CRR Report (09th November 2022) – EU Deforestation Regulation: Traceability Requirement Impact on Soy and Beef in Brazil

Following last July’s publication on the implications of the EU Deforestation Regulation for the palm oil industry, Chain Reaction Research (a coalition between AidEnvironment, Profundo and Climate Advisers) launched a new report discussing the traceability requirement of the new EU regulation on deforestation-free products and the feasibility of its implementation in cattle and soy supply chains in Brazil. Traceability is crucial to ensuring that commodity production is not linked to deforestation or forest degradation. Below are key takeaways from the report:

• The EU is a significant importer of soy, leather, and beef products, mainly from Brazil, that are covered by the EU Deforestation Regulation. In 2021, the EU imported 32 million metric tons (EUR 13.9 billion) of soy products and 739,000 metric tons (EUR 3.2 billion) of beef and leather products.
• Existing systems and tools provide feasible options to expand traceability in cattle supply chains to include the crucial indirect suppliers. Although the fragmentation of the Brazilian cattle supply chain poses challenges to full traceability, using available systems and tools that can trace cattle beyond slaughterhouses and direct suppliers makes it possible.
• Full traceability of Brazilian soy supply chains is possible and is already part of existing sector agreements. The Amazon Soy Moratorium already lays much of the groundwork required by the EU Regulation in terms of traceability. Nonetheless, challenges still exist, such as coverage of all indirect supply and extension of traceability efforts to other biomes, such as the Cerrado.
• Market leakage and segregation can be avoided while implementation costs will likely become negligible over time. As long as traceability to the plot of land is ensured, segregation is not required. Market players can avoid leakage by making traceability a default component of the management of both cattle and soy supply chains, no matter the destination market.
• Traceability may play a role in supply shortages while also creating legal and reputational risks for operators, traders, and downstream actors. The implementation of the EU Law can hamper operators’ supply capacity. In addition, failing to comply with the EU Regulation’s requirements may lead to legal and reputational damage for operators, FMCG companies, and retailers.
• Costs of compliance are relatively low for downstream actors. They generate high profits on embedded soy and beef and would be able to prevent reputation damage. While still excluded from the Regulation, banks and investors face reputation and investment risk when assets do not comply with the EU Law.