Analysing commodity market connections between the EU and Brazil, Indonesia and Colombia
In recent years, international demand for agricultural commodities such as soy, palm oil, and coffee has grown tremendously, raising concern about impacts of the global commodity trade on forests, landscapes, the climate and producer groups. In response, there have been calls for actors in key destination markets, such as the European Union (EU), to step up action to support sustainable commodity trade and strengthen partnerships with producer countries.
The rising importance of this agenda in Europe in particular has coincided with a marked reduction of the EU’s market share in these global commodity markets. Soy produced in Brazil is case in point: until 2006, the EU was the main foreign market destination; but by 2018 with 11% of the market, the EU was far behind China (57%). Similarly, the EU’s market share of Indonesian palm oil fell from 17% in 2013 to 12% in 2019.
However, national-level trade statistics mask important nuances in these complex commodity markets. Subnational trade data for three major agricultural commodity markets where the EU is not the first destination market – soy produced in Brazil primarily going to China, Colombian coffee primarily going to the United States (US) and Indonesian palm oil primarily going to India and China – show strong market relationships in each producing country with the EU market or EU-based companies in many subnational regions. These relationships are of key importance for the transition to sustainable commodity production more broadly.
In this insight, market connections between a production region and the EU are considered strong when:
- the EU is the first or second destination market for commodities from the region; or
- trader groups headquartered in the EU rank first or second in the share of traded commodities produced in the region.
Market relationships between producer countries and the EU appear to be much stronger than national-level market share statistics suggest. Strong market relationships extend to 86% of internationally traded coffee from Colombia, 56% of palm oil produced in Indonesia, and 50% of Brazilian soy.
Identifying strong market relationships between subnational production regions and destination markets that are advancing more stringent sustainability requirements is one important step in Step 4 – Supply chain tracking to jurisdictions of the Transparency Pathway. Tracking commodities from producing jurisdictions through supply chains is a critical element in support of effective partnerships between producer and consumer nations. This is especially important given current discussions of new regulations in consumer countries that would introduce sustainability standards for the production and trade of certain commodities. These new standards will require tracking to verify progress and to identify where further support might be needed.
Leadership positions of the EU market in key production jurisdictions
A review of recent, publicly available, subnational data compiled and processed by the Trase initiative in three commodity markets shows that the EU held the top or second market position, in terms of the percentage of volume exported to the EU market, in:
- 18% of soy producing municipalities in Brazil,
- 59% of Colombia’s coffee producing departments, and
- 35% of Indonesia’s palm oil producing districts.
For this insight, the data on palm oil from Indonesia is from 2015. Soy supply chain data from Brazil covers the period from 2016 to 2018, and coffee data from Colombia spans 2014 to 2016, due to differences in data availability. To determine the EU export market share position, we averaged the total production in each subnational jurisdiction to a particular destination market across years for the soy and coffee contexts.
In Colombia, the EU held the dominant share of the coffee export market in Caldas and Magdalena, two of the 18 departments that exported coffee to the EU (based on Trase data for 2014 to 2016). In 11 other departments, the EU was the second destination market, generally after the United States.
Caldas, one of the three important departments of the “coffee triangle”, had the highest coffee production for the EU across all departments and was one of the top coffee producing departments for all markets during this period. While much of the focus on deforestation in Colombia has been centred on the Amazon region, an analysis by Trase estimates that 110 000 hectares (ha) of forest in Caldas and 160 000 ha in Magdalena are at risk of future conversion into coffee cultivation by 2050. It is expected that climate change will affect where coffee can be grown and that farmers will in the future shift coffee cultivation to currently forested areas.
In Brazil, the EU market held the dominant position in the soy export market in 123 municipalities (on average for data from 2016 to 2018). These municipalities produced 24.7 million tonnes of soy between 2016 and 2018. When combined with those municipalities where the EU held the second market position, they produced 136 million tonnes of soy, equivalent to 41% of the total national production during those three years. Many of these municipalities are located in the Cerrado region where the conversion of forests and natural ecosystems for soy has been the highest in Brazil.
With palm oil production in Indonesia, an interesting spatial pattern emerges that points to the opportunity not only for district level but also regional prioritisation. While production of palm oil for the EU market occurred throughout the country, the EU was the top destination market for palm oil produced in 35 districts, 34 of which are clustered in the southern part of Sumatra (2015 data). This area of Sumatra is home to some of the country’s remaining peatlands and is also where frequent forest and peatland fires have become a major concern.
