The European Union's (EU) new regulation for deforestation is sending ripples through the global coffee industry, impacting coffee exporters in Ethiopia and other developing countries.

The sweeping regulation, which aims to combat global deforestation, demands stringent due diligence from companies importing agricultural commodities, including coffee, into the European market to ensure these products are not linked to deforestation or forest degradation post-December 2020. While set to be effective from December 2024, the rule is already influencing supply chains, with European businesses reducing orders from countries struggling to meet these stringent standards.

The regulation requires due diligence statements to include information attesting that products supplied have complied with countries’ land-use, labour and human rights laws, including indigenous communities’ rights. Noncompliance entails up to four percent of annual turnover as punishment, confiscation of goods and a temporary ban from participating in procurement or tenders of the 27-strong Union.

The regulation poses a particular challenge for coffee exporters in countries like Ethiopia. Coffee, renowned for its quality and originality, is a crucial part of the country's economy and cultural heritage. However, the new regulation casts a shadow of uncertainty over this critical sector.

Heavily dependent on coffee as a major export commodity, exporters sold nearly 40pc of their beans last year to buyers in Europe, a market that accounted for nearly half of the global coffee consumption. Exports of over 300,000tns of coffee contributed around a third of Ethiopia's nearly four billion dollars in earnings.

Gizat Worku, manager at the Ethiopian Coffee Exporter Association, echoes the concerns of many in the industry. He noted the immediate impact on current cultivation and future orders, with companies indicating a shift towards alternative sources for their coffee supply.

"We're very concerned," he told Fortune, "So is anyone who cares about the crop."

Gizat stated the need for a transition period to meet the new standards, a sentiment shared by many in the sector. The transition is not merely a procedural change but requires significant investment, particularly challenging for smallholder farms that dominate Ethiopia's coffee production landscape.

Ethiopian Coffee & Tea Authority officials actively seek a grace period for compliance, engaging in discussions with the EU delegation and various embassies based in Addis Abeba. The latest discussion was held last week with the Norwegian delegation. Despite the diplomatic efforts, these officials remain sceptical about any immediate response or a reversal of the EU's decision.

Adugna Debela (PhD), director-general of the Authority, talked about the logistical constraints in mapping smallholder farms. Although developing digital mapping and certification capabilities to meet the EU's requirements remains a concern, he sees a potential upside in these difficulties, viewing them as an opportunity to advance digitalisation in the sector, albeit acknowledging the need for a substantial time frame for the transition.

International coffee prices, which saw a 32pc decline last year, add another layer of complexity.

Adugna suggested that focusing on speciality coffee instead of commercial varieties could offer long-term benefits, aligning with global trends towards premium and sustainably sourced products.

Cooperative Unions, significantly affected by the regulation, stress the urgent need for an extension period. The Sidama Coffee Farmers' Cooperative Union, enlisting 68 associations with 70,000 farmers who collect 5,000tns annually, has requested an extension of the period through the EU delegation in Ethiopia.

Tsegaye Anebo, its general manager, noted ongoing digitisation efforts but disclosed the need for a more extended period for detailed mapping, which is crucial for compliance.

The nature of its coffee cultivation further complicates Ethiopia's situation. Unlike major coffee-producing countries like Brazil, where coffee is grown on large commercial farms, its coffee is primarily produced on small, fragmented land holdings. A coffee farmer's average land size is around half a hectare, accounting for 85pc of coffee plantations. This structural difference poses additional problems in meeting the EU's stringent standards.

"The most important thing is time," Tsegaye said. "We need at least three years."

Tsegaye is not concerned about the conditions of deforestation, as coffee grows in most places. His apprehension comes with the details of the forest cover data that can be provided through a three-year-old satellite map. He fears Ethiopia's labour market is short of professionals who can conduct the mapping and certifications.

"We hope efforts by the Authority bear fruit," said the manager.

Despite several attempts to reach out, the EU Delegation's silence on the matter reflects the sensitivity of the issue. However, the impact of the EU's deforestation regulation is not confined to Ethiopia.

A report by S&P Global revealed that the regulation will lead to significant reconfigurations in trade supply chains for deforestation-linked commodities globally. Asian economies producing palm oil, like Indonesia, are also expected to feel significant impacts. The European Commission estimates compliance-related costs for companies to range between 170 million dollars and 2.5 billion dollars annually.

Exporters from Ethiopia are adapting to this new reality, with some of the largest coffee exporters exploring alternative markets and focusing on enhancing the quality of their supply chains. While the Association and the Authority are doubling down on lobbying for an extension period, efforts are underway to expand Ethiopia's presence in markets like the Middle East.

"It's not like we can afford to stop exporting coffee," said one of the largest coffee exporters with an annual supply of 5,000tns to global markets.

Yet, shifting focus to other markets is not straightforward.

Established cooperatives like the Oromia Farmers Cooperative Union have begun geolocating 4,800 farmers in six cooperatives to maintain access to the European market, understanding the difficulties in re-entering the market once excluded.

"Reentry is nearly impossible once you exit," said Mitiku Bekele, a commercial head of the Union, formed in 1999 with 34 cooperatives comprising over half a million smallholder farmers and 26 million dollars in capital.

Mitiku revealed that they cannot afford to lose 40pc of their market. He estimated up to five years to complete mapping and geolocating all small plots, pointing to the larger issue of market access and the power dynamics in global trade.

"This shows we merely produce the coffee with little say afterwards," he told Fortune, with a tone of frustration.

Alois Dallmayr Kaffee OHG, a German coffee roaster, has indicated plans to cease imports from Ethiopia, citing the EU's digital tracking requirements as a burden too high for Ethiopian suppliers to carry.

"EU wants digital tracking that Ethiopia can't give," Johannes Dengle, a member of a senior management team in the company, told the Swiss news outlet, Tagesanzeiger.

Experts fear the inevitable impact on Ethiopian coffee is evident as rhe situation calls for a thorough analysis of alternative markets and a long-term strategy.

According to Gezahegn Berecha (PhD), director of the International Institute of Coffee Research at Jimma University, even if an extension is granted, a national project involving significant labour and resources would be necessary for compliance.

While he applauds the effort where 200,000hct of coffee were planted in Jimma town in the last few years - part of the Green Legacy Initiative - forest degradation remains to be an issue. A team of academics he is a part of is finalising a research paper to indicate possible discrepancies of inaccurate data collection from remote sensing tools like satellites. However, Gezahegn believes due attention is not given as the issue needs more than writing a letter to the EU.

He advocates for a coalition with other countries like Ghana, which also depend heavily on exports of commodities like cacao, to address these demands collectively.

"We're all on the same boat after all," Gizat told Fortune.

Ethiopia officials' response to the EUDR remains critical not only for its coffee industry but also for the broader conversation around global trade, environmental sustainability, and the balance of power in international markets. As the deadline looms, the decisions made by the authorities, exporters, and the EU will have lasting implications for the global coffee trade and the livelihoods of millions who depend on it.

PUBLISHED ON Jul 03,2024 [ VOL 25 , NO 1262]

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