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New EU deforestation regulation could threaten the palm oil sector

The European Union (EU) regulation fighting deforestation could lead to further inflated prices for consumers as well as higher costs and unfair competition for food manufacturers globally, according to multiple affected industry experts.

Deforestation is happening at an alarming rate. In the 10 years to 2020, an area larger than the EU was lost to deforestation, according to estimates from the UN Food and Agriculture Organization (FAO). Deforestation is mainly caused by agricultural expansion for commodity production; beef, palm oil, and soy account for a staggering 80% of tropical deforestation worldwide, while EU consumption represents approximately 10%.

In an attempt to protect the world’s forests and terrestrial biodiversity, the EU parliament recently approved the heavily debated regulation on deforestation-free products. Voted in on 13 September 2022, the regulation mandates all companies operating in Europe to ensure that commodities sold within the EU are “deforestation-free”, otherwise meaning they “have not been produced on deforested or degraded land”.

The regulation has experienced a backlash from various industry stakeholders, particularly those working in commodity production in the developing world, who claim that it will cause unfair competition with goods produced inside Europe as well as price hikes for consumers.

From cocoa to palm-oil: The affected goods

Globally, consumers are growing increasingly aware of where their food and drink products come from and how they are sourced. As climate concern mounts in much of Europe and beyond, over one in eight consumers (82%) believe that businesses should refrain from selling products that harm the planet’s forests, a recent European poll found. Meanwhile, a large majority of consumers (78%) think that products produced from deforested areas should be banned for sale by governments.

Responding to this consumer demand, the proposed regulation will oblige businesses to undertake due diligence to evaluate threats in their supply chains, ensuring that products sold in the EU do not in any way contribute to deforestation practises, and ultimately climate change and biodiversity loss.

Cattle, cocoa, coffee, palm oil, soy, wood, as well as any products containing these commodities such as chocolate, are all subject to the regulation. While a proposal from the EU parliament could also see the regulation extended to include pig-meat, poultry, sheep and goats, maize and rubber, and charcoal and printer paper products.

“We are serious about fighting climate change and biodiversity loss. Acknowledging that the EU is responsible for around 10% of global deforestation, we have no choice but to ramp up our efforts to halt global deforestation,” said Christopher Hansen, EU spokesperson.

“If we get the balance right between ambition, applicability and [World Trade Organization) WTO compatibility, this new tool has the potential to pave the way to deforestation-free supply chains.”

A blow for the palm oil sector?

Palm oil, traditionally produced and imported to the EU from southeast Asia, is likely to be one of products most heavily affected by the regulation. Under the regulation, palm oil producers will be required to report and prove that their activities in producing products do not infringe on anti-deforestation laws or practices. This process, it is expected, will demand a significant time-money investment, which is likely to impact heavily on the most developing nations that lack the knowledge, skills, and resources required to undertake the necessary steps.

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“Europe’s proposal is unscientific, and will lead to higher food prices. It is an attempt to protect European interests that cannot compete in the marketplace with Malaysian palm oil,” a spokesperson from the Malaysian Palm Oil Council (MPOC) told Ingredients Network.

The regulation will be based on a benchmarking system which classifies high, low, and no-risk countries vis-à-vis their deforestation risk. Countries classes as low to no-risk, such as those within the EU, will benefit from simpler and quicker compliance pathways than those considered high-risk. In this regard, the non-EU palm oil sector could face competition from alternative oils produced within Europe, such as sunflower oil which is a common alternative to palm oil.

Yet with average vegetable oil prices currently higher than ever before, having risen by over 200% in two years alone, this does not bode well for consumers. Challenges in the supply of sunflower oil fuelled by the Ukraine war, caused the cost of vegetable oils to hit a record high last February and increase by a further 30% in the month following the invasion.

For manufacturers looking to switch from palm to sunflower oil, the path ahead may not be so straightforward.

“We encourage Brussels to pursue an alternative path: one of cooperation and mutual respect for the standards and farmers of their trading partners,” MPOC said.

Further price hikes for consumers

Despite promising to ease the pressures of climate change, experts have predicted that the regulation could ultimately result in price hikes for consumers, with the most scrutinised products such as palm oil and coffee expected to be worse affected. This comes at a time when much of the world is experiencing record inflation and a cost-of-living crisis that is driving up the price of food and drink.

In April, the FAO’s food price index, which records prices of the world’s most commonly traded food commodities, increased by almost 60% from the rate it stood at six years prior, reaching its highest point since records began.

It does not come as a surprise then that rising food prices are now the top consumer concern, with a recent McKinsey survey revealing that for sixty percent of British respondents the price crisis was their main source of worry, followed by 40% of Spaniards, 44% of French respondents, 40% of Germans, and 32% of Italians.