Coffee Memo | Rob Talks EUDR Ep. 6
Episode Summary
In this episode, Rob delves into the European Union Deforestation Regulation (EUDR) and its implications for the coffee sector. The discussion explores EUDR details, compliance significance, challenges for coffee importers and producers, and potential shifts in market dynamics and supply chains. Rob stresses the necessity for traceability and documentation in coffee sourcing, noting the varying levels of preparedness among companies to comply with these new rules. The episode wraps up by examining the future of the coffee industry in the context of EUDR and the critical importance of keeping abreast of these changes.
Episode Notes
- EUDR refers to the European Union Deforestation Regulation.
- Coffee production contributes to deforestation linked to EU imports.
- Meeting EUDR compliance demands thorough documentation and traceability.
- Larger enterprises are typically better equipped for EUDR compliance.
- Smaller producers encounter more obstacles in achieving compliance.
- Non-compliance penalties can be substantial for businesses.
- Market dynamics are expected to evolve as companies adjust to EUDR.
- EUDR could globally affect traditional coffee supply chains.
MIKE FERGUSON: Welcome to Coffee Memo with Rob Stephen, a podcast where we talk about coffee industry news and current affairs. This is episode six of Coffee Memo and we are talking with Rob about the EUDR. Rob answers the question, what is the EUDR in a lot more detail than he has in the past, but more importantly, he tells us why, if the E in EUDR stands for Europe, we should be thinking about it.
So, Rob, as we sit down to record episode six of Coffee Memo,
I'm not surprised that certain things get mentioned every episode, regardless of the topic. I'm not surprised that we mention market volatility every episode or prices. I'm not surprised we mention the inverted market or tariffs every time we talk. But I am surprised that the EUDR gets a mention in every episode. And I have my guess as to why, but I'm not completely sure. Give us a refresher on what the EUDR is and please explain why we, coffee importers in the United States, keep talking about it.
ROB STEPHEN: Sure, yeah. Well, yeah, you're right. I been mentioning EUDR in every episode and I've kind of given it short shrift in terms of what I've been explaining. I would further say it's not just the importers that are worried about it, but I think there's a case to be made that roasters should be worried about it as well. So, if you think back to prior discussions that we've had, I talk about the various factors that are impacting market pricing, market volatility, and just the general noise and craziness and things that are very intense right now in the coffee industry. And EUDR is absolutely one of those factors. And so just like I would want to explain why the market is inverted, I want to explain the impact that EUDR is having on coffee. So, let's start with what it is. It's the European Union Deforestation Regulation. The people who it affects primarily is in the title, the European Union. So, this is for all the countries, for the coffee industry, in all of the countries that are actually in the European Union. There's actually seven products in the EUDR. There's palm oil and cocoa and rubber and a bunch of others, but coffee is the one obviously that we're focusing on here. And why is coffee something that they're focusing on? This legislation is designed to limit and mitigate deforestation. So, we start with the assumption that deforestation is bad for the planet.
It's a contributor to climate change, something that we want to stop and/or reverse if we can, right? So European Union imports about 30-ish percent of the world's coffee and they have done a complete map of all the things that they buy, imported to the European Union and what is their sort of, deforestation footprint. And they've concluded that coffee is 6% of their total footprint for deforestation.
MIKE: Okay.
ROB: And that's largely because coffee is grown in places that are mostly forested, right? In Latin America, in Africa, and in Asia specifically, right? So, they're trying to reduce their deforestation footprint or at least not have it get any worse. So, they've created a rule that says: coffee needs to be sourced from places that haven't been deforested since 2020. And you know, they probably would have liked to have gone back further, but there's less and less coffee that's going to meet that definition. Because what happens as you grow in coffee, you need more land, especially when the prices are up, you want to plant in more places. What do do? You clear forest, you make some room, those kinds of things, especially if you're looking for flat land, which is what a lot of people want to do. Right. There's trees on it. I could make money with this land. I'm going to cut down these trees. And so, it's creating a, a market incentive to not do that by saying if you want to sell it into Europe, you have to not do that.
The next question that sort of comes up after we say why coffee is when, right? And when has been sort of a moving target. There's been the original legislation that was supposed to go in at the very end of 2024. And at the very last hour in mid-December, after everyone was scrambling and scrambling and saying we're not going to be ready, we're not going to be ready on the supply side, they realized what was happening, realized it was going to be an absolute nightmare for compliance and coffee was going to get stuck and fines were going to happen. They all went back into session and said, let's extend this for a year. And so, they did. And so now what was supposed to happen was that there was supposed to be 20, 25, at the end of 2025 was large companies. And then in the middle of 2026, small and micro companies.
