The fight against deforestation is intensifying. The new European Union’s Deforestation-free Regulation (EUDR) compels companies placing products on the EU market to prove the provenance and journey of their commodities to prevent imports from recently deforested land or imports that have contributed to forest degradation. The EU rules require robust digital solutions to trace products from producer to consumer.
This blog discusses how EUDR can spur innovation in the agricultural last mile but also potentially create market access barriers for smallholders and agribusinesses lacking the financial and technological means to comply with the regulatory framework.
Deforestation triggers biodiversity loss and climate change
Forests play a crucial role in carbon storage and biodiversity preservation. Despite their significance, alarming rates of deforestation are observed globally. Over half of the world’s tropical forests have vanished since the 1960s, with approximately 2000 trees (equivalent to 11 football fields) being cleared every minute. Some projections suggest the complete disappearance of rainforests by 2100.
Although deforestation is a global issue, top countries for primary forest loss by area in 2022 included Brazil, the Democratic Republic of the Congo, Bolivia, Indonesia and Peru. Deforestation primarily occurs to make space for agriculture, animal grazing, and to obtain wood for fuel, manufacturing, and construction. Agricultural expansion, in particular, results in nearly 90% of global forest loss. Commodities like beef, palm oil, soybeans, timber, rubber, cocoa, and coffee are frequently linked to deforestation within global supply chains.
This trend has far-reaching consequences for our planet, triggering carbon emissions, biodiversity loss and global warming. In fact, deforestation has been identified as the second-largest contributor to climate change, solely responsible for 15% of carbon emissions.
Regulatory frameworks for deforestation-free commodity markets
Recognising forests’ vital role in combating climate change and biodiversity loss, governments worldwide are imposing regulations to restrict the trade of products tied to deforestation.
While efforts in the past primarily targeted the timber supply chain, with measures such as the EU Timber Regulations (2010), the UK Timber Regulations (2013), and Australia’s Illegal Logging Prohibition Act (2012), the European Union has elevated requirements to other commodities in 2023 with the introduction of EUDR. This new rule aims to guarantee that the agricultural produce consumed in the EU, including cattle, wood, cocoa, soy, palm oil, coffee, rubber, and some of their derived products, such as leather, chocolate, tyres, or furniture, does not contribute to “deforestation and forest degradation, which would accentuate global warming and biodiversity loss”. It mandates companies to have complete supply chain visibility and traceability down to the farm level.
Traceability compliance pushing digital innovation to the agricultural last mile
The traditional pen-and-paper methods used for tracking produce in the agricultural last mile are ill-suited for the stringent traceability requirements of EUDR and other similar regulatory frameworks. Prone to errors and loopholes, these traditional methods fall short of providing the necessary value chain due diligence envisioned in the regulation. Instead, robust digital solutions are needed to collect, store and share information about the commodity’s provenance and journey, including geolocation information of the plot of land the commodity was sourced from. These digital solutions leverage a combination of innovative technologies, including:
- Distributed ledger technologies, such as blockchain, create a secure, shared ledger where all value chain actors (farmers, processors, retailers) can access and verify information about the product’s journey, preventing data tampering.
- Electronic tracking methods such as QR codes and RFID tags are affixed to produce easy scanning and real-time tracing throughout the supply chain.
- Satellite imagery pinpointing farm geospatial coordinates to verify historical land-use practices and compliance with deforestation regulations.
Over the past decade, an increasing number of agritech companies in low-and-middle-income (LMICs) countries, like J-Palm in Liberia and Koltiva in Indonesia, have developed digital solutions for supply chain traceability. These solutions serve various purposes, including compliance with certification standards, improved supplier management through supply chain information, and transparency for consumers, investors, and policymakers in regard to ethical practices along the value chain. Despite their early emergence, the adoption of these solutions has been limited so far.
Because EUDR is now making traceability a requirement for any business hoping to access the EU’s 440 million consumer market, there is a significant opportunity for agritechs to expand digital innovation across the agricultural last mile. Some agritech companies are already fine-tuning their services for easier compliance with EUDR.
