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The European Union Deforestation Regulation; And what it means for the Ethiopian Coffee Industry.

What's the EUDR and how did we get here?

The European Union Deforestation Regulation (EUDR) is an initiative by the EU to minimize the Union’s contribution to deforestation and forest degradation. The regulatory framework particularly aims to acknowledge and tackle the impact of the trade of commodities and the Union’s consumption contributing to deforestation and forest degradation. The Food and Agriculture Organization of the United Nations (FAO) estimates that 420 million hectares of forest – about 10 % of the world’s remaining forests have been lost worldwide between 1990 and 2020. Every year the world continues to lose 10 million hectares of forest. Agricultural expansion drives almost 90 % of global deforestation, with more than half of forest loss being due to the conversion of forest into cropland.

If proper regulatory intervention was not implemented, according to the impact assessment of this regulation, the production and consumption of six commodities (wood, oil palm, cattle, cocoa, coffee, and soy) alone in the Union would result in over 248,000 hectares of deforestation annually by 2030. Of the six commodities examined in an efficiency analysis research, oil palm (34,0 %), soya (32,8%), wood (8,6%), cocoa (7,5%), coffee (7,0%), and cattle (5,0%) account for the biggest share of deforestation induced by the Union.

The EU started the legal requirements in place of voluntary action as business zero deforestation pledges have not been carried out. The EUDR establishes regulations for the placement and availability of relevant products—cattle, cocoa, coffee, oil palm, rubber, soy, wood, and specific derived products—on the Union market as well as for their export from the Union. The bill for the European Union Deforestation Regulations passed in December 2022, and the legislation entered into force on 29 June 2023. Operators are currently in a transition period lasting for 18 months (or 24 months for small operators), to prepare for the implementation of the regulation.

Any operator or dealer who places these commodities on the EU market or exports them out of the EU is required by regulation to demonstrate that the goods are not sourced from deforested land (cutoff date: December 31, 2020) or contribute to the deterioration of forests. After an 18- month transition period (30 December 2024) for major operators and up to 24 months (29 June 2025) for small operators, these obligations will become legally enforceable.

What do you need to know about the EUDR?

1. Products that fall under this regulation should not be exported or put on the market unless they can demonstrate that they do not contribute to deforestation and forest degradation. Geographic coordinates of the land used to produce these commodities must be gathered in accordance with EUDR regulations in order to confirm that no deforestation or forest degradation has occurred. The geolocation information required for a farm that is smaller than 4 hectares is one data point (one latitude and one longitude reference), if the farms are larger than four hectares, a polygon with three or more vertices is required.

2. The operator bringing the goods into the EU must demonstrate that the products were manufactured in compliance with applicable laws in the country of production. This covers obeying laws pertaining to land use, the environment, labor, human rights, taxes, anti-corruption, trade, and customs, among others.

3. Commodities entering the EU market must come with a due diligence statement attesting to the fact that the relevant items are free of deforestation and produced in compliance with the applicable national laws.

4. It is anticipated that a three-tiered benchmarking system reflecting countries classified as low, standard, or high risk will be developed. With the help of the system, operators will be able to conduct simplified due diligence on products from low-risk nations while regulators will be able to focus checks on goods from high-risk countries.

5. The "Operator" importing products into the EU bears the burden of proof when it comes to compliance with the EUDR. This implies that the company putting items on the EU market has to attest to the fact that they do not contribute to deforestation. Businesses who break the rules risk fines of up to 4% of their EU revenue.

How does the EUDR affect Coffee-producing nations like Ethiopia?

Coffee is Ethiopia’s main export commodity, contributing to the livelihoods of more than 15 million smallholder farmers and other actors in the coffee sector. The Ethiopian coffee industry generates about 30-35 percent of the country’s total foreign exchange earnings. According to the Ethiopian Coffee and Tea Authority, out of the total volume of green coffee exports made from the country, Germany and Belgium hold the second and fourth-largest shares of exports made to destination countries. Out of the total coffee exports from Ethiopia, in the years 1998-2016, a total of 53.5% were exported to the EU, and 34.13% were exported to Asian countries. It is estimated that the EU currently covers a significant portion of around 32% of total Ethiopian Coffee Exports. While it is estimated that Ethiopia has a share 2.1% in the total of EU’s product imports

According to Global Forest Watch, in 2020 and 2021; Ethiopia lost 366,000ha of forest, over 90% of which was because of commodity-driven deforestation and shifting agricultural practices. Although, garden coffee accounts for more than 90% of Ethiopia’s coffee production, whereby farmers grow and harvest coffee from yards behind their living quarters in less than 2 hectares of land on average, there is a gap in awareness and understanding of what truly constitutes as deforestation under the EUDR regulation.

Fighting against time: - Although the regulation came into force on 29 June 2023, we are in a transition period lasting for 18 months (or 24 months for small operators) , Because actors in the different levels of the value chain especially at the farm are not completely aware of the EUDR regulation and what it entails, there is a risk of compliance as a result of actions related to forest degradation or deforestation. Even though the deadline for compliance is fast approaching, there is still a lot of work that needs to be done in terms of awareness creation in different coffee growing regions in Ethiopia and preparation for compliance. Whether or not Ethiopia with the large percentage of production coming from small-hold farmers has enough time to prepare for the EUDR is a big question.

No remediation after the Cutoff date; - The cutoff date of December 31, 2020, was set to avoid an expected spike in activities that would cause deforestation and forest degradation between the notification in the Commission proposal and the date EUDR Regulation came into force. According to the regulation producers and operators with relevant commodities and products that have caused deforestation and forest degradation during the negotiation of this regulation are prohibited from being placed on the market or exported by producers and operators.

With the majority of the Ethiopian coffee exports going to the EU, it is unclear what will happen to the smallholder farmers and their families who are not able to comply with the regulation. The dynamic nature of international market prices coupled with the rising inflation in the Ethiopian economy, last year has been a tough year for exporters, processing station owners, and farmers to find market access to their coffee. Recollecting last years’ experience of a lot of warehouses filled to the brim while still fighting to find market access. If this continues to be an issue in the coming years, it will be even more difficult for farms that don’t comply with the EUDR.

Who will pay for it: - The Elephant in the room, the restrictions can put further strain and expense on growers who are already having difficulty. The implementation and data-gathering administrative costs would also be covered by producers and operators. Where will these costs be absorbed in the supply chain? The shifting demands from consuming countries and interests in voluntary sustainability certification that are constantly updated have broken the banks of many producers in Ethiopia. Not all of the which efforts have paid off. Keeping up with the latest trends in Sustainability Certifications and now that EUDR, Producers are now expected to shoulder a big portion of the burden. The question remains, who will pay for it?

Switching to easier Supply chains: - Relationships built with exporters and importers through the years are now faced with a challenge as compliance with the EUDR comes at a cost of severe penalties in case the integrity of the data is compromised. Hence there is worry in producing countries like Ethiopia with very few commercial farms and a majority of small-scale coffee farmers where data needs to be collected from thousands of our growers and then verified, passing through many hands. Buyers as a result of the EUDR might now shift to other producing countries with easier supply chains.

According to the WCR, there are 2,241,000+ coffee farms in Ethiopia. Will all small farmers be able to afford the resources and the technology to fulfill the requirements needed to comply with the EUDR? There are efforts being made by cooperatives to reach smallholder farmer members and help them comply, however, they are only able to reach a few. A few months into the Transition phase of the EUDR a lot of questions still remain unanswered. Stay tuned for more insights on how DayeBensa is adapting to the EUDR on our next blog.

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