13. Iceland
Iceland has seen limited reform to agricultural policies and support remains among the highest in the OECD. The Producer Support Estimate (PSE) was more than three times the OECD average in 2020-22, at 50% of gross farm receipts. Market price support measures account for 47% of producer support, principally tariffs that maintain high domestic prices relative to world prices and cause a large transfer from consumers to agricultural producers. Payments coupled with production factors complement market price support. Output payments for milk producers and largely decoupled payments to sheep meat producers represent most of the remaining support to farmers. About 70% of farm support is potentially most-distorting to production and trade.
Effective prices received by farmers have declined over time on average as the Producer Nominal Protection Coefficient (NPC) declined but remain almost double those in world markets. Market price support is especially high for poultry and egg products, where it accounts for 100% of Single Commodity Transfers (SCT). SCT represent 95% of total PSE.
Expenditures for general services (General Service Support Estimate, GSSE) represent 4% of total support to agriculture (Total Support Estimate, TSE), much lower than the 14% OECD average. These expenditures decreased from 8% of the value of agricultural production in 1986-88 to 3% in 2020-22 because the value of production increased 18% while expenditures decreased around 56%. Inspection and control represent 63% of GSSE and much of the rest is devoted to public stockholding. TSE as a share of Gross Domestic Product (GDP) declined significantly, from 5% in 1986-88 to 0.8% in 2020-22.
A Ministry of Food, Agriculture and Fisheries was established at the beginning of 2022, placing food in the foreground to emphasise the food context as one comprehensive chain of value-creation and resource-utilisation. The policy goals are to promote high-quality food production along with responsible and sustainable use of land and oceanic resources, and support innovation and product development.
Discussions towards a comprehensive policy for agriculture and other industries responsible for food production continued in 2022, leading to a draft to be presented in Parliament in 2023 for expected adoption before the end of the year. A dedicated agricultural policy will also be presented to Parliament for the first time in 2023; the policy was previously included only in the regulatory framework and agricultural agreements between the government and farmers’ association. The major components of the agricultural policy include food security, climate-change mitigation and adaptation, biodiversity, land use, sustainable circular economy, research, and development. These policies are expected to be adopted by Parliament in 2023 and in force until 2040.
Climate change has had positive impacts on crop and grass yields. However, warmer climatic conditions also bring new pests and insects that might reduce future yields. The agriculture sector is assumed to play a significant role in the national action plan for social adaptation to climate change being finalised by mid-2023, but a comprehensive climate-change adaptation policy and measures for agriculture have not been implemented. It will be important to move from adaptation strategies to policy implementation, supported by monitoring and measurement of progress. It will also be important that adaptation policy supports the shift from coping and incremental adaptation strategies towards transformative adaptation of production systems.
Agriculture plays a central role in Iceland’s climate-mitigation policy and efforts to reach carbon-neutrality, mainly due to the size of the livestock sector. Measures to reduce greenhouse-gas (GHG) emissions from agriculture will be important to reach the challenging goal of carbon-neutral agriculture by 2040. However, current agricultural support measures – especially market price support and output payments for ruminant products such as milk and wool – counteract and reduce the effectiveness of GHG-mitigation measures in agriculture.
Progress in agricultural policy reforms has been limited, and Iceland’s support to farmers remains well above that of most OECD countries. Given that agricultural support policies remain dominated by market price support and output payments, Iceland’s support to agriculture continues to be production- and trade-distorting, contributing to inflated agricultural and food prices, and risks adding to environmental pressures.
Producer support should be decoupled from agricultural production and favour less production- and trade-distorting and less environmentally harmful forms of support. Re-instrumentation of producer support from production-coupled support measures towards decoupled support payments with environmental cross-compliance requirements and towards specific agri-environmental measures (including GHG-mitigation) would contribute to reaching agriculture’s carbon-neutrality target by 2040.
The re-instrumentation and reform of agricultural support policies could contribute to adaptation too. Reducing market price support and payments targeted at specific commodities would contribute to climate-change adaptation, as farmers would not be locked into producing subsidised commodities under changing climatic conditions.
In addition, shifting budget expenditure from producer support towards Iceland’s agricultural innovation systems and other general services could increase innovations to enhance environmentally sustainable productivity growth and contribute to climate-change mitigation and adaptation.
Overview of policy trends
Iceland’s agricultural policy focuses on food security, safety and quality; strengthening rural activity; environmental sustainability; and maintaining farm income.
Iceland supports agriculture heavily and reforms over time have been limited. Support consists mainly of price support sustained with border measures and quotas. Dairy producers receive payments based on output. In 1996, support to sheep meat producers changed from price support to direct payments based on historic entitlements. A regional scheme for sheep farmers implemented in 2008 provides additional direct payments based on historic entitlements. Individual non-transferrable quotas for milk producers were introduced in 1980 and went through a number of reforms. In 1992, the current system of freely transferable quotas was introduced, and production-based payments were linked to the quota, paid directly to the farmer.
