To stick, the EU’s deforestation regulation needs to protect forests without sidelining small farmers
Reuters (24/06/2026) - June 23 - When the European Union passed its groundbreaking deforestation regulation (EUDR) in 2023, it was based on a simple premise: if you want to sell certain commodities into the European market, you must prove they are not contributing to deforestation or forest degradation. Forests have long been under pressure, and the production of cocoa, coffee, palm oil and other commodities plays a significant role in that loss.
But when a regulation meets a value chain built around millions of smallholder farmers across the world, “simple” on paper becomes “complicated” on the ground.
The EUDR is now moving toward full application, but it remains unclear whether it can protect forests without pushing smallholders out of the market, with potentially severe consequences for populations and economies, as well as corporate supply chains.
Compliance requires granular, reliable data, and large commodity traders have invested heavily in meeting its requirements. They have the capital to build up the required personnel, digital infrastructure and systems, and they have the scale to insist that their suppliers meet the same standards.
Small and medium exporters, local traders, cooperatives and licensed buying companies operate in long, intermediary-heavy supply chains. Many aggregate their stock, buying from hundreds or thousands of smallholders, who lack formal land documentation, digital records or any prior exposure to geolocation-based traceability.
If they want to sell into Europe, buyers must know – and be able to prove – where a commodity was produced, confirm it was legally sourced and verify it is not linked to new deforestation. The traditional practice of mass-balancing, where certified products can be mingled with non-certified products in the supply chain, is no longer allowed.
Non-compliance risks are no longer negligible, so buyers and manufacturers must assess and mitigate their exposure. And the measures they have available to do so, while technically feasible, all come at a cost. For many smallholders, and the organisations that buy from them, the operational burden is often prohibitive.
These realities have already split cocoa sourcing into at least three distinct and more vulnerable streams. The first includes advanced supply chains sourcing from clearly low-risk areas. These are regions where farms are distant from forests, and deforestation risk can be demonstrated at scale without intensive farm-level verification.
The second stream involves buyers acting as filters. Faced with compliance risk, they assess their supplier networks and exclude farmers deemed too risky, including those located near forest boundaries. These farmers, despite not necessarily contributing to deforestation, are pushed into informal markets and toward less regulated buyers.
The third stream captures supply chains where the cost and complexity of compliance outweigh the benefits of EU market access. In these cases, entire value chains exit the European market altogether, redirecting trade to non-EU buyers, often at lower prices.
The exclusion of farm holders in these market streams is not only a social failure. Fragmented markets are more fragile and less resilient to internal and external shocks. A split market also means smaller supply and demand pools, which lead to more volatility and risk of imbalances.
The costs of EUDR compliance land at an uncomfortable moment, particularly in cocoa markets, which have experienced extreme volatility over the past two years, driven by supply disruptions in Ghana and Ivory Coast. Absorbing additional compliance costs is harder when margins are already squeezed and the cost of supplies are uncertain.
Also uncertain is the market’s willingness to pay premiums for EUDR-compliant cocoa. Particularly in the absence of global standard alignment, those premiums can create disadvantages against non-compliant competitors. When compliant supply exceeds demand for it, sellers are forced to sell at conventional prices, which erodes the returns that justified compliance investment in the first place.
As in any business, these elevated costs and loss of margin move down the chain, from traders to cooperatives and finally to farmers. In these contexts, the incentive grows at all levels to misrepresent origin, blend supply or exploit weak enforcement.
However, at Palladium we have seen firsthand how targeted technical assistance and financial support allowed several small and medium enterprises, working with thousands of smallholders in Ghana, to maintain access to European buyers.
For example, one Ghana-based cocoa business sourcing from farmer groups in mixed agroforestry systems faced a stalled commercial relationship with an international buyer. Their cocoa was being grown in a low-deforestation context, but they lacked the geospatial data, governance records and internal capacity to respond to increasingly detailed compliance questions.
But with support from Regeneration’s Markets Readiness and Technical Assistance Facility these businesses were able to map farms, digitise supplier records, strengthen internal controls and align traceability systems with EUDR requirements, re-establishing the confidence of their buyer within a single sourcing cycle.
There are also encouraging signs that the sector is beginning to respond collectively. In recent years, new alliances have emerged across the cocoa industry, reflecting a shift from voluntary commitments toward shared standards, producer-led frameworks and greater accountability. Initiatives focused on supply chain resilience and closing the living income gap are gaining traction, alongside coalitions advocating stronger enforcement of deforestation and human rights regulations.
Producing countries are also taking a more assertive role. The joint sustainability standard introduced by Ivory Coast and Ghana sets mandatory requirements on traceability, deforestation and social safeguards.
There is a legitimate debate about regulation versus voluntary action, but deforestation is too high, and the threat too urgent, to argue for inaction. EUDR reflects a political judgement that voluntary commitments have not been sufficient. It will almost certainly be refined, but it is unlikely to disappear, and it may prove to be a template for more governments, sectors and industries around the world.
The test now is whether buyers, regulators, and sustainability leaders invest where exclusion risk is highest. The EUDR will only deliver lasting impact if smallholders are treated not as compliance risks to be managed, but as partners the system cannot afford to lose.