That is still the law that's on the books. That's still the deadline.
MIKE: That's still the plan.
ROB: That's still the... It's still what's on the books. I'm not so sure it's the plan. Right now, there are pros and cons and people who are advocating on either side, but the proposal is on the table to extend it another year.
MIKE: Yeah, some surprises on who's on what side of that question.
ROB: Very much so, very much so. And I think I'll get into some of the reasons why, but to your point, some very big food companies have come out opposed to extending the deadline again. Part of it is very sort of altruistic. We want to start not deforesting the planet now, and part of it is we're ready.
MIKE: Well, yeah, I think the metaphor I would use is part of it is, if I'm training to be a sprinter and I have a whole team of people, of trainers, and I have a whole workout resume, and I get to train to be a sprinter full time for a whole year, and I'm about to line up to the starting line, and I know the guy next to me didn't have all that, those benefits, didn't have a full team. He's just sort of out there and all of sudden say, well, we're going to wait another year. Yeah.
ROB: No, I'm ready to race now. Thanks very much.
MIKE: I have the advantage, I know I have an advantage. The larger companies, I mean don't think it's any coincidence that a lot of the companies that are in favor of going now are among the largest.
ROB: Absolutely what I will say in their defense and I'm not trying to be a corporate shill here is but is that they've spent quite a lot of money in time getting this right and so I've seen firsthand some of the IT effort and some of the on-the-ground work that's been done to prepare to comply for this. Extensive. Really, really lots of work. Yeah, it's been just complete reorienting of how you buy coffee, how you account for it, how you trace everything physically and data-wise, the data requirements are really high. And then being able to interface that with the needs of the regulation and beat it into their systems, requiring another sort of whole overhaul of how coffee is traded. I mean, the sort of typical document flow gets very interrupted by this whole thing. So big companies, they do business on a long time horizon. They knew they needed to be ready. They spent the money. They put in the time. They're ready. So, they're ready to go. It doesn't hurt that it's also a competitive advantage at this point. And there's obviously the point to be made that if this is supposed to help the planet. Let’s start. So, you know, and I don't really mean to come down on either side of that. I think that there's plenty of, you know, sort of pros and cons there. Right.
MIKE: Yeah, and there are coffee companies on both sides. Even large ones.
ROB: Yeah, there's large roasting companies that are like, yeah, we could use the time. And there's others that are sort of like, no, no, let's go. Right. And I think that reasonable people can disagree on that. I'm not so much on that. I do have a different point on the delay, which is that it made a lot of sense for the delay in the first time, because there was lots of real demonstrable challenges in getting ready.
Let me sort of talk about what it takes to comply. And that will put some sort of color on this, right? in order to comply with the EUDR regulation, you need to prove some things. You need to prove that the coffee was produced in a place that is deforestation free since December 2020. And in order to do that, they have basically a satellite map of the world at that time. And then they say let's take a picture of where you bought you got it from now. And let's see if the trees are still there. Yeah, that's a very gross oversimplification of how they're doing it. It's requiring these polygon mappings and GPS for coordinates and all this kind of stuff. But basically, first of all, let's talk about the piece of land that it's grown on and let's make sure that that is deforestation free. And then second of all, let's make sure that you the supplier own that land. You have title to it. There's no forced labor. It is a legal product to be growing there. So, all sorts of other things that need to be verified in this paper trail involved in that. You have to document your supply situation so that you can prove that this is traceable to that farm plot. Because otherwise you could just grab a nice picture of a forest and say, that's where I'm producing. Of course, you're producing someplace else, right? So, the documentation, the paperwork, and the traceability is there to tie those things together one to one.
So you need to do all those things, which is a pretty big amount of work.
MIKE: And some of those things are bigger than others.
