Indonesia, the world’s largest producer of palm oil, is at the center of a brewing global trade storm. The country produced over 51 million tons of crude palm oil in 2023, a largely unknown, yet ubiquitous commodity found in half of all packaged products in our supermarkets – Oreos, Kellogg’s breakfast cereals, and even Tide pods. At the close of 2024, however, the $61 billion industry would have been thrown into turmoil due to an environmental regulation enacted over 7,000 miles away, in the European Union (EU).

Designed to curb deforestation linked to seven key commodities – coffee, cocoa, soy, palm oil, cattle rubber, and wood – the well-intentioned EU Deforestation Regulation (EUDR) threatens to reshape $110 billion in global trade. Companies importing these goods into the EU must now prove that their products are “deforestation-free.” EUDR-compliant products must be kept separate from non-compliant products throughout their supply chains. This new requirement means tracing every coffee bean, every plank of wood, and every drop of palm oil back to the exact plot of land where it was grown. On paper, the EUDR is a win for the planet. In reality, it presents a logistical nightmare for industry stakeholders, the governments of producing countries, and, most of all, smallholders at the bottom of the supply chain.

Palm oil giant Indonesia, notorious for its outsized role in large-scale deforestation, has emerged as the strongest voice of opposition against the EU. Indonesia’s chief economic minister, Airlangga Hartaro, denounced the EUDR as “regulatory imperialism,” contending that the EU’s decision to unilaterally dictate environmental standards encroaches on the country’s sovereignty, and fails to recognize national efforts to balance environmental conservation with economic development. In September 2023, 16 other countries echoed this criticism in a letter to the EU, claiming that the EU’s “one-size-fits-all” approach fails to account for the varying local realities in commodity-producing countries.

While the EUDR advances much-needed forest conservation efforts, it hasn’t solved the knotty tangle of global supply chains. Its disregard of the local conditions of the industries it seeks to regulate hinders its ability to achieve its environmental goals, and will also lead to industry restructuring that puts those at the bottom of the supply chain at risk. The biggest losers in this regulatory crackdown aren’t the multimillion-dollar corporations or government agencies – they’re the 2.6 million smallholder farmers who toil to grow around 40% of Indonesia’s palm oil.

These farmers, who rely on palm oil cultivation for a living, are now caught in a messy crossfire between powerful, faraway actors that ignore their voices and their lived realities. Most independent smallholders lack the resources to meet the EUDR’s exhaustive traceability requirements. The EUDR requires farmers to prove compliance with Indonesian law, requiring land titles and cultivation certificates that are only accessible through a costly and overly bureaucratic application process. The vast majority of independent smallholders do not have formal documentation, with fewer than 2% currently holding official land certification. Though not having official documentation does not necessarily mean that farmers are cultivating palm oil illegally, many now face the risk of being shut out of the EU market.

The largely informal industry also isn’t set up to accommodate a rigid separation of  “compliant” and “non-compliant” supply chains as the EUDR mandates. Enforcing such a system risks squeezing independent farmers and mills out of the industry or pushing them into contract work with palm oil companies. The market for Indonesian palm oil is facilitated by hustling middlemen who collect palm oil harvests from dozens of different farmers, load them onto the same trucks, and then deliver their amalgamated payloads to various palm oil extraction mills. Competition among middlemen is fierce and, without the proper incentives, they have little reason to disclose their palm oil sources to the mills they supply. However, this lack of transparency creates challenges for independent mills, which need this information to produce the EUDR traceability documentation demanded by the palm oil companies they sell to.

For large palm oil companies, the risks are high – if even just one of their palm oil sources is found to be non-compliant, the entire shipment would not be allowed into the EU. The conditions produced by the competing incentives of these industry actors make it risky for palm oil companies to source from independent smallholders and mills, thus increasing the incentive to simplify, formalize, and grow supply chains that rely on company-owned sources.

The ironic result of this new incentive structure would be a consolidated market that favors large agribusinesses, the ones precisely responsible for the majority of large-scale palm oil-driven deforestation. Unfortunately, the EUDR’s segregation requirement means that even smallholders that are not involved in EU supply chains may face exclusion if they do not comply with the EUDR, since palm oil derived from their harvests cannot be mixed with EUDR-compliant palm oil. The potential exclusionary impact of the EUDR extends beyond Indonesia, impacting millions of farmers in Brazil, Ghana, Ivory Coast, and many more producer countries who depend on agricultural exports to the EU.

Though the EU has made attempts to support producer countries in complying with the EUDR, these efforts remain inadequate and continue to exclude independent smallholders from the decision-making process. Joint forums between the EU, Indonesia, and Malaysia brought together representatives and stakeholders of the commodities subject to the EUDR. However, though smallholder farmers were allowed to participate in the forum, NGOs, Indigenous Peoples organizations, and smallholder organizations – key advocates with the expertise to navigate policy negotiations – were not invited to be physically present. Instead, they were only allowed to observe the meetings virtually, with no opportunity to participate in the discussion. Expecting unorganized, individual farmers to champion their own cause in high-stakes regulatory discussions is both unrealistic and unfair. 

If the EU wants to reduce their contribution to deforestation without deepening such power asymmetries, it must rethink its approach. Backlash from its trading partners has led to a one-year delay in the enforcement of the EUDR, pushing the compliance deadline to December 30, 2025. The EU must use this additional year to implement meaningful reforms that ensure smallholders are not shut out of global supply chains. This starts with giving smallholder farmers a real seat at the table, not just a symbolic one. Over the next year, there must be greater dialogue between smallholder farmers, smallholder organizations, NGOs, and policymakers. Serikat Petani Kelapa Sawit (SPKS), a palm oil smallholder organization in Indonesia, has already proposed policy recommendations to increase smallholder inclusion in zero-deforestation supply chains, including a mandate for companies to source at least 30% of their palm oil from independent smallholders. Ensuring that smallholder voices are not just heard but integrated into policy decisions is the only equitable way forward.

At the same time, safeguards must be put in place to prevent large commodity suppliers from disengaging with smallholders to avoid compliance risks under the EUDR. The EU must introduce explicit obligations for companies trading within its market to actively support smallholders in meeting regulatory requirements – rather than abandoning them altogether as a ‘quick fix.’  

Without urgent course correction, the EUDR risks becoming an exclusionary policy that punishes the most vulnerable and those least responsible for deforestation. The EU has a year to get this right – smallholders can’t afford for them to fail.