In a major step forward, eight French grocery store chains late last year signed an agreement to eliminate soy grown on deforested land from their supply chains through strengthening sourcing policies. Based on this agreement, the supermarkets will include no-deforestation clauses in supplier contracts to curb deforestation in the Brazilian Cerrado biome. European retailers have been under pressure to mitigate deforestation risk, due primarily to tightening EU regulation on deforestation-free supply chains. Shifting consumer preferences have also played a role as over 70 percent of consumers report a willingness to pay more for sustainable products. The combination of legal, market access, financing, and reputation risks is increasing the potential financial consequences for retailers if linkages to deforestation emerge, especially amid opaque supply chains and mounting deforestation rates in Brazil. The recent agreement represents an effort to both fulfill French demand for an essential commodity, while mitigating the risk of environmental, social, and governance (ESG) impacts through supplier contracts.
The connection between soy supply chains and the Cerrado biome
Deforestation in the Cerrado has been in the spotlight as the global demand for Brazilian soy spiked in 2020 amid U.S.-China tensions and a devaluation in the Brazilian real. The two million-kilometer squared Cerrado provides essential ecosystem services through supporting biodiversity, carbon storage, and clean drinking water, but only one-fifth of the original vegetation remains intact. Since the 2006 Amazon Soy Moratorium successfully curbed soy-driven deforestation in the Amazon, production has shifted to the Cerrado, which now produces 60 percent of all Brazilian soy. Because the Brazilian Forest Code allows soy plantations to clear up to 80 percent of natural vegetation in the Cerrado, versus only 20 percent in the Amazon, legal deforestation has become a growing concern in the region.
Implications of tightening sourcing policies
Carrefour, Casino, Auchan, Lidl, Leclerc, Metro, Mousquetaires (owner of Intermarché), and Système U signed the agreement to prohibit soy sourced from recently deforested regions of the Brazilian Cerrado. Some supermarkets, including Auchan, Lidl, and Système U, have also released action plans to support the pledge, while the others are under pressure from environmental NGOs to do so. This development comes as major soy traders remain reluctant to sign the Cerrado Manifesto, which aims to “halt deforestation in the Cerrado, adopt sustainable land management practices and mitigate financial risks associated with deforestation and climate change.” Already, 160 fast-moving consumer goods companies and institutional investors have signed a statement of support for the manifesto. However, large soy traders such as Cargill, Bunge, COFCO, and Louis Dreyfus are notably missing. If the French retailers follow through with applying recent commitments, they may suspend contracts with traders not party to the Cerrado Manifesto as early as this year.
France’s strategy to reduce reliance on Brazilian soy
France relies on Brazilian soy primarily for animal feed in pork, poultry, and dairy production. The country imported 2.8 million tons and 3.2 million tons of soybean meal in 2020 and 2019, respectively, as shown in Figure 1.
Figure 1: French imports of Brazilian soy (2019-2020)
Source: Chain Reaction Research visual based on Thomson Reuters data
To mitigate soy related ESG risks, France’s strategy has two pillars:
Improve sourcing practices: France became a leader in combatting supply chain deforestation two years ago when it first announced its National Strategy to Fight Imported Deforestation (Stratégie Nationale de lutte contre la Déforestation Importée), known as the SNDI. The SNDI included a pledge to end deforestation driven by unsustainable forestry and agricultural imports by 2030, although the country has already fallen short of achieving its 2015 goal of doing so by 2020. However, the country has been under pressure to move beyond voluntary commitments and to mandate sustainable sourcing practices. The recent pledge by French retailers shows a commitment from private sector stakeholders and may incentivize stricter, industry-wide measures from the French government.
Increase domestic soy production: France recently launched a plant protein development plan to promote domestic production of legumes and oilseeds, including soy. According to the French Minister of Agriculture and Food, Julien Denormandie, the goal of the plan is to “recover part of [France’s] agri-food sovereignty, reducing dependence on vegetable protein, and to stop importing deforestation.” The plan will involve EUR 100 million in producer incentives to cultivate and research protein crops over two years. The goal is to increase production of oilseeds and legumes from 1 million hectares (ha) today to 1.4 million ha in three years, and finally, to 2 million ha in 2030.
Market access risk mounts amid rising deforestation rates
Recent actions by the French government and major French retailers have not occurred in isolation and may be indicative of more actions to come. For example, Chain Reaction Research recently released a report on Casino Group, a French multi-banner retailer, and its Brazilian subsidiary, Grupo Pão de Açúcar (GPA), which estimated USD 2.5 billion of potential financing and reputation risk as pressure mounts to comply with the French Law on Duty of Vigilance and to eliminate deforestation from its beef supply chain.
Beyond France, retailers throughout Europe are also facing increasing pressure to assess and mitigate deforestation risk. The UK and Germany are already drafting legislation to tackle supply chain deforestation, and the EU is strengthening its language around the EU-Mercosur deal. France has already indicated that it will not support ratification of the deal without more action to reduce deforestation. More recently, EU ambassador to Brazil, Ignacio Ybáñez, said that if “European partners do not see that there is a will in the Brazilian government to put the idea of sustainability at the center of its activities, the agreement will not be able to pass.” If the Bolsonaro administration does not take action to curb deforestation, more countries may follow France’s lead to prevent ratification of the deal and further reduce market access for Brazilian producers and traders.