Chapter 12. Iceland
Support to agriculture
In Iceland, reforms of agricultural policies have been limited and the level of support remains among the highest within the OECD. At 59% of gross farm receipts, the PSE was more than three times the OECD average in 2016-18. The total support to agriculture (TSE) has averaged 1.1% of the country’s GDP in recent years, with support to producers (PSE) being the dominant component (96%). The remaining part of TSE is financing general services (GSSE), with almost half comprised of expenditures for inspection, and public stockholding expenditures responsible for much of the remainder.
Most agricultural support continues to be provided through market price support measures, principally through high tariffs that help to maintain high domestic prices relative to world prices, and therefore lead to a large transfer from consumers to agriculture producers. Market price support is complemented with a payment entitlements system, which is directly or indirectly coupled with production factors. Market price support accounted for 55% of the support to producers in 2016-18. Output payments for milk producers and the more decoupled payments to sheep meat producers represent most of the remaining support to producers. As a consequence, 77% of farm support is provided in a form that is potentially the most distorting to production and trade.
Main policy changes
Following the expiration of the previous agreements between the government and the Farmers’ Association, new agreements were concluded for the ten-year period 2017-26, with extensive reviews scheduled in 2019 and 2023. The key changes in the agreements relate to the dairy and sheep sectors: i) the possibility of a gradual abolition of the milk quota system and reduction in support entitlements in dairy production, subject to the revision process in 2019; ii) a reduction in support entitlements in sheep production and increased support for quality control. In addition, there is more emphasis on support that is not linked to specific agricultural sectors.
On 1 May 2018, an agreement came into force between Iceland and the European Union concerning reduced or eliminated tariffs, and increased tariff quotas on unprocessed agricultural products.
Assessment and recommendations
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Within the continued application of the multi-year agreements between the Government of Iceland and the Farmer’s Association, changes to the agricultural policy are limited and Iceland’s support to producers remains well above that of most other OECD countries. Moreover, most of the support to producers continues to be provided in forms that are potentially most production and trade distorting, thereby hindering agricultural producers from receiving market signals and responding to them. The new agreements between the Government and the Farmer’s Association (which provide the policy framework for the 2017-26 period) provide an opportunity for fostering the reform process to make Iceland’s agricultural sector more responsive to market forces, including through phasing out support to the dairy and sheep sectors, and the scheduled 2019 review of the production quota system.
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Despite some progress in reducing border protection of some agricultural products, tariffs on several agricultural product groups – particularly meat, dairy, plants and flowers – remain high, and are often applied in the form of complex non-ad valorem duties.
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Further progress is needed in supporting innovation, including by encouraging a well-functioning agricultural knowledge and information system, for which public expenditures have been declining over the past decade.
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The effects of climate change could be favourable for agriculture, although pests such as invasive insects may become a greater threat, introducing new challenges to agriculture in Iceland.
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Measures advocated in the new Climate Change Strategy, such as phasing out fossils fuels in transport and increasing carbon sequestration in land use, are a welcome shift towards a low-carbon economy and could contribute to increased efficiency in the use of natural resources.
Note: * Share of potentially most distorting transfers in cumulated gross producer transfers.
Source: OECD (2019), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Support to producers (%PSE) has declined by 18 percentage points between 1986-88 and 2016-18. However, at 59% of gross farm receipts, it is three times higher than the OECD average in 2016-18 period. Moreover, transfers considered as the potentially most distorting support represent 77% of the total PSE (Figure 12.1). The level of support decreased slightly in 2018 due to a decline in budgetary payments – mainly direct payments for dairy (Figure 12.2). Effective prices received by farmers, on average, have declined over time, but still remained twice as high as those in the world markets. The sectors with the largest divergence between domestic and world prices (NPC) in 2016-18 are poultry (4.7), eggs (3.8) and wool (3.3). MPS is also the main component of Single Commodity Transfers (SCT), for poultry, eggs and wool, roughly 70% or more of their gross farm receipts derived from SCT (Figure 12.3). Overall, SCT represent 97% of the total PSE. The expenditures for general services (GSSE) relative to agricultural value added decreased from around 3% in 1986-88 to 1% in 2016-18; half of these expenditures are for inspection and control. Total support to agriculture as a share of GDP has declined significantly over time. Around 95% of total support is provided to individual farmers (PSE).
Source: OECD (2019), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Source: OECD (2019), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://doi.org/10.1787/agr-pcse-data-en.