Since the mid-1990s, tariffs on agricultural products were reduced. However, tariffs on several agriculture product groups, particularly meat, dairy and flowers, remain high and complicated. Many compound duties with both ad valorem and specific duties apply. Export subsidies for agricultural products have not been provided since the early 1990s.
The policy mix remains dominated by production- and trade-distorting measures. Iceland continues to provide agricultural support through market price support maintained by border measures, and through direct payments based on entitlements directly or indirectly coupled with production.
Support to producers declined since the mid-1980s. An important reduction in market price support took place at the beginning of the 1990s, but market price support still accounts for 42% of total support to agriculture. Two-thirds of producer support is provided based on prices (Figure 13.4). TSE has declined over time, averaging 0.8% of the country’s GDP in recent years, with PSE being the dominant component at 95%. The remaining TSE is financing for GSSE of which 70% comprises expenditures for inspection, with public stockholding expenditures responsible for much of the remainder.
Main policy instruments
The objective of Iceland’s agricultural policy is to maintain and strengthen a diverse agricultural sector to the extent that physical and marketing conditions allow. The key goals are to: meet domestic demand where realistically possible; maintain sustainable production of high-quality, healthy products; improve efficiency and competitiveness; improve farmers’ incomes; foster innovation and create job opportunities; and sustain livelihoods in rural areas.
Agricultural policies in Iceland are based on two legal instruments. First, the policy concerning production and marketing of agricultural products (laid out in the Act on the Production, Pricing and Sale of Agricultural Products No. 99/1993) establishes objectives for Iceland’s agricultural policy and provides the framework for Icelandic agriculture and its regulation. The second legal instrument concerns policies for the provision of support to farm construction projects, livestock improvement and extension (advisory) services (laid out in Act on Agriculture No. 70/1998).
The government negotiates with the Farmers’ Association concerning the general framework for support and production control in the cattle, sheep, and horticultural sectors. There is also an agreement on so-called horizontal support, such as advisory services, breeding, animal welfare, environmental protection, sustainable land management, organic farming, and land cultivation. The current agreements cover 2017-26, with extensive reviews in 2019 and again in 2023. These agreements have traditionally set the foundation of the support system for agriculture. These agreements are normally revised twice during their term of validity and the latest revision will take place in 2023 and is expected to focus on issues related to food security, environment, and climate change.
Iceland’s agricultural support comes through price support (maintained by border measures), and direct payments based on payment entitlements coupled with production factors. Price support is provided for all livestock products and some horticultural products. Direct payments are provided to cattle (mainly dairy) and sheep producers, and on a smaller scale, to certain greenhouse producers.
For dairy, direct payments depend on the size of a producer’s quota and the current number of animals. Headage payments are provided for up to 180 dairy cows and 260 beef cows per farm, with full payment for each of the first 50 dairy cows and 200 beef cows, then at a declining rate for each additional cow. The Ministry of Fisheries and Agriculture sets a national dairy production quota divided among producers based on their annual quotas for the preceding year. Annual dairy quotas also determine entitlements for direct payments. Production in excess of quotas is permitted, provided all such production is for export. Wholesale prices are regulated for approximately half of all dairy products based on the volume of raw milk required. A government-chaired committee representing both the Farmers’ Association and the labour union (acting on behalf of consumers) determines the guaranteed minimum prices for milk delivered within production quotas on an annual basis. Trade in support entitlements (basic payments to all active dairy and cattle farmers) between entitlement holders is allowed with quantity limitations and takes place in a market operated by the government. Dairy producers also benefit from support for breeding, land cultivation and development programmes.
For sheep, direct payments link to entitlements based on historical production. However, eligibility to receive full payments requires keeping a minimum number of winter-fed sheep on the farm. Additional payments to sheep farmers relate to a quality-control scheme for lamb meat based on animal welfare, product quality, traceability and sustainability criteria. Premium payments are provided at the wholesale level for purchasers of wool, and to farmers to co-operate in increasing added value for sheep products.
Imports of meat, dairy products, and some vegetables that compete with domestic production are subject to tariffs, often compound duties with an ad valorem component of 30% and a specific duty that varies from ISK 5/kg (USD 0.04/kg) to ISK 1 462/kg (USD 2/kg). However, products originating in partner countries of the European Economic Area (EEA) or in one of the 41 countries with which Iceland has free trade agreements may carry lower tariffs. The agreement for the cattle sector includes a provision to change the specific duties for certain cheese and milk powder products based on changes in the Special drawing rights to Krona (SDR/ISK) exchange rate from 1995 to 2016, effective 1 March. Since then, the specific component was adjusted annually to the 12-month evolution of SDR/ISK.
