The European Union Deforestation Regulation (EUDR) is set to be implemented by the end of this year, marking a significant development in food and drink regulations.
However, opposition to the regulation persists, largely stemming from concerns about the compliance costs it could impose on the food and beverage industry. Many critics argue that the financial burden may stifle innovation and efficiency.
A recent report by consultancy Profundo sheds light on potential compliance costs and their implications for end consumers in the food distribution sector. Understanding these costs is critical for businesses aiming to navigate the evolving landscape of food manufacturing trends.
What does compliance involve?
Ensuring compliance with the EUDR involves a multifaceted process. It requires businesses to gather pertinent information, documents, and geolocation data regarding their suppliers related to the specified commodities. This data must then undergo careful analysis and verification.
Companies are mandated to first verify whether their commodities were cultivated or produced on land that has experienced deforestation or forest degradation, ensuring adherence to local laws. For products with multiple geolocations, comprehensive checks for each area are essential. Subsequently, firms must adopt necessary risk mitigation strategies.
How much will these measures cost?
The Profundo report estimates compliance costs by consulting geolocation data firms, analyzing predictions from the European Commission, and referencing previous due diligence studies, including collaborations with WWF and Chain Reaction Research.
By scrutinizing twelve companies of varying sizes, the report forecasts compliance expenditures based on reported import volumes. On average, companies can expect to allocate 0.1% of their revenues, 1.45% of their operating profit, 1.89% of net profit, 4.33% of employee costs, and 58.77% of top management remuneration on compliance.
Notably, small-to-medium enterprises (SMEs) face higher costs in certain areas—averaging 0.17% of revenues compared to 0.06% for larger firms, while their personnel costs reach 5.28% versus 3.7% for larger companies. However, SMEs typically incur lower percentages of operating profit (0.92%) and net profit (0.91%) than their larger counterparts (1.71% and 2.38%, respectively). According to Gerard Rijk, who authored the report, “Many of these [smaller] companies have quite good profit margins.”
Analyzing individual companies reveals specific projections; for instance, Barry Callebaut might spend approximately 0.04% of its revenues annually on compliance, translating to an annual total of around 0.05%. In another case, Bunge would incur about 0.03% of revenues in ongoing compliance costs. Similarly, Touton’s costs are slightly elevated, with setup costs reaching 0.01% of revenues and recurring costs estimated at 0.08%.
Conversely, for smaller enterprises like Brazilian meat importer Frostmeat, setup costs also remain at 0.01% of revenues, yet ongoing costs jump to 0.253%.
Rijk highlights that geolocation data collection sometimes constitutes ongoing costs rather than initial expenditures due to the variability in supplier contracts. Moreover, purchasing certified commodities, such as RSPO-certified palm oil, can potentially lower compliance expenses, contingent upon the acceptability of certifier data by the European Commission.
Rijk further asserts that compliance with the EUDR “will help your share price, because it helps your reputation.”
How will these costs affect consumers?
Naturally, when businesses face increased costs, there is often a trickle-down effect that leads to higher consumer prices in the food and drink marketplace.
Thus, EUDR compliance could theoretically raise prices for consumers, as the added financial burden may be reflected in product costs. However, the report indicates that although this additional expense is not insignificant, it may not be overwhelmingly dramatic.
To arrive at this conclusion, the report assessed the proportion of EUDR-compliant commodities within final products. This analysis measured the impact of compliance costs on retail prices.
Consider cocoa, which could lead to a 0.007% increase in chocolate prices; coffee may rise by 0.018%, while palm oil’s contribution to price hikes could be 0.006%. Beef prices might increase by 0.066%, and soy-fed cow milk could see a minimal hike of 0.001%.