Leadership positions of key companies trading between producing countries and the EU market
Identifying the companies involved in the critical junctions of trading relationships between the EU and producing countries can be used as leverage points to concentrate action. In each of the three markets, there are hundreds of companies exporting these commodities. But taking a closer look at the key subnational jurisdictions where the EU was the dominant foreign destination market for commodities produced in those jurisdictions, just a fraction of those exporter companies are involved in the trade of commodities in each context.
Between 2014 and 2016 in Colombia, just two companies exported nearly 90% of coffee produced for the EU market in Caldas and Magdalena, the two key departments previously identified in the analysis of jurisdictions where the EU was the top destination market for coffee.
Trader groups exporting coffee from key Colombian departments to the EU, 2014-2016
Similarly in Brazil, while there were 50 exporter groups operating in the 123 key municipalities, only about one-fifth of those (11 companies) handled 90% of soy volume exported to the EU market between 2016 and 2018.
Trader groups exporting soy from key Brazilian jurisdictions to the EU, 2016-2018
In Indonesia, 91% of palm oil produced for the EU market in the 35 key districts was exported by just five companies in 2015.
Trader groups exporting palm oil from key Indonesian jurisdictions to the EU in 2015
Narrowing down further, we can identify the main trader groups operating within those key jurisdictions where the EU market holds the top export market share position. By exploring in more detail the operations of the main trader groups exporting to the EU in key sourcing localities, EU actors and producer country partners can further target and tailor their efforts to promote the sustainable production and trade of agricultural commodities to a handful of jurisdictions and companies.
In Colombia, for instance, Federación Nacional de Cafeteros and SKN Caribcafé LTD are the dominant trader groups in terms of average volume handled in the two departments where the EU is the top export market. Between 2016 and 2018, Federación Nacional de Cafeteros exported 91% of the coffee destined for the EU market from Caldas (113 148 tons), while in Magdalena, SKN Caribecafé exported 73% of the coffee produced (11 404 tons) for the EU market.
From 2016 to 2018 in Brazil, the trade of soy was dispersed across a larger set of exporter groups operating in the key jurisdictions for the EU market. Thirty-two different exporter companies held the top spot (in terms of highest average trading volume) in at least one of the 123 key Brazilian jurisdictions.
The opposite occurred in Indonesia in 2015. A single exporter, Sinar Mas, was the dominant trader in all but six of the 35 districts where the EU market held the top share of palm oil exports. In nearly three-quarters of those districts, Sinar Mas exported over 95% of palm oil produced for the EU market in 2015.
Leadership positions of EU-based companies
Deepening the focus to traders in analysing subnational trade data for Brazilian soy, Colombian coffee, and Indonesian palm oil, we identify:
- key EU-based importers,
- those companies importing at least 0.1% of total production from the three commodity markets, and
- the subnational jurisdictions that they source from.
This analysis points to possible levers of corporate action and opportunities to upscale sustainability efforts. When combined with the analyses of jurisdictions and trader groups sourcing for the EU market, the analysis shows the potential scale of influence that European regulations as well as partnerships between producer and consumer countries may have on commodity supply chains.
We compiled the location of each company’s headquarters for all of those importers handling at least 0.1% of total production across the three country-commodity contexts. A review of this supply chain data shows that EU-based companies handling at least 0.1% of total production make up less than 2% of the total number of importers across the three markets but traded a significantly higher proportion of total traded volumes.
Proportion of total volume traded internationally by EU-based importer companies
26.7 million tonnes of palm oil from Indonesia were traded by 523 companies in 2015. Of those, only four companies handled at least 0.1% of total volume and were based in Europe. Louis Dreyfus, SIPEF NV, Kasteel Calesberg, and Koepcke Food Export Gmbh & Co Kg imported 989 006 tonnes combined, equalling 4% of palm oil destined for the international market in 2015.
In the Brazilian soy sector, a larger share of the trade of soy for the international market was captured by a handful of European based companies. From 2016 to 2018, three EU-based companies traded 13% of total volume for international consumption (30 360 635 tonnes).
Greater leverage exists in the market for coffee from Colombia. In Colombia, the market is considerably less concentrated with 1 594 companies handling 2.1 million tonnes between 2014 and 2016. Of those companies, 29 have headquarters in the EU and traded at least 0.1% of the total volume. These EU-based companies handled just over a quarter of coffee (262 902 tonnes) imported to the international market.
Linking producing jurisdictions to trader groups
By examining data on production and trader groups compiled by the Trase initiative, we identify the key jurisdictions for European-based importers. Subnational jurisdictions were deemed important for this analysis if European-based importers held the top or second position in terms of total volume traded from a given jurisdiction.
In Indonesia, two EU-based importers, Louis Dreyfus and SIPEF NV, held the top or second position in terms of volume of palm oil traded by company in 19 jurisdictions in 2015.
