12. Iceland
Iceland has seen limited reform to agricultural policies, and support remains among the highest in the OECD. At 57% of gross farm receipts, the producer support estimate (PSE) was more than three times the OECD average in 2018-20. Market price measures form most agricultural support, principally tariffs that maintain high domestic prices relative to world prices and lead to a large transfer from consumers to agriculture producers. Market price support is complemented by payment entitlements directly or indirectly coupled with production factors. Market price support accounted for 51% of support to farmers in 2018-20. Output payments for milk producers introduced in 1992 and largely decoupled payments to sheep meat producers introduced in 1996 represent most of the remaining support to farmers. Consequently, 71% of farm support is potentially most-distorting to production and trade.
Effective prices received by farmers declined over time on average, but remain almost twice as high as world markets. Sectors with the largest divergence between domestic and world prices in 2018-20 are poultry and eggs. Market price support accounts for more than 70% of single commodity transfers (SCT) for milk and poultry. Overall, SCT represent 96% of the total PSE.
Expenditures for general services (GSSE) relative to agricultural value-added decreased from around 3% in 1986-88 to 1% in 2018-20. Half of these are for inspection and control, with much of the rest devoted to stockholding. Total support to agriculture (TSE) as a share of GDP declined significantly over time.
The main policy changes in 2020 stem from revised agreements on the operating environment for horticulture and the framework agreement (horizontal support) for agriculture. For horticulture, the revision promotes development and innovation, and sets the stage to achieve carbon neutrality by 2040. The revised framework agreement includes the goal of carbon neutral agriculture before 2040 and emphasises environmental issues along with other technical or minor changes. All revised changes of existing agreements entered into force on 1 January 2021.
The Climate Action Plan was updated. Actions to reduce greenhouse gas (GHG) emissions from agriculture include reduction of the use of non-organic fertilisers and improvement of manure management.
With the continued application of multi-year agreements between the government and Farmer’s Association, changes to overall agricultural policy are limited and Iceland’s support to farmers remains well above that of most other OECD countries. Moreover, most support to farmers continues to be in forms that are potentially most production- and trade-distorting, and contribute to environmental degradation, soil erosion in particular.
Despite progress in reducing border protection of some agricultural products, tariffs on several groups – particularly meat, dairy, plants and flowers – remain high, often applied in the form of complex non-ad valorem duties. Slow progress in this area perpetuates the burden on consumers and the distortions to markets associated with border protection.
Although the revisions of agreements on the operating environment for horticulture aim to promote development and innovation, progress is needed to support innovation, including encouraging a well-functioning agricultural knowledge and information system.
Agriculture plays a central role in Iceland’s climate policy and efforts to reach carbon neutrality. Emphasis on environmental issues, including measures to gradually reduce GHG emissions from agriculture are a welcome shift towards a low-carbon economy and will contribute to Iceland’s challenging goal of carbon-neutral agriculture before 2040. However, support to producers that is only partly conditional on meeting environmental performance standards should be reviewed. Emissions from agriculture are high, reflecting the important role of sheep raising. Producer support should be decoupled from agricultural production and favour less economically distorting and environmentally damaging forms, linking support to sustainable land management and production of environmental amenities.
The development of a food policy involving various stakeholders provides an opportunity to address food security, productivity and sustainability of the agro-food sector in Iceland in a coherent and integrated framework.
The new Agreement on the European Economic Area’s (EEA Agreement) changes to the regulatory framework for agricultural trade – mainly in the system of tariff quota allocation and the elimination of tariff duties on certain agricultural products – will reduce import costs and increase transparency with regard to imports.
Establishment of the Antibiotic Immunity and Zoonosis Fund – based on an action plan on food safety and protection of livestock, and a joint effort by the ministers to reduce the spread of antibiotic-resistant bacteria in Iceland – is a welcome development towards a holistic and inter-sectoral approach to antibiotic resistance.
Note: * Share of potentially most distorting transfers in cumulated gross producer transfers.
Source: OECD (2021), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Source: OECD (2021), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Source: OECD (2021), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
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; 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 based 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 complex. A large number of compound duties with both ad valorem and specific duties apply. Export subsidies for agricultural products were not 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 payment 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. However, since the mid-1990s, around half of total support to agriculture comprises market price support, the other half being budgetary support. More than two-thirds of producer support continues to be provided through price support (Figure 12.4). TSE has declined over time, averaging 1% of the country’s GDP in recent years, with PSE being the dominant component at 95%. The remaining TSE is financing for GSSE, almost half of which comprises expenditures for inspection, with public stockholding expenditures responsible for much of the remainder.
Note: A/An/R/I:Area planted/Animal numbers/Receipts/Income
Payments not requiring production include Payments based on non-current A/An/R/I (production not required) and Payment based on non-commodity criteria. Other payments include Payments based on non-current A/An/R/I (production required) and Miscellaneous payments.
