(Bloomberg) -- The European Union’s move to delay of rules that would ban the import of crops linked to deforestation is creating upheaval for big traders’ long-set plans to meet the new demand.
Traders of everything from soybeans to coffee to rubber have been working for months to line up supplies to meet the new rules — and paying premiums to farmers who raise qualifying crops. The EU Deforestation Regulation, which would have gone into effect at the end of the year, is expected to be put off for another 12 months after the bloc votes on the matter.
The delay of EUDR is creating uncertainty for traders including crop giant Archer-Daniels-Midland Co. who may lose sales and farmers who have already been facing low prices amid big global crop supplies. At the same time, the postponement will likely shift the flow of grains and oilseeds cargoes, as scrutiny eases and lower-cost suppliers such as Brazil are favored over countries including the US.
Importers in the EU could back out of pricier cargoes of deforestation-free coffee or soybeans and instead choose cheaper shipments without the necessary certifications. Prices for coffee have dropped 9% from a 13-year high on Sept. 26 amid easing supply concerns, while soybean meal futures have fallen about 5% this month.
“The stakes are high when you’re developing a market based on policy, no matter the commodity,” said Susan Stroud, a crop analyst and former trader based near St. Louis. “Risk is real because it can create winners and losers in the blink of an eye as well as a laundry list of unintended consequences with far-reaching implications.”
ADM as well as some of the world’s largest coffee traders such as Sucafina SA and Ecom Agroindustrial Corp. were positioning to become the winners of the EU’s new market. But the rules faced fierce criticism from countries such as the US, Brazil and Germany amid concern they’d hurt smallholder farmers and curtail key exports.
Here’s a look at some key commodities affected by the delay:
Soy
ADM offered to pay premiums of up to 20 cents per bushel for farmers who could prove their soybeans were sourced from land that wasn’t recently deforestated. More than 5,000 farmers had signed up and the company was set to keep those beans separate from others at over 20 of its locations.
The Chicago-based company said it remains committed to the program. “We are monitoring developments, and will continue to work with our partners and stakeholders as new information becomes available,” an ADM spokesperson said.
Among the so-called ABCDs of global crop traders, ADM, or the A, was leading the charge to sell deforestation-free supplies into the EU. Cargill Inc. and Bunge Global SA didn’t have dedicated programs in the US. Louis Dreyfus Co., the D, didn’t respond to requests for a comment.
The EU is the second-biggest market for US soybeans and accounts for about 7% of soymeal exports, according to the US Soybean Export Council.
The delay of EUDR is likely to benefit Brazil, where it’s more difficult and expensive to prove supplies are from areas that weren’t deforested, according to traders. Now that the rules are being held back, soybean traders who were favoring US shipments are now turning back to cheaper cargoes from Brazil, they said.
Coffee
Coffee traders have been paying 3 to 5 cents above futures in New York to meet the EU rules. The traders now believe appetite for those contracts is likely to decline, which ultimately would cause the premium to fall significantly or even disappear until next year.
For existing contracts, though, premiums should remain in place, Dave Behrends, head of trading at Sucafina, said in a social media post. He also expects roasters will continue to request full EUDR data from suppliers so they can run trials.
A delay in the implementation of new rules means the industry no longer has to worry about the risk of fines in case problems emerge during such trials. One of the main concerns of the coffee trade was the possibility that exporters and importers could come to different conclusions when analyzing data.
Brazil exporter group Cecafé, for example, said false deforestation alerts were noticed due to technological issues in the system used by Europeans.
Rubber
EUDR-grade rubber has fetched a premium of about 3 to 5 baht (9 to 15 cents) per kilogram in auctions in Thailand, the world’s biggest producer and exporter of natural rubber.
But the ongoing uncertainty surrounding the proposed delay is causing significant ripples across the market and may reduce premiums for EUDR-grade rubber in the short term, said Farah Miller, head of commodities at Smartkarma.
Still, Thailand said this week it will continue the rubber auctions despite the potential delay. They were one of the most prepared for the EUDR because of government support, Miller said. Concerns about poor weather in Thailand have also kept flat prices elevated.
--With assistance from Mumbi Gitau, Tarso Veloso, Hallie Gu and Patpicha Tanakasempipat.
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