinar.

He said most Ethiopian coffee farmers have never heard of the EUDR, and even educated villagers struggle to collect the necessary data in a timely manner.

Coffee produces 30-35% of Ethiopia’s total export earnings, with almost a quarter sold to the EU.

„Roasters are moving towards the big rich Brazilian farmers. It’s very shocking,” said a trader at a coffee trading major.

„In dangerous countries, there are illiterate smallholders and middlemen – we come to them with a law that even Europeans do not understand.”

Fragmented supply chains

But it is impossible to reduce small-scale farmers or entire countries if they are producers of large commodities.

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 90% of the world’s palm oil, which is used in everything from pizza and lipstick to biofuel.

Therefore, some large companies say that while they send compliant products to the EU, they divert raw materials that cannot be reliably found in those countries to non-EU markets.

Golden Agri Resources, one of the world’s largest palm oil companies, told Reuters that implementing the EUDR would „require disaggregated supply chains”. A source at palm oil company Musim Mas agreed.

To the extent that this strategy prevails, it will reduce the EUDR’s impact on forest conservation, as raw materials will still be grown on deforested land and not for EU consumption.

Compliance costs across the supply chain are meanwhile expected to push up food prices in the 27-nation European Union.

Sucafina and Louis Dreyfus Company (LDC), two of the world’s largest coffee traders, have already locked in futures contracts covering the EUDR premium, according to a source at a commodities trading major.

LDC and Sucafina declined to comment.

The EUDR is not expected to increase food inflation, the European Commission said. For example, it noted that although there is a cost to discoverability, this is offset by the fact that legislation should reduce the number of intermediaries in the market.

Save forests?

EUDR poses a particular challenge in large cocoa-producing countries.

For example, half of Ivory Coast’s crop is sold through local middlemen, making it difficult to find. Grown mostly for EU consumption, chocolate cannot be fully diverted to Asia as it is not popular there.

But cutting back on buying from middlemen is also tricky, traders say, because Ivorian authorities force them to buy 20% of their beans from this local supply chain.

„The authorities are coming in. They’re supposed to guarantee that supply, but they’re not,” said Coco’s global head.

Ivory Coast’s problem is that 20-30% of its cocoa is grown in protected forests by about a million people. Denying them livelihood would cause social unrest, while relocating them would be impossible without massive funding and support.

Sources say Abidjan is considering reclassifying its protected forests.

„Where are you moving society with what resources?” said Renske Arnoutze, senior program manager for cocoa and forests at the non-profit IDH.

He said the EU should accept an Ivorian plan to reclassify some areas where forests are already heavily degraded into agricultural land.

„These areas now have almost zero forest cover and most of the benefits can be gained by converting them into agroforestry areas owned by smallholders,” Arnoutze said. ($1 = 0.9163 euros)