Source: OECD (2021), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
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; improve creativity 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. Second, policies on the provision of support to farm construction projects, livestock improvement and extension (advisory) service (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 2017-2026, with extensive reviews in 2019 and again in 2023. Changes in 2019 to the agreements for sheep farming and cattle entered into force on 1 January 2020. In 2020, the agreements on horticulture and the framework agreement (horizontal support) of agriculture were revised. All entered into force on 1 January 2021.
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 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 SDR/ISK1 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.
Concerning Iceland’s commitments under the Paris Agreement on Climate Change, according to its Nationally Determined Contributions (NDC) submitted to the UNFCCC, Iceland aims to be part of European countries’ collective 40% reduction in GHG emissions compared to 1990 levels by 2030. A precise commitment for Iceland within this collective delivery is yet to be determined and depends on agreement with the European Union and other countries. Iceland’s participation in the EU Emissions Trading System will be key in this regard, considering that almost half of Iceland’s emissions would be regulated through this scheme. In December 2020, Iceland’s prime minister introduced a new target of 55% reduction in GHG emissions by 2030. The government plans to make the economy largely carbon neutral by 2040.
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, 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 Free Trade Agreements with the Faroe Islands, Greenland, and the People’s Republic of China.
Domestic policy developments in 2020-21
Revisions of the agreement on the operating environment for horticultural producers and the agricultural framework agreement (horizontal support) of agriculture took place in 2020.
As part of the revision in the horticultural agreement, the government’s annual contribution has increased by 29% or ISK 200 million (USD 1.6 million) in 2020 and is valid until the year 2026. Increased funding was secured for adaptation to organic production in horticulture and for subsidising electricity transmission and distribution costs. Objectives were set that Icelandic vegetable production will increase by 25% over the next four years to increase the market share of domestic production and that Icelandic horticulture will be carbon neutral by 2040. In addition, an agricultural dashboard is to be established to provide an overview of production, sales and supplies in the country.
The revision of the agricultural framework agreement includes a goal of carbon neutral agriculture by 2040 and increased emphasis on environmental issues and climate change. The agreement states that elements of a new agriculture policy for the future would be the foundation for fundamental changes in the next revision process anticipated in 2023.
In Iceland’s 2020 Climate Action Plan five actions are planned for agriculture. The actions include improved utilisation and handling of fertilisers by reducing the use of mineral fertilisers, improved livestock feeding to reduce enteric fermentation, increased domestic vegetables production, carbon neutrality in cattle breeding and implementing a project called Climate-Friendly Agriculture where farmers receive comprehensive advice and education with the aim of reducing GHG emissions from agriculture and from land use. The project started in February 2020 and continues with new participants in 2021.
In October 2019, the European Union, Iceland and Norway formally agreed to extend, for the period 2021-30, their climate co-operation by including the Effort Sharing Regulation and the Regulation on greenhouse gas emissions (GHG) and removals from land use, land use change and forestry (the LULUCF-regulation), into the EEA Agreement. According to the agreement, Iceland is to fulfil its respective GHG emission reduction target for the period 1 January 2021 to 31 December 2030 in accordance with the ETS-directive, LULUCF-Regulation and the Effort Sharing Regulation.
The Minister of Fisheries and Agriculture and the rector of the Agricultural University of Iceland signed an agreement in February 2020 for the years 2020-23. According to the agreement, the university will work on projects concerning research, development, and innovation in the field of agriculture and food production. The university also advises the Ministry and conducts research, innovation and development activities in agriculture and environmental sciences in the fields covered by the agreement.
The Minister of Fisheries and Agriculture and Matís (Icelandic Food and Biotech R&D) signed two new agreements in 2020: i) a service agreement to ensure security services in the field of food research for the benefit of Icelanders; and ii) an agreement to strengthen Matís operations in rural areas.
Matvælasjóður (The Food Fund) was established in 2020 by merging the Agricultural Productivity Fund and the AVS Fisheries Research Fund. Its main objective is to strengthen development and innovation in production and processing of food from agriculture and fisheries. The fund will support value creation in the production, processing and marketing of food, with due emphasis to be placed on innovation, sustainability and the competitiveness of Icelandic food sector. An amount of ISK 480 million (USD 3.7 million) was allocated from the fund in December 2020 to 62 different projects.
Work is underway to formulate a comprehensive agricultural policy for Iceland for the years 2021-2040. The agricultural policy will be formulated in collaboration between the government, farmers and other stakeholders.
A ten-year food policy for Iceland was introduced in December 2020. The policy is intended to guide public decision-making to promote increased value creation in food production in Iceland, strengthen competitiveness of the Icelandic food sector, ensure food safety and security and increase people’s well-being in harmony with the environment and nature.