ROB: Yes, absolutely. And then you have those things and it was very sort of like, we just need these things. And everyone was like, wow, that's a lot. And by the time, you know, December was of 2024 is rolling around people, a lot of people, more people than not were saying we're not ready. And so, it made sense to move it then. Since then, a lot more people have gotten ready and have figured out ways to comply and now the European Union IT department is basically saying we're not ready. And that I don't like so much. You got us all ready for this thing and now you're not ready? Come on, man. So, I think that is part of what's driving the frustration as well. To their credit, they said we don't want to shut the coffee system down or trade routes down and we don't think our portal is ready to handle all the incoming in a way that will facilitate trade flows. Meanwhile, picture everyone looking at their watch going, tick tock, you've had an extra year. If I have an opinion on anything, it's that. It's this sort of rank hypocrisy of, let's tell everyone else what to do. And after they go out and do it, say, well, actually we need a little more time.
MIKE: Yeah, all of us carry baggage when it comes to IT not being ready.
ROB: Different episode, but anyway they also got heard from the market that this is quite hard and they did make some changes and simplifications, Yeah, so at first, you know every country in the world had its own sort of scheme of what they wanted and instead they moved all the countries into just low, medium and high risk, which helped a lot and there's only four countries that were high risk
MIKE: And only one of them produces coffee.
ROB: Correct.
MIKE: Myanmar.
ROB: Myanmar, yeah, that's the one, right? So, and then a lot of them are in medium risk and then some of them are low. And so, depending on where you fall in that risk category, there are more extensive audits, more frequent audits, and sometimes more paperwork involved. But that does help with a number of things. And so the first time you're going to import from a producer in a place that is subject to these regulations, you have to fill out all this paperwork. And that's called a DDS, which is a Due Diligence Statement. And at first, you were going to have to fill out one of those every time.
MIKE: Right, for every time it's a first time purchase under the new system.
ROB: Yeah, I mean basically so, you know if you buy a hundred containers a year from this exporter in Brazil, you were going to have to do this a hundred times kind of thing. And so instead they simplified it greatly by saying, you know for every producer group. you just need to do it once. So, that that was super helpful and then they allowed this system authorized representatives where you could basically say I've collected the DDS numbers from all these people and I'm just an agent of transfer and I'm moving it along so you just popping DDS numbers into the system. I think it's sort of shrunk the paperwork requirement considerably. And that's really what you want when you're in trade. Anything that slows you down, time is money. You know we talked about that in working capital, right? I mean, even a day of things not moving along, that's a day your money's not helping you. So, we want to move things along as quickly as possible. And the last thing they did was they reduced the size of the companies that need to do some of this really big due diligence work. So, if you're a much, much smaller company you can get a pass on a lot of this stuff. Which I think was really helpful because if you're a company with you know, ten employees, you're looking at adding three people just to do this kind of work.
MIKE: Yeah, when your impact on deforestation is...
ROB: Pretty diminimus, Yeah, diminimus is one of our favorite words around here. And so, on the import side and the compliance side in terms of the first purchaser interfacing with the EU and their regulatory, that became a bit simpler. And so that's good. But on the compliance side, on the ground, there's a lot, right? And I think that's where, when we talk about some people saying, let's go, and other people saying, let's hold, there's another dimension of, there's still the argument of is this fair? Right? And so, there's a conversation back and forth, right? It's like, well, we can't do nothing because, you know, we have to do what's right for the planet. And I agree with that for sure. And then there's the, that's fine, but let's be fair about it. And let's not disadvantage people based on where they live or what the state of their government is at the time or what their state of infrastructure is at the time. That's not fair either. I also agree with that.
Right. Yeah, you know, so that's where the tension is, is between these two things. So, for example if you are a small farmer in a country that doesn't have a lot of technical infrastructure you're presented with something, “this is easy. All you need is a smartphone.” Okay. You know not everyone has a smartphone, right? So, it's that kind of sort of…
MIKE: Hard to imagine but true.
ROB: Yeah, hard to imagine, but true.
And I think that there is things like lot separation. So, lot separation requires pretty good amount of oversight. You know, coffee comes, if you've ever been to a coffee mill, lots of coffee comes in, tons of stuff on harvest time, coffee's coming in 24/7, it's being dumped into machines and stuff like that. So, if you, if you want to separate, you know, what might be from a EUDR compliant area of the country and what's not, you've got to put some infrastructure around that.
MIKE: Yeah, because they're not going to certify an entire co-op just across the board.