Contextual information
Iceland is a small, sparsely populated economy with a GDP per capita slightly above the OECD average. Agriculture (excluding fish) is a relatively small part of the economy, representing 1% of GDP and around 2% of employment in 2017, and it remains small compared to fishing and aquaculture (Table 12.2). Approximately one-fifth of the total land area of Iceland is agricultural land mostly suitable for fodder production and livestock raising and some left undeveloped. Only around 6% of this area is arable land.
Livestock-rearing is the main farm activity, with milk and sheep meat being the most important products. The main crops are hay, cereals for animal feed and vegetables – the latter of which 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 (Figure 12.5). Imports are more diversified than exports, and have increased steadily in recent years.
Iceland’s economy continues to grow and is one of the most egalitarian economies of the OECD area. It has high living standards and inclusiveness, the lowest poverty rate in the OECD area and life expectancy is among the highest in the world (Figure 12.4). Historically, 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). Exports of marine products were exceptionally high in 2018. The unemployment rate remains low, at around 3%, but inflation has risen slightly, mainly due to a weaker exchange rate and higher import prices.
Sources: OECD statistical databases; World Bank, WDI and ILO estimates and projections.
Note: Numbers may not add up to 100 due to rounding.
Source: UN Comtrade Database.
While output growth in agriculture has been below the global average over the 2006-15 period, according to the estimates, agricultural total factor productivity has grown by 3% per year, almost double the global average rate (Figure 12.6). Harsh climate, lack of suitable land, small size of farms and the narrow genetic base for breeds of cows, sheep and horses present significant constraints to the sector. Due to the relatively low livestock densities, Iceland’s nutrient balances show a comparatively low surplus of both nitrogen and phosphorous (Table 12.3). Iceland has the lowest pesticide sales per hectare in the OECD area and the sector’s use of energy has fallen over time. Agriculture continues to represent a significant share in the country’s total greenhouse gas (GHG) emissions – well above that for the OECD average – mainly due to the importance of the livestock sector. 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 almost nine times lower than the OECD average.
Note: Primary factors comprise labour, land, livestock and machinery.
Source: USDA Economic Research Service Agricultural Productivity database.
Description of policy developments
Main policy instruments
The strategic 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 of policy are: to meet domestic demand where realistically possible; to maintain sustainable production of high quality and healthy products; to improve efficiency and competitiveness; to improve farmers’ incomes; to improve creativity and create job opportunities; and to sustain livelihoods in rural areas.
Agricultural policies in Iceland are based on two main legal acts: i) Act No. 99/1993 on the Production, Pricing and Sale of Agricultural Products (known as the “Act on Agricultural Produce”), which lays down the policy framework as well as provisions for production control, provisions for slaughter and processing, market measures and producer support; and ii) Act No. 70/1998 on Agriculture, which provides the legal basis for development projects, extension services and livestock improvements.
Under these Acts, there are a number of renewable multi-year agreements between the government and the Farmer’s Association, which provide the general framework for support and production control for farmers in the cattle, sheep and horticultural sectors. There is also an agreement on horizontal support, such as technical development and improved land cultivation, livestock improvement, extension services, organic farming and the Agricultural Productivity Fund.
Following the expiration in 2016, of the previous agreements between the government and the Farmers’ Association, new agreements were concluded for the ten-year period from 2017 to 2026, with extensive reviews scheduled in 2019 and 2023. The key changes in the agreements, which came into force on 1 January 2017, relate to the dairy and sheep sectors: i) the gradual abolition of the milk quota system and reduction in support entitlements in dairy production, subject to the revision process in 2019; ii) a reduction in support entitlements in sheep production and increased support for quality control. In addition, there is more emphasis on support that is not linked to specific agricultural products.
In early 2018, the Minister of Fisheries and Agriculture appointed a consultation committee for the revision of the agriculture agreements. The reviewing process is expected to be completed in the first half of 2019. Subsequently, the government and the Farmer’s Association will negotiate regarding possible changes to the agreements.
