State of Sustainability Podcast

Solo Episode: EUDR — The Regulation and Its Second-Order Effects

SAIF: Welcome back to another episode of the State of Sustainability. I'm your host Saif Hamid, founder and CEO of Altruistiq.

Today we are talking about the EUDR, the EU Deforestation Regulation. Longtime listeners will know I do not enjoy talking about regulation. I find it dry, and with AI tools available, you can simply ask one what the terms of a given piece of legislation are. But I wanted to cover EUDR for two reasons. First, it is big: it will have a significant impact on multiple industries, particularly food. Second, I think it will have interesting second-order effects that are both disruptive and formative for global agriculture. And it is topical: it goes live for large and medium companies on December 30th.

Here is the plan: a brief overview of what EUDR is, how the regulation has evolved so far, whether more changes are expected (we are all still traumatised by Omnibus and its impact on CSRD), and then the impacts and effects in more detail.

What EUDR Is

EUDR focuses on seven commodities: cattle, cocoa, coffee, palm oil, rubber, soy, and wood, plus their derivatives. The core question is whether these commodities are the product of deforestation.

It applies as a customs rule. Whoever first places the product on the EU market is responsible for ensuring that the necessary data, documentation, and provenance are in place. Countries supplying into the EU are classified by risk. The high-risk category includes Belarus, Myanmar, North Korea, and Russia, essentially countries where the EU feels it cannot adequately assess oversight or data quality. The medium-risk category includes Brazil, Indonesia, Malaysia, Côte d'Ivoire, and Ghana. Roughly 140 countries fall into the low-risk category, including all EU member states and the US.

Member states must check at least 1% of operators from low-risk countries, 3% from standard-risk countries, and 9% from high-risk countries. Penalties are enforced nationally, but EU law requires a maximum fine of at least 4% of the operator's annual EU turnover, plus confiscation of goods and revenue, temporary exclusion from public procurement and funding, and public disclosure of final judgments. Fines apply to whoever put the product on the EU market first. That could be an importer selling B2B, or a retailer importing a derivative such as chocolate or a wood product directly.

Three tests apply:

1. Deforestation-free. The product must not have been produced on land deforested or degraded after December 31st, 2020. The cutoff is retrospective and fixed.
2. Legal in the country of production. This covers land tenure, environmental rules, labour, human rights, tax, anti-corruption, and the rights of indigenous peoples.
3. Covered by a due diligence statement. The DDS must be filed in the EU's TRACES system before the goods are placed on the market, with geolocation of every plot of production.

How the Regulation Has Evolved

Lobbying has come from several directions. Some countries have tried to be moved into a "no risk" category. Multiple attempts have been made and all have failed, so the categories remain low, standard, and high. There have been minor changes to documentation requirements, but for the most part the regulation is unchanged.

The two biggest changes, from my perspective: leather was removed from scope, which was probably clever from a regulatory standpoint because it took the fashion, apparel, and automotive lobbies out of the room and likely simplified the path to implementation. And palm oil was brought into scope, which increased the interest of personal care and soap brands.

What It Requires in Practice

For a large or medium first operator, the impact is on both data and operations.

On data, you need the latitude and longitude of every plot of land where the commodity was produced. For plots over four hectares, you need a polygon rather than a point. On operations, you need physical segregation, or full documentation of why segregation has been maintained. You cannot mix compliant and non-compliant products, and if they are mixed, the whole batch is treated as non-compliant. If low-risk material is mixed with standard- or high-risk material, the batch takes the higher classification. If you buy cocoa or coffee from several countries across different risk tiers, the whole lot defaults to the highest. That means segregation must be maintained through fermentation, drying, bulking, shipping, and every other step.

You also need legality filings for each origin, covering land tenure, environmental permits, labour rights, and anything else required under that country's laws, plus the due diligence statement filed in TRACES before goods enter the EU. It is a substantial amount of work.