For example, the supply chain management platform eProd, who considers EUDR as a catalyst for business expansion in the agricultural last mile, is tailoring its existing traceability solution, eProdTrace™, to fit the new requirements. Their current mobile app can already map farmer fields using GPS polygons, gather farmer data (including planting material and certification schemes) and track produce using QR codes. However, the company must develop new functionalities to export data in formats that comply with the new regulation. eProd is also currently working on integrating historical satellite data into mapped fields to identify plots that have been deforested in the last three years or that are at risk of potential deforestation. The company is piloting the use of satellite data in cocoa farms in Cote d’Ivoire. Finally, eProd plans to support EUDR’s risk mitigation efforts by raising awareness of EUDR compliance and deforestation risks through farmer training and community engagement.
Another example of EUDR-compliant digital innovation in the last mile is iov42’s software Interu. The digital solution has been designed to collect traceable data points between participants in the timber supply chain that can be captured in one place and shared securely and privately through iov42’s bespoke distributed ledger technology. With EUDR requirements in mind, iov42 has expanded the software’s scope to additional commodities (cocoa, rubber, palm oil, cotton, and animal products) and is building a mobile app to capture farms’ GPS coordinates and other required data points (e.g., crop type, farmer name, etc.). The company will be able to leverage their existing integration with the geospatial company to provide 3rd party verification of plots of land.
EUDR can also create market access challenges for smallholders and small commodity traders
Despite digital solutions being developed to support EUDR’s implementation in the agricultural last mile, the cost of rolling these out can impede farmer cooperatives and agribusinesses from adopting them. These costs go beyond software and equipment acquisition (e.g., mobile devices, and software licenses). Upcoming research by NGO Nitidae suggests that software license fees (usually ranging between USD 5,000 to 10,000 annually) might actually be marginal in comparison to the substantial investment required for capacity building and human resource training.
“Hiring and training staff – such as cooperative clerks and field agents – on traceability technologies likely represents the highest investment for value chain actors,” says Julien Gonnet, Project Manager at Nitidae.
As a result of these compliance costs, some traders are already reconsidering their sourcing strategies from LMICs. For example, coffee importers to the European Union are starting to scale back purchases from smallholder farmers in Africa due to their inability to fully comply with EUDR’s traceability requirements. Instead, they prefer to engage with larger farmers in Latin America who have already adopted and used traceability solutions. The repercussions of these shifts in commodity sourcing could have drastic consequences for smallholder farmers and national economies in LMICs. Ethiopia, for example, could lose 7.5% of its total export earnings if its coffee beans can’t be placed in the European Union anymore.
To ensure that small commodity traders and the smallholders they source from are not left behind, targeted action is imperative. Multistakeholder collaborations between agritech companies, NGOs, donors and/or investors, like the USAID/Feed The Future ‘Partnering for Innovation Programme’, can help leapfrog traceability technology adoption by agribusinesses. These collaborations can provide catalytic funding and technical assistance towards the development of inclusive solutions and build the knowledge base and capacity of agribusinesses, cooperatives and their farmers on regulatory traceability requirements so they are able to navigate the new rules and continue participating in international trade, safeguarding their livelihoods in the process. Governments also need to ensure enabling environments and proper incentives are in place to allow seamless application of the regulation. For example, governments can organise inclusive stakeholder consultations with agritechs, trade and commodity associations and value chain actors, to help identify implementation challenges and improve local knowledge of the new rules. They can also provide financial incentives, grants or subsidies to support compliance with EUDR, and capacitate agricultural extension officers to support farmers and small commodity traders with the transition.
Conclusion
EUDR is accelerating digital innovation in the agricultural last mile. Agritech companies like eProd and iov42 demonstrate how digital solutions can be tailored to enable last-mile traceability. However, the high costs of implementation, particularly in terms of capacity building and human resources, pose significant barriers for small-scale value chain actors.
Without targeted support to address these challenges, there is a risk that smallholder farmers and small-scale agribusinesses in LMICs will be left behind in the transition to EUDR compliance.
The GSMA AgriTech Accelerator is funded by the German Federal Ministry for Economic Cooperation and Development (BMZ) and supported by the GSMA and its members.
