Ethiopia's Coffee Sector Faces $453 Million Export Risk Under EU Deforestation Rules

Addis Abeba — Ethiopia could lose up to $453 million in coffee export revenue under the European Union's deforestation regulation, with compliance gaps threatening to exclude smallholder farmers from a market that accounts for around 30% of the country's coffee exports, according to an October 2026 briefing paper by ODI Global.

The study, The case of EUDR in Ethiopia: How to secure climate, trade and development goals, and overcome risks of market exclusion, warns that difficulties in tracing coffee to individual farms, documenting land-use legality and collecting plot-level geolocation data could expose up to 60% of smallholders to exclusion from EU-bound supply chains.

The resulting disruption could reduce Ethiopia's gross domestic product by up to 0.5%, deepen foreign exchange shortages and transmit financial pressures through rural lending networks.

The findings highlight a central challenge for Ethiopia as the EU prepares to enforce its Deforestation Regulation (EUDR): whether a policy designed to prevent forest loss can achieve its environmental objectives without imposing disproportionate costs on smallholder producers in developing countries.

Compliance gaps threaten smallholder access

Ethiopia's coffee industry is particularly exposed because production is dominated by smallholders cultivating fragmented plots, many of which are less than one hectare. Around four million smallholder farmers account for approximately 95% of national coffee output, while the sector supports an estimated 15 million people across the value chain.

The EUDR requires companies placing covered commodities on the EU market to demonstrate that products are deforestation-free and comply with relevant laws in their country of production. For coffee, this includes providing geolocation data linking shipments to the plots where the beans were grown.

However, the ODI study identifies significant gaps in Ethiopia's preparedness. By July 2024, geolocation data had been compiled for approximately 200,000 hectares out of an estimated 860,000 hectares of coffee-growing land, equivalent to around 23%.

Traceability presents another major obstacle. An estimated 57.4% of marketed coffee passes through local collectors or channels outside legally designated marketplaces, complicating efforts to track beans from individual farms through processing and export.

The study estimates that geolocation constraints alone could put 10%-20% of smallholders at risk of exclusion, while traceability gaps could affect up to 57% of supply chains. Together with unresolved legal documentation requirements, these weaknesses could expose a substantially larger share of producers to exclusion.

The consequences are already visible in parts of the sector. The Sidama Coffee Farmers' Cooperative Union told researchers that it had excluded 40% of its member cooperatives from EU exports because of compliance constraints. Meanwhile, the Oromia Coffee Farmers' Cooperative Union had collected geolocation data for only 92,000 of its more than 557,000 member farmers.

Export losses could deepen economic pressures

The potential losses extend beyond coffee-producing communities. According to ODI Global, Ethiopia could forfeit approximately $160 million in EU-destined coffee revenue under a scenario involving 20% exclusion, rising to $453 million if exclusion reaches 57%.

These figures represent estimated gross export revenue losses, not necessarily the amount Ethiopia would ultimately lose after redirecting coffee to other markets.

The study estimates that even if all excluded coffee could be sold elsewhere, lower prices in alternative markets could leave Ethiopia with net revenue losses ranging from approximately $42 million to $118 million.

This distinction matters because Ethiopia has been expanding its coffee exports beyond Europe. The study notes that Asia accounted for approximately half of the country's coffee exports, compared with 28% for Europe and 12% for the United States. Yet EU-bound coffee often commands higher prices, making alternative destinations an imperfect substitute.

The broader economic exposure is significant. Coffee accounts for approximately 35% of Ethiopia's merchandise export earnings, meaning EU-bound coffee represents an important source of foreign currency.

ODI estimates that disruption to these exports could reduce foreign exchange earnings by between 2.2% and 6.3%, potentially reaching 8.5% under a severe scenario involving traceability and geolocation failures.

Such a shock would compound existing pressures on foreign exchange availability, inflation and import costs. The study also warns that financial risks could spread through exporters, processors, cooperatives and banks that depend on coffee sales to service loans and finance seasonal procurement.

Cooperative Bank of Oromia is particularly exposed because approximately 20%-30% of its loan portfolio is linked to coffee export financing, according to the study.

Environmental objectives and local realities

The study questions whether excluding Ethiopian smallholders would necessarily advance the regulation's environmental objectives.

While deforestation remains a concern in Ethiopia, the researchers argue that coffee has not been a major driver of recent forest loss. Citing European Forest Institute data, the paper notes that no more than 20 coffee plots were linked to post-2020 deforestation.

Ethiopia's coffee production systems frequently incorporate shade trees and forest cover. Garden coffee accounts for approximately half of national production, while semi-forest and forest systems contribute around 35% and 10%, respectively.

The researchers warn that excluding farmers from higher-value European supply chains could weaken incentives to maintain these systems. Producers unable to meet compliance requirements may redirect their coffee to less-regulated markets or turn to alternative cash crops that could create greater pressure for land conversion.

The paper therefore argues that compliance measures should be accompanied by incentives that reward sustainable production, including price premiums, carbon credits and payments for ecosystem services.

Market diversification offers only partial relief

Ethiopia has previously sought additional time to prepare for the regulation. In October 2024, the government welcomed the European Council's decision to postpone implementation by one year, following concerns over the costs and feasibility of meeting the original deadline.

Addis Standard reported in April 2025, citing The New York Times, that Ethiopian coffee growers were struggling to meet the regulation's traceability requirements. Dejene Dadi, head of the Oromia Coffee Farmers' Cooperative Union, said the process was costly and difficult without additional support.

The ODI study indicates that these concerns remain unresolved despite government efforts to establish national traceability systems and expand farm-level data collection.

The Ethiopian Coffee Traceability Management System is intended to track coffee from production plots through processing and export. However, the researchers say its effectiveness remains uncertain while data collection, land registration and integration across supply-chain actors remain incomplete.

Exporters have also indicated a willingness to redirect shipments to markets including China, the United States and Canada if European buyers do not help cover compliance costs.

China's growing importance could provide additional opportunities. As Addis Standard previously reported, China had become Ethiopia's fourth-largest coffee importer, with exports reaching approximately 9,470 tonnes and generating $65.49 million during the first quarter of the 2025/26 fiscal year, according to the Ethiopian Coffee and Tea Authority.

However, the ODI analysis suggests that diversification alone may not offset the loss of European price premiums.

The study recommends that Ethiopia engage with EU authorities to clarify acceptable evidence of legal compliance, explore greater flexibility in applying the regulation and support smallholders and informal collectors in meeting traceability requirements. It also calls for stronger cooperative financing and transparent mechanisms to ensure that sustainability premiums reach producers.

The regulation's implementation deadlines are approaching, with the study identifying late 2026 for large operators and mid-2027 for smaller enterprises under the phased timetable it examines.

For Ethiopia, the challenge is therefore not simply to find new buyers. It is to preserve access to a valuable export market while ensuring that the costs of demonstrating environmental compliance do not undermine the livelihoods of the smallholders whose production systems the regulation is intended to protect.

Read the original article on Addis Standard.