More hikes imminent: EU’s deforestation stance set to cause food price rises – policy experts

The European Union parliament voted on and approved its long-debated deforestation regulation on September 13 2022, turning a deaf ear to strong opposition voiced by multiple countries​, particularly producer countries of commodities such as palm oil which would be the most heavily impacted by the new regulation.

Opponents claim the move is nothing more than a ‘political protectionist tool’.

As it is, the new deforestation regulation now mandates all companies to ensure that goods sold inside the EU are ‘deforestation-free’ and have ‘not been produced on deforested or degraded land’, essentially banning all other products from entry.

Protests have continued to be voiced, but with the EU looking unlikely to budge on this stance any time soon, experts predict that this is likely to culminate in further all-round price hikes for products that utilize any of the commodities that are on the regulation’s hit list from palm oil to coffee to cocoa – to the ultimate detriment of consumers.

“​It is highly likely that the deforestation regulation will drive up prices for [the commodities including] palm oil, and there are two parts to this,”​ palm oil industry expert and Senior Policy Advisor for the American Association of the Indo-Pacific Khalil Hegarty told FoodNavigator-Asia​.

“First, the key factor here is going to be the costs of compliance - Although on paper the traceability and due diligence needs to be submitted by European firms to European authorities, it is going to be the producers and exporters that will need to provide that information. ​

“Although supporters might say something along the lines of ‘firms that haven’t deforested after 2019 or 2020 don’t have anything to worry about,’ this is not quite true. Firms still have to prove that they haven’t deforested. That is going to take time and money.​

“This is like any non-tariff barrier. It’s the nature of the compliance and regulation – making trade more difficult – that drives up the cost.”​

This part is going to be particularly difficult given that many of the producers are located in developing countries far away from the EU and are not always educationally or linguistically equipped to deal with these new mechanisms, as even within these countries a large majority of producers for commodities such as palm oil are smallholder farmers who have minimal grasp of these changes.

The other part is the highly-debated benchmarking system, which many have deemed discriminatory against most producer countries.

“Second, the regulation is going to distinguish between high-, low- and no-risk countries for deforestation - The proposals for the regulation argue that lower risk countries should have more straightforward compliance pathways,”​ said Hegarty.

“So developing and tropical countries that have higher levels of ‘deforestation’ will end up having higher compliance costs compared to EU member countries, or a country like Canada.​

“For some products this won’t matter. Cocoa and coffee, for example, don’t have competitors within Europe or in developed countries - But for the vegetable oil market, South East Asia’s palm oil often competes with sunflower that is mostly either grown within the EU or in Ukraine and European countries won’t be considered high risk.”​

Along those lines, obtaining say palm oil from South East Asia will now become much more expensive than before, and prices will go up - and as costs for the use of such a widely-used commodity are hiked up, so will the prices of end-products made using this.

There have been arguments that consumers, particularly those in the EU, could ‘just make the switch to other oils’ – but the switch is nowhere near as straightforward as it is on paper.

“[Will these changes] mean that sunflower is cheaper at the end of the day? Not necessarily,”​ said Hegarty.

“Prices tend to track each other, i.e. a palm price rise will prompt a rise for other oils – and this will flow through to consumers across the board. Or if those costs can be passed on, it will erode profitability for sellers.”​

Another area of consideration is that as it is palm oil is being used by many manufacturers and foodservice operators not only due to the lower price but also due to its suitability in processes such as frying, so much so that experts have declared it irreplaceable at this time.

It is also worth remembering that this change is likely to drive palm oil prices up – but not necessarily drive the prices of other edible oils down – so at the end of the day, consumers are the ones likely to pay the price.

“Doubly frustrating is that this measure is being introduced at a time of food price inflation, and this really isn’t going to do much to alleviate those concerns,”​ said Hegarty.

“We just saw what happens when the vegetable oil supply chain is disrupted. It doesn’t feel like EU policymakers are remotely sensitive to that.”​

Penalised despite all efforts​

Before the deforestation regulation was passed, a lot of effort was already ongoing in producer nations to address the concerns that the EU had brought up regarding sustainability and deforestation, making large strides and transformations especially in the palm oil sector.

“What is frustrating here is that nearly all of the palm oil going to Europe is certified sustainable and deforestation free and much of it is traceable,”​ he said.

“The systems being used by the major sellers and buyers adequately deal with this problem, [and] Indonesia’s national standard – ISPO – will provide legality and sustainability assurance for smallholders [in] the largest producer nation in the world.​

“But now palm oil – which has already met most of EU consumer concerns – is still going to be penalised.”​

Even more concerning is whether or not commodities in the same boat – produced in developing nations and having some trade competition with EU locally-produced items – will also meet the same fate moving forward, which Hegarty believes is a very real possibility.

“We will see similar patterns with commodities such as beef from Latin America, if the EU opens up its markets further,”​ he said.