Iceland’s agricultural support is provided through market price support, maintained by border measures, and through direct payments, which are based on payment entitlements that are coupled with production factors. Market 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 are based 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, with full payment for each of the first 50 dairy cows and 200 beef cows, then at a declining rate for each additional cow. There is a national dairy production quota, which is set each year by the Minister of Fisheries and Agriculture and is divided among producers based on their present quotas. Present quotas also determine the entitlements for direct payments. Production in excess of quotas is permitted, provided all such production will be exported. Wholesale prices are managed for approximately half of all dairy products. A government-chaired committee, representing both the Farmers’ Association and – on behalf of the consumer side – the labour union, annually determines guaranteed minimum prices for milk delivered within production quotas. Trade in support entitlements (basic payments to all active dairy and cattle farmers) between entitlement holders is not allowed. In 2017, the government began to redeem the milk quota and to redistribute it. Dairy producers also benefit from support for breeding, land cultivation and development programmes.
For sheep, direct payments are linked to payment entitlements that were originally based on historical production. Keeping a minimum of winter-fed sheep on the farm, in relation to the entitlements is, however, required for eligibility to receive full payments. Additional payments to sheep farmers are related to a quality control scheme for lamb meat, based on animal welfare, product quality and traceability, and sustainability criteria. Consumer subsidies are provided at the wholesale level for purchasers of wool and to farmers (co-operation between farmers) in order to increase added value for sheep products.
Imports of meat, dairy products, and some vegetables that compete with domestic production are subject to tariffs which are often compound duties with an ad valorem component of 30% and a specific duty component 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. In the new agreement for the cattle sector, the Minister of Fisheries and Agriculture will take action to amend the Customs Act so as to revert specific tariffs on milk and skimmed-milk powder and cheeses back to the real-price levels of June 1995. Export subsidies for agricultural products have not been provided since the early 1990s.
According to the legislation on protection against animal diseases, imports of uncooked animal products require the permission of the Food and Veterinary Authority. Imports of live animals are prohibited, with exceptions regarding pets and certain animals for breeding subject to strict quarantine measures.
Concerning Iceland’s climate change commitments under the Paris Agreement on Climate Change, according to its National Determined Contributions (NDCs) submitted to the UNFCCC, Iceland aims to be part of a collective delivery by European countries to reach a target of 40% reduction in GHG emissions by 2030 compared to 1990 levels. A precise commitment for Iceland within this collective delivery is yet to be determined and is dependent upon an agreement with the European Union and other countries. Iceland’s participation in the EU Emissions Trading System would be key in that regard, considering that almost half of Iceland’s emissions are regulated through this scheme.
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 a number of processed agricultural products and encourages bilateral agreements on primary commodities.
As a member of EFTA, Iceland is also party to several additional free trade agreements, including with countries in South-East Europe, North Africa and the Middle East, Latin America, and Asia, as well as with the South African Customs Union. In addition to agreements under the FTA, Iceland has bilateral Free Trade Agreements with the Faroe Islands, Greenland and the People’s Republic of China.
Domestic policy developments in 2018-19
The new 10-year (2017-26) agreement addresses key elements of the regulation on horizontal support for agriculture, including support relating to advisory services, breeding, animal welfare, environmental protection, sustainable land management, organic production, land cultivation, goat farming, and investment support for pig farming. Furthermore, the Agricultural Productivity Fund is set to allocate funds for development projects in the horticultural, cattle and sheep sectors, as well as for increasing employment in rural areas. For example, this agreement contains a scheme intended to stimulate recruitment of newcomers into the different sectors.
The regulation also includes sector-specific programmes for the pig and goat sectors, and forestry. These programmes are relatively small-scale compared to those for the dairy and sheep sectors, however. Support for the goat sector is divided among headage payments (up to 60% of the total), slaughter premiums (up to 17% of the total), goat-milk subsidies (up to 8% of the total), and support for breeding (up to 15% of the total). Support for the pig sector includes subsidies to improve pig housing, including investment support for new construction and the demolition of existing buildings.
The new Agreement on the operating environment for the cattle sector opens the possibility to abolish the production quotas which have been in place for over 25 years, phase out the system of “support entitlements” (basic payments to active dairy and cattle farmers), de-link output payments for milk from the support entitlements and change the milk pricing arrangements. These changes, together with a new system for supporting beef production, will be considered in the 2019 revision of the agreement and subject to agreement by producers.
Mainly in response to the increasing domestic consumption of dairy products, the milk production quota was increased from 144 million litres in 2017 to 145 million litres in 2018. Production in excess of the quota must be exported. Payments to farmers are made in equal monthly payments of one-twelfth of the annual quota. In 2018, the minimum price paid by dairies for milk delivered within the production quota was set at ISK 90.5 (USD 0.75) per litre.
