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Over the last few months, there has been a clear protagonist in the market sessions and various industry meetings: the general concern about implementing the new EUDR standard as of December 30, 2024 (June 30, 2025 for micro and small companies).
Let's take it step by step: What is the EUDR?
It is the new European regulation against deforestation (European Deforestation Regulation), a directive approved in December 2022 to replace the European Timber regulation, extending its scope of application to several products (previously only wood). This directive aims to combat deforestation and global forest degradation linked to products marketed in the EU by imposing a series of requirements on companies operating within the European Community.
Let's unravel some key points of the regulation:
- Ban on products associated with deforestation: ban on the import and sale throughout the EU of products originating from deforested areas after December 31, 2020. The applicable products will be timber (as in the former regulation), plus soybeans, palm oil, cocoa, rubber, cattle, coffee, and all other products derived from these.
- Due diligence: companies are obliged to ensure that the products with which they operate do not contribute to deforestation, and are obliged to obtain information on the entire traceability chain of the product, including the geolocation of the fields (they must verify and check that the exact coordinates are correct). An example of the complexity of the regulation's application is that it requires precise demarcation of the georeferenced crop fields. The regulation also expressly prohibits mass balance chains at any step in the supply chain (to try to simplify: mixing products that are deforestation-free and for which all the required information is available with others that are not so that volumes can be averaged).
- Sanctions: the directive includes rules for companies that fail to comply with the regulation, but these vary between member states as they are the responsibility of national governments. The regulation states they must be “effective, proportionate, and dissuasive." Sanctions include imposing fines (percentage of annual turnover of the offending company), product confiscation, temporary suspension of activities, and repair of environmental damage.
- Country classification system: The EU will implement a country classification system according to high, standard, or low deforestation risk. Depending on the level of risk, procedures will be more or less restrictive.
- Impact on international trade: with this standard, the EU intends to encourage sustainable practices in producing countries based on exerting pressure using the purchasing power of the European Community, thus trying to influence a more sustainable management of resources in the countries producing the different commodities.
What is the problem then?
We believe the EU should be committed to consuming more sustainable products and should try to minimize the ecological impact of the products imported or exported by the Community, but as always, the devil is in the details. Everything works on paper, but in reality, the complexities involved in trading certain products make normal market function impossible. Looking at soybeans, the EU consumes around 30 million tons. The key is what percentage of this figure is likely to meet all the standard's requirements (remember that producing countries such as Brazil have the harvest already mixed in warehouses, making it impossible to geolocate consignments). According to some estimates, only 35-40% of consumption will be able to comply with the requirements. Another important issue is whether the producing countries are willing to provide so much information to their customers, or whether they have an alternative market for their products that doesn't have so many administrative obstacles. There is also the price of course: a premium of €80/MT has been requested for soybeans as of January 1 that meet all the standard's requirements. Another important problem is the document management of the law, which is still not entirely clear.
In practice, it's mid-September, and in Europe, it's barely been possible to secure hedging for soybeans for 2025. This creates uncertainty among all operators, and if prices rise, it could lead to a competitive disadvantage compared to other producing countries.
Several voices have spoken out to ask the EU to reconsider the law to allow compliance, but not to be a deterrent to product imports. Among them, the German Federal Minister of Agriculture has recently written to ask the European Commission for a six-month postponement of the rule, citing the possibility of breaking some products' supply chains starting January 2025. Last week the Brazilian government also sent a letter to the Commission urging them to postpone implementation of the rule beyond January 1. Feed manufacturers' and pig producers' associations, among others, have also called for a review of the standard.
In short, everyone is waiting, but the days go by and there is less and less room for negotiation. There is a lot of uncertainty for both buyers and sellers who should already be thinking about shipping logistics from January onwards.
