Cargill’s EUDR compliance: risks of a soy-prise

16 minute read

US food company Cargill is in scope of the EU Deforestation Regulation (EUDR), which requires businesses to demonstrate that their products are deforestation-free. The costs of penalties for non-compliance or the additional costs to evidence full compliance could affect the financials of commodities importers. Analysis shows that Cargill’s disclosure may be insufficient to meet the due diligence requirements of this regulation, and so may be exposed to more deforestation-related risk, with implications for key financial ratios and potentially even the scorecard underpinning the company’s credit rating.

Cargill’s reporting indicates that 96% of its soy products are deforestation-free, which suggests it is unlikely to fall materially foul of EUDR requirements. However, this assessment is based on proxies and estimates that may downplay the company’s true deforestation footprint.

If Cargill’s true exposure to deforestation is greater than disclosed, then it may incur fines and other costs for non-compliance, or may need to incur costs to make its supply chain compliant. Using scenario analysis, we consider the financial implications to Cargill assuming low, partial, and full compliance with EUDR legislation. This reveals that impacts to earnings could be significant, with the potential to degrade the scorecard underpinning the company’s credit rating from Moody’s.

Evidence from the pricing of Cargill’s outstanding bonds suggests the financial risk posed by EUDR-related costs has yet to be fully digested by market participants.

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