For the beef sector, headage payments are allocated to owners of cows which are registered under the breeding records programme and which produce a calf at least every two years. Under the new Agreement, total headage payments are divided between the categories “dairy cows” and “beef cows”. Initially, the total payment was divided between the two categories based on the headage counts of 25 000 dairy cows and 3 000 beef cows. This division is set to be revised annually by the Committee for the Implementation of National Agricultural Agreements. Support is also available for breeding, investment (up to 40% of the capital costs, but limited by a fixed total amount) and balancing of production and demand (improved marketing of cattle products, support for diversification, compensation for the slaughtering and temporary support). The measures for balancing production and demand are discretionary and are to be triggered only when there is a need to respond to changes in supply and demand.
Similar to the dairy sector, the support entitlements for the sheep sector are to be abolished over the duration of the Agreement and replaced by quality assurance premiums for farmers, subject to meeting requirements relating to quality, animal welfare and sustainable land use. These changes are subject to the revision expected to take place in 2019.
In response to over-supply related to declining exports ‒ due to the appreciation of the Iceland Krona and rising stocks of sheep meat ‒ the government applied the following measures: 1) provided a one-time payment of ISK 400 million (USD 3.3 million) to farmers, which was divided by number of winter-fed sheep; 2) added ISK 150 million (USD 1.4 million) to the special regional support in 2018; and 3) allocated a total of ISK 115 million (USD 1.2 million) to various projects, such as carbon offsetting, environmental projects and an analysis of the meat processing center system.
Following the revision of the agreement reached by the government and Farmer’s Association in January 2019, headage payment to sheep will not be introduced ‒ as originally expected ‒ in 2020.
Throughout the term of the agreement, additional support is foreseen for producers in certain regions which are particularly dependent on sheep farming. A complementing regulation sets out certain requirements that need to be met in order to receive this support, such as the number of sheep and distance to urban areas.
Support is paid for the production of wool during the term of the agreement. Payments should be based on the quantities produced, although part of the support may also be used to subsidise the cost of collecting the wool. Applying specific coefficients, different premiums may be paid for individual categories of wool.
Investment aid is also available to promote better living conditions for sheep and more cost-effective farming practices. To be eligible, each project must have a cost of at least ISK 1 million (USD 9 362). Contributions may cover up to 20% of capital costs, but no individual producer may receive contributions exceeding 10% of the total annual funds available for investment aid.
The agreement concerning the framework of support to horticultural producers remains unchanged and provides production-based payments to producers of cucumbers, tomatoes and bell peppers. Electricity subsidies are also granted for greenhouses (which are heated by geothermal energy) to cover up to 95% of the cost of the transfer and distribution of electricity. Support payments to each individual producer are capped. No single entity can receive more than 10% of annual total direct payments or 15% of total funds to electricity subsidies annually.
In September 2018, the government launched a new Climate Strategy aiming for the country to be carbon neutral before 2040. The strategy consists of 34 measures ranging from the phasing out of fossils fuels in transport to measures aiming to increase carbon sequestration in land use (including afforestation and revegetation). The government will also support efforts to reclaim drained wetlands, which in recent years have been shown to be a significant source of carbon emissions. A collaboration with sheep farmers is expected to be launched in 2019, with the goal of increasing carbon sequestration within the sector.
Trade policy developments in 2018-19
In 2017, Iceland eliminated tariffs of all non-agricultural products. Tariffs on cheese and powdered milk were updated by Act No. 102/2016, which resulted in increased specific duties. The tariff is updated in March each year based on developments in the exchange rate (SDR/ISK). The distribution of import quotas for cheese, which refers to designations of origin and geographical indication, is to be determined by drawing lots.
On 1 May 2018, the new EEA Agreement on trade in agricultural products and the protection of geographical indications (GIs), which was reached in September 2015, entered into force. Under the agreement, Iceland: i) granted duty-free access for a range of agricultural products (mostly processed products but also live animals, and some fresh fruits and vegetables); ii) expanded existing tariff quotas for beef, pig meat, poultry, cheese, and certain meat products; iii) reduced tariffs on imports of meat, some vegetables, and some other products; and iv) provides protection for EU-listed GIs. In return, under the agreement, the European Union grants duty-free access for a range of products and opens or expands tariff quotas, including an expansion of the existing quota for skyr from 380 tonnes to 4 000 tonnes over four years.
Finally, as a member of EFTA, Iceland is currently engaged in negotiations with MERCOSUR and India on the Trade and Economic Partnership Agreement (TEPA).