What is EUDR? Impact and challenges for the global coffee market

The EU Deforestation Regulation (EUDR) is becoming a focal point in the global coffee market as its implementation deadline approaches. With potential penalties of up to 4% of revenue and strict traceability requirements, EUDR is not just an environmental regulation but a factor that could reshape the entire global coffee supply chain.

What is EUDR and its scope

The EU Deforestation Regulation (EUDR) is a crucial legislative measure introduced by the European Union to combat global deforestation and forest degradation linked to specific commodity production. According to the FAO, about 10% of the world’s forests were lost between 1990-2020, with nearly 90% due to agricultural development. Six key commodities account for the largest share of EU import-related deforestation: palm oil (34%), soybeans (32.8%), timber (8.6%), cocoa (7.5%), coffee (7%), and livestock (5%).

The regulation has three core requirements:

• Ban on products sourced from deforested land after December 31, 2020
• Detailed traceability requirements down to individual production plots
• Mandatory detailed information disclosure through Due Diligence Statements

EUDR is part of the EU’s broader effort to address environmental issues and promote sustainability. It’s expected to significantly reduce the EU’s contribution to global deforestation and biodiversity loss while encouraging companies to reassess and improve their supply chain operations.

The regulation took effect on June 29, 2023, with large companies required to fully comply by December 30, 2024. Small and medium-sized enterprises (SMEs) have until June 30, 2025, to comply, while micro-enterprises have until December 30, 2026.

With such broad scope and stringent requirements, EUDR is creating significant fluctuations in the global coffee market, particularly regarding supply, and is one of the factors driving coffee price volatility.

Impact on the coffee market

Short-term supply fluctuations

ICO data reveals EUDR’s clear impact on market behavior. Since the regulation took effect (June 29, 2023), European coffee stocks have sharply decreased by 3.12 million bags from June to October. This 26.9% decline in just a few months has brought inventory levels to historic lows, reflecting two main trends:

• Companies accelerating imports before the compliance deadline
• Minimizing inventory risk in Europe due to compliance costs

Long-term supply chain

Impact EUDR may restructure the global coffee supply chain in several ways:

• Market segmentation: Countries like Brazil and Costa Rica, with developed traceability systems, may increase their EU market share. This could lead to a market split between EUDR-compliant and non-compliant segments.
• Cost and price pressure: Increased expenses for traceability, certification, compliance management, risk management, plus potential penalties of up to 4% of revenue.
• Business model evolution: Trend toward vertical integration for supply chain control, investment in technology and management systems, and development of long-term supplier partnerships.

The regulation’s anticipation has led to significant drops in European coffee inventories. This inventory reduction, combined with high demand, creates temporary supply-demand imbalances that could push prices higher.

These profound changes in supply chains and price pressures are posing unprecedented challenges for all stakeholders, from European businesses to manufacturing countries.

Challenges for stakeholders

For European Businesses: According to the Coffee Barometer, many businesses, especially SMEs, face difficulties in:

• Establishing tracking and traceability systems
• Assessing and managing supply chain risks
• Verifying data accuracy from suppliers
• Managing increased operational costs while maintaining thin profit margins

For Major Coffee-Producing Countries: Vietnam, despite showing proactive preparation for EUDR compliance, faces challenges, particularly with small-scale farmers in remote areas struggling with traceability systems implementation.

Ethiopia, with approximately 2.2 million coffee-producing households, faces even more complex challenges. While the Ethiopian government recently proposed a national action plan for EUDR compliance over the next three years, their request for an implementation extension was rejected by the EU.

Proving deforestation-free coffee production across a continent of smallholder farmers presents a significant challenge. Informal and opaque supply chains make traceability particularly difficult, and it’s unclear how many farmers are even aware of or compliant with local regulations. However, maintaining access to the European market is crucial – in some producing countries, a quarter of the population depends on coffee for their livelihood.

Faced with these multifaceted challenges, stakeholders are developing and implementing various solutions, from high-tech approaches to sustainable certification models.

Solutions and adaptation strategies

• Traceability Technology

Companies like Neumann Kaffee Gruppe (NKG) are partnering with technology providers such as Satelligence for satellite monitoring systems across their supply chains in countries like Honduras and Uganda.

• Sustainability Certification

The 4C standard, with 27 principles covering economic, social, and environmental aspects, is emerging as a key solution, helping smallholders self-assess and declare production legality alongside third-party verification.

• Stakeholder Support

The EU has established the Team Europe Initiative (TEI) with an initial €70 million investment to help smallholders maintain EU market access. Major companies are also implementing their support programs.

While solutions are gradually being developed and implemented, successful adaptation to EUDR will depend on close collaboration between stakeholders and smallholder farmers’ access to support resources.

In conclusion,

EUDR is more than just an environmental regulation – it’s reshaping the entire structure of the global coffee market. Its impact is already evident through the sharp decline in European inventories and emerging supply chain restructuring trends. In the short term, compliance pressures and costs may cause price volatility, particularly in EU-dependent markets like Vietnam and Ethiopia. However, in the long term, this could serve as a catalyst for developing a more sustainable and transparent coffee industry.

Related question

1. When does EUDR come into effect?

EUDR entered into force on June 29, 2023, but mandatory compliance begins December 30, 2024 for large companies and June 30, 2025 for small and medium enterprises.

2. What are the penalties for EUDR violations?

Companies can face penalties of up to 4% of their EU revenue, along with mandatory product recalls and potential suspension from operating in this market.

3. How can businesses demonstrate EUDR compliance?

Businesses must provide geographical coordinates of production areas, prove no deforestation occurred after December 31, 2020, and submit a Due Diligence Statement for each shipment.

4. How might EUDR affect coffee prices?

EUDR can impact coffee prices through compliance costs, traceability expenses, and EU businesses’ stockpiling behavior before implementation deadlines. However, the extent of price increases will depend on how well supply chain stakeholders adapt to the requirements.

5. What support is available for smallholder farmers to meet EUDR requirements?

Various support mechanisms exist, including the EU’s Team Europe Initiative (TEI) with a €70 million initial investment, support programs from major companies, and assistance from producing countries’ governments in developing national traceability systems.