ROB: I mean, they may if it's all compliant, but there may be parts of it that are not certifiable. And I am not an expert enough to know if there's a certain percentage that if you are you know, 90 % there, we can just call you 100% there. I don't know, that might be a thing. But I know that in general, this sort of lot separation and traceability requirement it's very onerous. It's hard to do. You know, if you're a producer of organic, you're already used to doing that. But if you're not a producer of organic, it's very hard. It's the same thing if you're a roaster. If you're organically certified, you're used to keeping paperwork on certain things and understanding how to make that separation. But if that's not something you bother with, then it's sort of like, what do mean you want to see all this paperwork? So, you've got that going on. And then I think that proving that you own the land that you farm on…
MIKE: Is a big one.
ROB: Is a huge one. In many cases, you just don't. It's just been under common use for maybe generations, or titles are just hard to come by, or they're in dispute. And so that means those people can't participate. So that's a difficult one. And then tech literacy is something that you and I have struggled. You and I used to be involved with a nonprofit that worked in coffee growing countries, Coffee Kids. And one of the things that we always struggled with was this capacity building thing. You know, all I need from you is an Excel report. Oh, come on. You know, it's like, I don't have a smartphone, I don't have a computer, I don't know how to fill out a proper report. I don't have… and it's like, if you're used to working in an office, these are things that are sort of like table stakes, but these are very difficult if you're a poor rural farmer. And yet, if you're a company that buys from poor rural farmers, you either create that infrastructure for them or you put yourself at risk. Because I think what I haven't mentioned here is that if you find yourself a foul of these regulations, the penalties are massive. really kick in. mean, like, first offense is sort of a semi-expensive slap on the wrist, but the second one is, you know, like, large percentages of your annual income. It's designed to make you not want to get around it.
MIKE: So just straight percentages, not flat.
ROB: Yeah. So, and so I think, you know, it's got the industry's attention in that, okay, we've got to take this seriously. We, you know, we can't mess around with this thing. And everyone's looking at it very clear-eyed saying, okay, well, if we can't mess around, then where are the weak points? And a lot of these weak points are the things that we're talking about now, which is why there's been a lot of discussion about EUDR and it's, and is it being done the right way? Is it fair to do it all? Is it the kind of thing that is going to, is it going to change the coffee supply market because you'll create winners and losers in the supply market.
Europe, again, as we said at the beginning, they take about 30% of the world's coffee, give or take, and if you're a producing country that traditionally sells to Europe, now 30% of your market is offline. You know what I mean? Or more, if you were, say you're in Africa, a lot of that coffee, a disproportionate amount of coffee from Africa goes to Europe because of the proximity.
And if you can't sell there anymore, that's a huge disruption. Right? I mean, we live in a world where things can go from place to place a lot easier now, but still that's those multi-generational relationships disrupted potentially. Big impacts. Big impacts. So, you know, I think that the last thing I would say on that just before we move on from the technical challenges is the costs.
Another cost being pushed down to the origin levels is probably the last thing that the industry needs right now. And so the next question is if we want to comply, say you're an importing company or you're an exporting company and you don't want to lose your access to the European market and you know that the product that you're sourcing can comply, but there's infrastructure challenges keeping you from complying, what are you going to do? You're to pay for it. And where's that cost going to go? In your bill. Right? So I mean, it goes someplace.
So, these are all things to keep in mind as we think about EUDR. Now, if you're a US roaster, I can see you sort of thinking to yourself justifiably, okay, that's what's happening to my friends over in Italy, but where does that impact me? Right. And I think that I would encourage everyone to think, to take a step back and think about what would happen to the European roasters if their supply was disrupted. Right. It's the same thing that would happen to you as a US roaster, if your supply was disrupted, you would pivot. You would scramble, you'd get scrappy, you'd go get coffee that worked. And a lot of the places that they will go are the places where you're at now. And so, if they can't get, say, I don't mean to pick on Ethiopia, but if say they were having trouble complying because of lack of infrastructure in rural areas, and so some of that coffee is not available to the market they're going to go looking in Central America and Columbia and places like that. And it's going to push pressures up on differentials. It's going to push pressure up on overall coffee availability. It's going to create just a sort of free-for-all.
MIKE: Any disruption to the supply chain, whether it's coming from Europe or not, is going to affect all the customers who are getting coffee from that producer.