Iceland is a member of the European Economic Area (EEA) and of the European Free Trade Association (EFTA). While the EEA Agreement does not apply to most trade in agricultural goods, it opens trade in several processed agricultural products and encourages bilateral agreements on primary commodities.
As a member of EFTA, Iceland is also party to several Free Trade Agreements (FTAs), including with countries in Southeast Europe, North Africa and the Middle East, Latin America, and Asia, as well as with the South African Customs Union. In addition, Iceland has bilateral FTAs with the Faroe Islands, Greenland, and the People’s Republic of China.
Efforts are being made to strengthen environmental consultation within the agricultural sector, to implement green accounting for farmers and increase the number of participating farmers in programmes related to environmentally friendly agriculture. The agricultural sector has set a goal of carbon neutrality by 2040. Iceland’s 2020 Climate Action Plan contains several actions for agriculture. These include, for example, improved utilisation and handling of fertilisers by reducing the use of mineral fertilisers; improved livestock feeding to reduce enteric fermentation; increased domestic vegetable production; and carbon neutrality in cattle breeding. Another main action is an ongoing programme around climate friendly agriculture which is based on the co-operation of several ministries and institutions in the field of environment, food and agriculture. The main goal is to reduce GHG emissions from agriculture, improve feed and resource use, optimise land use and to preserve and increase carbon in soils and vegetation.
The climate action plan further aims at improved treatment of livestock manure and utilisation of synthetic fertilisers, aquaculture waste and other nutritious by-products that can be used for land cultivation or land reclamation. Emphasis is on improving farmers’ access to practical information and consultation regarding how they can best reduce GHG emissions from their operations. Efforts that reduce emissions intensity of production, that is GHG emissions per kg of product, are considered of importance since Icelandic agriculture primarily serves the domestic market. Furthermore, efforts are being made to increase domestic production of vegetables, cereals and organic farming.
The agricultural agreements between government and farmers will be revised in 2023 and the common goal between the contracting parties is that all changes will be climate friendly. There is also a comprehensive strategy and implementation plan for land reclamation and forestry, where the focus is on diverse ecosystems, nature-based solutions in climate issues, sustainable land use, knowledge, co-operation and public health.
Climate change adaptation policies in agriculture
A national action plan for social adaptation to climate change is being prepared, expected to be finalised in mid-2023. It will be based on existing policies and goals set by the government. The agricultural system will play a significant role in the plan, such as addressing how the agricultural system needs to respond to changing conditions and how land cultivation should adapt to changing climate conditions.
Domestic policy developments in 2022-23
In the beginning of 2022, a new Ministry of Food, Agriculture and Fisheries was established following elections. The Ministry is based on its predecessor, but focal points and goals have been adjusted and some portfolios transferred to other ministries. Food is now in the foreground of the title as it is emphasised to view food in a broad context as one comprehensive chain of value creation and resource utilisation. The main policy goals are to promote high quality food production along with responsible and sustainable use of land and oceanic resources, and to support innovation and product development.
An ongoing effort has been made to formulate a comprehensive policy in the field of agriculture and other industries responsible for food production. A draft of a comprehensive food policy will be presented to the parliament in the spring of 2023 and is expected to be adopted before the end of the year. A dedicated agricultural policy will also be presented for the first time to the parliament in the spring of 2023. The policy has previously only been expressed as part of the regulatory framework and in agricultural agreements between the government and the farmers’ association.
The policy was developed after widespread consultations throughout the country. Its major components include food security, climate change mitigation and adaptation, biodiversity, land use, sustainable circular economy, research, and development. These policies are expected to be adopted by Parliament in 2023 and to be in force until 2040. Factors of food security will be monitored more closely in near future and there the government have been preparing implementation of monitoring food security and other strategic reserves. The Agricultural University of Iceland has prepared comprehensive proposals for increased food security in Iceland. One of the main concerns is the lack of cereal production which has been limited in Icelandic agriculture in modern times but was once widespread. In 2023 the government started an action plan which aims to increase cereal production significantly by investing in infrastructure and plant breeding.
Domestic policy responses to Russia’s war of aggression in Ukraine
In early February 2022, prior to Russia’s invasion to Ukraine, the government decided to grant a one-time support to address the effects of rising costs (almost doubled) of fertiliser imports due to rising natural gas prices and other inputs. The support was meant to compensate farmers, at least partly, for the cost increase of around ISK 650 million (USD 4.8 million), and to strengthen domestic food security and farmers’ willingness to maintain production. Additionally, ISK 50 million (USD 0.37 million) was granted for long-term projects related to better nutrient use efficiency and environmental issues.