Why It Is Impactful

Traceability becomes a condition of trade. The fines are prohibitive, so compliance is table stakes for these commodities. That re-baselines pricing: commodities are now compliant or non-compliant, and in the near term compliant material commands a premium. Whether that premium persists is an open question. As with regen ag, a premium only makes sense when not everyone is doing it. If compliance becomes the universal expectation, non-compliant material may simply trade at a discount instead.

Much depends on what market share the EU holds for each commodity and whether primary producers can find alternative buyers for non-compliant goods. China, India, and others may absorb the excess. But I suspect the impact will be wider than it first appears: non-compliant cocoa imported into country A, converted to chocolate, and exported back to the EU still gets captured. It is possible the regulation lifts the standard across the whole global market over time.

Supplier behaviour will change as well as buyer behaviour. Some producing countries may treat this as an opportunity. I think of McCain's regen ag strategy, discussed in an earlier episode with Audrey Leuke: pitch the big QSR buyers on 100% regen potatoes, and if you are the only supplier that has built a supply chain able to deliver that, you effectively corner the market. A producing country could do the same with compliance: build the best data infrastructure, make transacting easy, reliable, and low-risk, and capture share from lowest-cost producers. There are early signs of this. Côte d'Ivoire and Ghana have mandated the African regional standard for sustainable cocoa and national farm registries.

The unit of accountability moves from the company to the plot. Traditionally, the exporter in Ghana or Côte d'Ivoire would be the entity audited. Now accountability goes all the way down to the individual plot. That will be very hard for smallholders. In the global north there is an expectation that increased data requirements on farms are both necessary and possible. Whether they are necessary is debatable, since extrapolation and data science can go a long way. Whether they are possible looks very different from the global south, where most smallholders cannot read or write, let alone absorb the cost of support. I expect a share of smallholders will simply stop participating, selling elsewhere at lower margins or shifting crops altogether.

Agroclimatic zone shifts collide with the regulation. As we covered in the cocoa episode, the places best suited to cocoa will change. Places that were less suited will become more suitable, but opening new land likely requires deforestation. It will be interesting to see how global supply of these commodities plays out under that tension.

The mechanisms will be copied. Three features of EUDR stand out. First, massive, potentially catastrophic fines: 4% of EU turnover is, for a retailer, effectively the whole margin. Second, the onus sits on the person bringing the product onto the EU market, who can be fully regulated because they sell in the EU. The buyer then pushes requirements upstream, so the effect becomes extraterritorial and global, even though EU consumption is responsible for only about 10% of global deforestation. Third, enforcement runs through customs controls, the same mechanism CBAM uses. The EU clearly thinks this is a workable way to enforce its agenda, and I expect it to spread.

The UK is already moving on its own due diligence rules covering the same seven commodities, limited to illegal deforestation, which makes sense given how closely UK and EU trade remain coupled. The US has begun discussing an EUDR-style regulation. China and India will be interesting to watch: over the last 10 to 15 years of climate regulation, they have shifted from resistance to building their own playing field and turning it into an advantage.

What I Am Watching in the Countdown

• The premium. Early indications are that forward contracts for verified deforestation-free cocoa, backed by satellite monitoring and farm GPS, command $80 to $150 per tonne over standard material, with signs it could rise.
• Stockpiling. Goods brought into the EU before the regulation takes effect are exempt, so expect stockpiling to increase.
• Origin reranking. Some countries will become more valuable import partners simply because they are more compliant.
• The vendor ecosystem. A whole industry of software and services providers is emerging to support compliance documentation, filing, and certification. That is an area where Altruistiq also plays.
• Scope changes. As with CBAM, the current list is probably a starting point. Expect commodities to be added or edited right up until the deadline and for years afterwards.

If you have thoughts on EUDR for your business, or anything that surprised you, please drop me a note. If you enjoyed this episode, hit follow so you never miss one, and share it with a friend. Until next time.

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