The Minister of Fisheries and Agriculture and the Minister of Health established an Antibiotic Immunity and Zoonosis Fund in 2020. The purpose of the fund is to provide financing for projects related to the fight against antibiotic resistance. The fund is set up in accordance with an action plan on food safety and protection of livestock and is a joint effort by the ministers to reduce the spread of antibiotic-resistant bacteria in Iceland.
Additional funding of ISK 500 million (USD 3.9 million) was provided to the Bjargráðssjóður Fund in 2020 due to unusual cold and fence damage during the winter of 2019-20. Its role is to provide financial assistance to individuals and companies to compensate for direct damage caused by natural disasters, including damage to fences and crop failure caused by unusual cold and drought.
Domestic policy responses to the COVID-19 pandemic
On 11 March 2020, the government presented an ISK 230 billion (8% of GDP) response package to the COVID-19 pandemic. Key measures to support households and firms include tax cuts, tax deferrals, increased unemployment benefits, one-off child allowances, support to companies whose employees have been quarantined, and state-guaranteed bridge loans to companies. Most of the larger measures presented by the government are applicable to the agro-food sector as well as other sectors.
More specific measures related to the agro-food sector include the following:
Increased funding for the development of the horticultural sector.
Specific one-time support for sheep farmers and cattle farmers during income decrease related to fall in demand.
Increased advisory services provided to farmers to meet the challenges faced due to COVID-19.
Ensuring salaries for temporary workers to assist farmers who are unable to take care of their farms due to COVID-19 illness.
Transfer of funds in accordance with existing agricultural agreements to specifically address domestic food producers currently facing temporary difficulties due to COVID-19.
Development of a dashboard for agriculture to improve the presentation of data on agricultural production, stocks and production forecasts.
Authorisation for cultivating industrial hemp in order to increase value creation in Icelandic agriculture.
Trade policy developments in 2020-21
Following the new Agreement on the European Economic Area (EEA Agreement) on trade in agricultural products and the gradually increasing tariff quotas, the Minister of Fisheries and Agriculture appointed a committee to work on proposals for changes of the regulatory framework for agricultural trade in order to reduce costs for importers of agricultural products and to simplify the system. As a result, several legal changes – mainly in the system of tariff quotas allocation and the elimination of tariff duties on certain vegetables, flowers, wild game and fertile eggs for the year or a certain period during the year, depending on the product – took effect at the beginning of 2020.
A Contingency Trade Agreement between Iceland and the United Kingdom entered into force on 1 January 2021. The aim of the agreement is to maintain current tariff preferences for trade in goods, including agro-food between the parties as previously applicable according to the EEA Agreement and other related trade agreements. The Contingency Agreement is intended to serve as a bridge arrangement until a new and comprehensive Free Trade Agreement can enter into force between the parties. Iceland is currently negotiating a comprehensive free trade agreement with the United Kingdom along with EEA EFTA partners Norway and Liechtenstein. The negotiations are expected to be completed in 2021. As a member of EFTA, Iceland is also engaged in negotiations with several other countries regarding free trade agreements. Iceland and its EFTA partners revised their chapter on trade and sustainable development, which now includes an article on trade and sustainable agriculture and food systems
According to new legislation that entered into force on 1 January 2020 on the protection against animal diseases, imports of fresh meat and meat products, raw eggs and raw egg products, and unpasteurised milk and dairy products processed from unpasteurised milk from EEA member states, do no longer require the permission of the Food and Veterinary Authority.
Iceland is a small, sparsely populated country with a GDP per capita above the OECD average. Agriculture (excluding fish) is a relatively small part of the economy, representing 1% of GDP and of employment, and it remains small compared to fishing and aquaculture. 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. The range of agricultural products is limited and meets approximately 50% of total domestic food requirements. 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. Traditional livestock production is 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. 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 set to contract by almost 8% in 2020 (OECD, 2020[1]). The unemployment rate remains low, at around 3%, and the country is one of the most egalitarian economies of the OECD. 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).
Sources: OECD statistical databases; World Bank, WDI; and ILO estimates and projections.
While output growth in agriculture has been below the global average over the 2007-16 period, according to the estimates on agricultural TFP, agricultural total factor productivity has grown by 2.8% per year – higher than the global average rate of 1.6%. 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 relatively low livestock densities, Iceland’s nutrient balances show a comparatively low surplus of both nitrogen and phosphorous. 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 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.
The sector’s share in water consumption has increased over the past twenty years and is higher than the OECD average. The water stress indicator has also increased, but is substantially lower than the OECD average. Water shortage is not a major concern and policy issue.
Reference
[1] OECD (2020), OECD Economic Outlook, Volume 2020 Issue 2, OECD Publishing, Paris, https://dx.doi.org/10.1787/39a88ab1-en.
Note
← 1. SDR= Special drawing rights exchange rate.