As with the war the impacts on markets for agro-food products and inputs became more significant, a working group established by the government identified significant additional challenges for farmers due to rising costs of fertiliser, feed, oil and other inputs, with implications differing between sectors. During the spring 2022, the financial basis of farmers and the willingness to maintain production were found to be significantly weakened. In response, the government designed and implemented a special support programme of ISK 2.5 billion (USD 18.5 million) to accommodate increased production costs. The support measures are divided into four parts and most of them are in the form of added funding to ongoing direct support payments, while also aiming to increase agricultural resilience and ensure domestic food security. The four support measures are: 1) 65% increase of support payments on land cultivation and farmland payments (ISK 517 million; USD 3.8 million); 2) around ISK 1.3 billion (USD 9.6 million) additional payments on existing support for sheep, dairy, cattle, and goat farming; 3) ISK 140 million (USD 1.03 million) contribution to horticulture farmers; and 4) ISK 450 million (USD 3.3 million) to poultry, swine, and egg farmers to accommodate increased feed prices. Additionally, it was proposed to continue monitoring the development of food security issues and necessary supplies of various inputs.
Trade policy developments in 2022-23
Trade policy responses to Russia’s war of aggression in Ukraine
A new provisional law was passed by parliament and took effect on 15 June 2022, which temporarily abolished all tariff duties on imports of products, including all agricultural goods, originated in Ukraine. The law will be valid through May 2023, unless further extended by parliament.
Iceland is a small, sparsely populated country with a GDP per capita above the OECD average. Agriculture contributes about 5% of GDP and 4% of employment. Conditions for agriculture in Iceland are limited by the country’s geographical conditions. The growing season is short – around four months – yields are low, and production and transport costs are high. Approximately one-fifth of the total land area of Iceland is agricultural land, mostly suitable for fodder production and livestock raising. Only around 6% of agricultural land area is arable land.
Livestock-rearing is the main farm activity, with milk and sheep meat being the most important products. Livestock production is mostly grassland-based and most farm animals are native breeds. The main crops are hay, cereals for animal feed and vegetables – the latter are cultivated primarily in greenhouses heated with geothermal energy. The main agricultural exports are pure-bred horses for breeding, sheep meat products and fur skins. The range of Iceland’s agricultural products is limited and meets approximately 50% of total domestic food requirements. Consequently, Iceland is a net importer of agricultural products (excluding fishery goods), mainly for final consumption. Imports are more diversified than exports and have increased steadily in recent years.
Iceland’s economy is recovering from a deep recession caused by the COVID-19 pandemic. The economy is projected to grow by 4.2% in 2022 and 2.8% in 2023, driven by buoyant goods and services exports, and the unemployment rate is expected to be around 4.5% in 2022 (OECD, 2022[1]). Iceland’s prosperity has been built on the sustainable management of its abundant natural resources, including the comprehensive fisheries management system based on individual transferable quotas, renewable energy (geothermal and hydro) and carbon sequestration opportunities (afforestation, revegetation).
Output growth in agriculture (8%) has clearly outpaced the global average (2%) over the 2011-20 period, which has been driven by commensurately robust growth in total factor productivity (TFP) of over 8% per year – which was also much higher than the global average rate of 1.1%. This is mostly related to a significant output growth in aquaculture and much less so in crop and animal output. At the same time input growth has decreased.
A harsh climate, lack of suitable land, small average farm size, and the narrow genetic base for traditional livestock present significant constraints to the sector. Due to its relatively low livestock densities, Iceland’s nutrient balances show a comparatively small surplus of both nitrogen and phosphorus. Iceland has the lowest pesticide sales per hectare in the OECD area and the sector’s share of energy use has fallen over time. Agriculture continues to represent a significant share in the country’s total GHG emissions – well above the OECD average – mainly due to the importance of the ruminant livestock sector. Emissions of CH4 emissions from enteric fermentation and manure management, and N2O emissions from manure management and fertilisers have historically accounted for over 99% of the total emissions from agriculture, with less than 1% arising from CO2. With abundant water and a small population, total water abstraction in Iceland is less than 1% of total available freshwater resources. This is one of the lowest intensities of water resource use in the OECD, although the freshwater abstractions per capita are the highest in the OECD area (OECD, 2019[2]). The share of agriculture in total water abstractions has decreased over the past two decades.
References
[1] OECD (2022), OECD Economic Outlook, OECD Publishing, https://doi.org/10.1787/62d0ca31-en.
[2] OECD (2019), “Water: Freshwater abstractions (Edition 2018)”, OECD Environment Statistics (database), https://doi.org/10.1787/09a848f4-en (accessed on 7 April 2022).