ROB: Couldn't agree more, right? So, you know, I think that when I look at industry reaction, I look at it from a number of angles, right? You know, so we talked about there's big food companies, there's big roasting companies on both sides of this. There's also, you know, the environmental groups. The first delay was too much. And then you've got, you know, sovereign governments saying, this is, you know, the United States has come out against it, right? And now, so... no surprise, but also it's a feeling of if this happens, how much of the US products would then be non-compliant, right? Or how much impact on our supply chains do we want, right? So, there's the knee-jerk reaction and then there's the sort of sober, what's this going to global trade reaction? And how much regulation in other countries do we want to be subject to? If the deadlines were firm, everyone would say, all right, on this date, I've got to have this much coffee in place. I have to have all these things in place. And that would be disruptive enough, but the deadlines are not firm and haven't been since the get-go. Right. So now we're, we're sort of sitting here going, I think at the end of the year, I need to have a bunch of compliant coffee sitting in Europe, ready to go. Or maybe I don't.
MIKE: Which are commitments that would have been already made. Yeah.
ROB: Yeah, I mean coffee has been traded with EUDR premiums on them, people have paid extra money already for coffee that is compliant and that coffee is either already in Europe or is on its way to Europe or is committed to go to Europe. Yeah, and if there's another delay all that business could potentially be rewritten on the other hand the suppliers would say you asked me to comply. I spent the money to comply, that was not free. So, whether or not you need the certification, I still met my obligation. So, there's going to be a lot of that too. And that creates hard feelings and that disrupts trade again. I think that as a roaster, anything that disrupts anywhere, has the potential to disrupt it everywhere. Especially something as seismic as the sort of flow of coffee into Europe. Worth paying attention to even if you're not in Europe.
So, I think the last thing I would say about its impact on the roasting community is, I'm going to go back to a local example, meaning in the US. So, after COVID, there was that government series of loans. Basically, we're going to loan you money at a very low interest rate so that you maintain your workforce, right? Because we don't want everyone just to suddenly become unemployed. And I remember it, I knew a lot of business owners who participated in that. As you can imagine, there was a line very quickly of people lined up to get them. The people who ran their businesses very well and had their, all their accounting really locked up and just everything, snap, snap, just ready to go. They were able to walk in, make the application very quickly and get the money. And that was, it was easy. And then everyone else who was sort of like, I keep everything in a shoe box. I mean, if there's money in the register, I guess we have money. Those people either didn't get the loans or at the back of the line. So, there's a benefit to having the capacity to run your business at a very high level. I would encourage everyone to think about what this is going to do to the capacity of the coffee companies in Europe. They're going to have to comply with something that's very hard to do. It's going to make them all better in my view.
MIKE: Okay.
ROB: And so, you know, we live in a world where these, where brands start to compete, you know, even cross nationally. I think that if your, if your operation is robust enough to handle very sort of, serious regulations that sort of got dropped on you, it makes you better. So that's something that I, I have been thinking about a lot, and I've been thinking about supply chain impacts that we've been talking about. I've been thinking about how coffee in the wrong place or what's perceived to be the wrong place continues to have really strong impacts on the futures market.
My view on this is that US roasters really should be looking at this. They should be, not worried about it, but see it as a contributing factor to what's going on with the price of their coffee.
MIKE: Yeah, and if contingency planning's not a part of your vocabulary yet…
ROB: You should go back to episode one and listen from the beginning. Yeah, I mean, is there more that you think we should be talking about when it comes to EUDR?
MIKE: I was going to ask you about if the EU is doing anything to help supply side.
ROB: It's funny, I I tried to look into this a bit. There's a lot of money that's been, relatively a lot of money that's been set aside to help producers, but I can't really see how it's being spent. But you know, we're talking about like 90 million euros kind of thing, right? And I think if it's about helping with education and basic compliance issues, that's great. It's not going to change whether there's internet in rural Africa, you know, that kind of thing. So, I think it's all relative.
MIKE: It's always the same questions we ask whenever we're spending money in origin.
ROB: So, you know, I'm going to close like I have been, which is to say, you know, keep an eye on things. I would say keep an eye on this as a factor, especially as we get towards the end of the year, because if this is moved again, it will change the market. And I can't really definitively say how, but it will for sure have an impact. It's really going to depend on whether people were right or wrong and their guess on it and how they acted up until that point.
I would ask folks to write in and let us know what else they'd like us to be talking about. But I will say that for the next episode, I'm very excited that we are going to have a special guest who I won't reveal at this time, but I would encourage you to listen in because it's coming from someone who knows a lot more than I do on just about everything.
MIKE: I'll tell you after Rob leaves the room.
ROB: Thanks Mike.
