On April 19, 2023, the European Parliament approved the EU Deforestation Regulation (EUDR), legislation banning imports into European Union member countries of products with links to deforestation. This includes coffee, beef, palm oil, soy, wood, cocoa, rubber, and other agriculture commodities and derived products. The ban will apply to these products regardless of the legal status of the deforestation efforts in origin countries.
To avoid fines, companies importing such goods to the EU must produce a due diligence statement and “verifiable” information confirming that the goods were not grown on land deforested after 2020. EU member states are expected to conduct their own enforcement through compliance checks.
Food manufacturers and other sectors reliant on agricultural inputs are likely to face disproportionate sourcing disruptions due to the ban. Other sectors reliant on sourcing raw material inputs for finished consumer goods will be disrupted as well.
Legislation anticipated to disrupt flow of palm oil and soy commodities
Soy was the most imported product by EU countries in 2021, with an import value of €14 billion ($15.38 billion). The EU is also the world’s third-largest palm oil importer. According to the European Commission’s impact assessment, 34% of palm oil imports and 32.8% of soya imports likely come from deforested land.
Palm oil and palm oil derivatives are estimated to be in about half of all food-packaged products, including baked goods, dairy products, confections, and frozen items as thickeners, stabilizers, or preservatives. More than 77% of soy is fed to livestock in the EU for meat and dairy production.
The European Oleochemicals and Allied Products Group (APAG) and the European Committee of Organic Surfactants and their Intermediates (CESIO) have expressed concern about potential disruption to palm oil derivatives. The ban applies to glycerine with over 95% purity, oleic, stearic, palmitic fatty acids, and industrial fatty alcohols, a critical input for the pharmaceutical and cosmetics sectors. It is used to manufacture cough syrups and oral care products, posing a risk to companies that may be unable to verify the derivative sourcing of sub-tier supplier networks.
It is expected that failure to adapt to the EU regulation over the national code will lead to disruptions in the flow of Brazilian soy commodities to the region. Both palm oil and soy exports to end markets through the EU are also anticipated to see disruption, as imports will not be permitted for transit through the region either. This is likely to raise costs and create shipping inefficiencies for producers.
Implementation will include sizeable fines
The EU’s deforestation ban requires formal approval from member states before it enters into force. When approved, it will grant companies 18 months to adapt supply chain practices to the new regulations, with an extension of 24 months to smaller firms with less resources. Firms that fail to comply could face fines of up to 4% of the company’s turnover in an EU member state. It is expected that requirements of the law will become applicable by the first quarter of 2025. Additionally, the European Commission estimates that companies will face a one-off cost to set up due-diligence procedures that could range from €5,000 to €90,000 ($5,489 to $98,803) depending on the complexity of their supply chain network.
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