In Brazil, three EU-based importers had the top or second-largest share of soy traded from 505 jurisdictions between 2016 and 2018.
In Colombia, no EU-based importers held the top or second position in terms of traded volume from any subnational jurisdiction. When we expand the scope to importers based in other European countries, such as Switzerland, two importers had dominant shares of the internationally traded coffee market in 8 out of 22 coffee producing Colombian departments between 2014 and 2016: Starbucks Coffee Trading Company, a subsidiary of the American Starbucks Corporation based in Switzerland, and Volcafe.
Strong relationships with the EU market
Potential levers for strategic partnerships between producing countries and the EU multiply when examining the jurisdictions important for meeting EU demand for commodities as well as key EU-based traders and the jurisdictions where they source from.
The chart below illustrates how we identified the potential scope of EU influence when examining multiple points of EU trade leverage. Using data for the market for Indonesian palm oil as an example, we considered the proportion of producing jurisdictions with strong market connections between a particular region of production and the EU, either because:
- the EU was the first or second destination market for palm oil from the jurisdiction, or
- EU-based companies were first or second in the share of traded palm oil from the jurisdiction.
The number of boxes in colour represent the percentage of producing jurisdictions that make up the combined scope of EU leverage (39% for Indonesia). The colour of the boxes indicates the proportion of jurisdictions identified in each analysis taking into account the overlap of jurisdictions identified as important in both analyses.
- Orange = jurisdictions where the EU was the first or second destination market only
- Yellow = jurisdictions where EU-based companies traded the largest or second largest share of the traded commodity only
- Red = jurisdictions where both conditions were met
Combined EU leverage in the trade of Indonesian palm oil as determined by the proportion of producing jurisdictions with strong relationships with the EU market
Percentage of producing jurisdictions with strong relationships with the EU
Strategic opportunities for partnerships between these leading producer countries and the EU are considerable when looking at both the jurisdictions where sourcing for the EU market dominates, and jurisdictions where EU-based importer groups hold the top or second market position (green bars in figure below). From that perspective, the EU market potentially holds a significant influence in 36% of producing jurisdictions in Brazil, 39% in Indonesia, and 59% in Colombia. When comparing leverage points, we observe nuances across markets as the level of influence from EU-based companies is greater than from the EU destination market in Brazil, while the opposite is true in Colombia and Indonesia.
Proportion of total commodity markets with strong relationships with the EU
In addition, the potential scope of influence from the trade of commodities between the EU and producing countries was also examined in terms of traded volumes. The scope of influence was calculated as the proportion of internationally traded volume produced in key jurisdictions (those where the EU was the top or second destination market or where EU-based importers ranked first or second in the share of traded commodities).
In those key jurisdictions with strong relationships, the EU holds substantial influence with the potential to impact 86% of internationally traded coffee produced in Colombia (1.8 million tonnes), 56% of palm oil from Indonesia (15 million tonnes), and 50% of Brazilian soy (125 million tonnes). Comparing the potential leverage across analyses, we find that in terms of volumes from key jurisdictions, greater leverage lies with the EU as a destination market than with EU-based companies.
Caption: This figure shows the percentage of commodity exports destined for the EU (black) and the percentage of total volume that was exported from key jurisdictions identified as having strong relationships with the EU (green).
A closer examination of subnational data reveals different patterns of subnational market relationships across the three country-commodity contexts and, importantly, points to much more significant market leverage for partnerships between producer countries and the EU than a simple national level analysis of trade data would suggest.
According to recent national trade data for each country-commodity context, the EU’s market share was just over 10% for Brazilian soy and Indonesian palm oil, and about a quarter of the market for Colombian coffee. In contrast, our analysis shows that much more significant portions of these markets – more than half of the traded volume in the Brazilian and Indonesian contexts and up to 86% of traded Colombian coffee – have strong relationships with the EU market, when taking into account the combined leadership positions of the EU as a destination market and multinational companies registered in the EU.
Given the scale of this trade in forest-risk commodities and the adverse impacts caused by their production and trade, coordinated, targeted, and effective action is needed to promote sustainable supply chains. While the scope of potential action is immense, this review of subnational supply chain data in three major commodity markets shows opportunities for key actors — such as producer countries, the EU and companies in the middle — to leverage their influence at different positions in global commodity supply chains to promote sustainable production and trade.
Identifying strong market relationships between producing jurisdictions, trader groups and destination markets through supply chain tracking and improved transparency — a fundamental element of Step 4 – Supply chain tracking to jurisdictions — is important for supporting stronger and trusted partnerships between producer and consumer nations for sustainable trade.