Agricultural Policy Monitoring and Evaluation 2024

12. Iceland

Main findings

Support to agriculture

Relative agricultural support to producers in Iceland is among the highest in the OECD. The Producer Support Estimate (PSE) was more than three times the OECD average in 2021-23, at 46% of gross farm receipts. Market price support measures account for 43% of producer support, principally tariffs that maintain high domestic prices relative to world prices and cause a 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 very high at 56% above those in world markets in 2021‑23. 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 7% of the value of agricultural production in 2000-02 to less than 3% in 2021‑23; the value of production has increased 29% while expenditures decreased around 56%. Inspection and control represent 63% of GSSE and the rest is split between agricultural knowledge and innovation system, marketing and promotion, and public stockholding.

TSE as a share of Gross Domestic Product (GDP) declined from 1.7% in 2000-02 to 0.7% in 2020‑23. This largely reflects the declining share of agriculture in the overall economy.

Key recent policy changes

A new comprehensive agricultural policy was passed by parliament in 2023. The agricultural policy is meant to guide development of the agricultural system until 2040. The main objectives of the agricultural policy are to strengthen and support Icelandic agriculture for the future with sustainable development as a guiding principle. The policy is based on three key pillars: land use; climate and environmental protection; and technology and innovation.

The agricultural policy is an integral part of a newly adopted food policy in Iceland aiming to the year 2040 horizon. The food policy takes all major aspects of food production in Iceland into consideration, including fisheries, agriculture, and aquaculture. The focus is on sustainability and the circular economy of food production, food security and food safety, R&D, consumers, and society.

In 2023 some adjustments were made to the agreement between the government and the Farmer’s Association. This was to agree that agriculture in Iceland will be carbon neutral no later than 2040 and on taking necessary steps to prepare implementation of climate accounting for agriculture. The agreement runs between 2016 and 2026 and such agreements are normally revised twice over that period.

A comprehensive analysis on the financial situation across farms in Iceland was undertaken in 2023 in response to high inflation and rising input costs for agriculture. This led to various one-time support measures aimed to accommodate particularly vulnerable farmers. The focus of these was to help younger farmers who generally have a higher debt ratio and were at risk of leaving the sector. Family farms facing short term vulnerabilities due to increased capital costs and a long-term lack of profitability were also targeted. In total, the increase in support measures was ISK 2 100 million (USD 15.2 million).

The new agricultural policy introduced in 2023 is designed to reduce greenhouse gas (GHG) emissions from agriculture and encourage carbon removal and storage in soils. The government has identified climate actions where the agricultural sector plays a significant role. GHG emissions from agriculture may be reduced by improving feed and resource use, optimising land use and preserving and increasing carbon in soils and vegetation. A framework to create certified carbon units in agriculture and land use sectors is to be developed.

Assessment and recommendations

• As regards environmentally sustainable productivity growth Iceland is performing relatively well. Output growth in agriculture (9%) has clearly outpaced the global average over the 2012‑21 period, which has been driven by robust growth in total factor productivity (TFP) of over 10% per year which was also much higher than the global average TFP growth. At the same time agri-environmental performance indicators, such as nitrogen and phosphorus surpluses and share of agriculture sector of the total energy use are comparatively small. However, agriculture continues to represent a significant share (13%) in the country’s total GHG emissions – well above the OECD average – mainly due to the importance of the ruminant livestock sector.

• 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. Reducing market price support and payments targeted at specific commodities would also contribute to climate-change adaptation, as farmers would not be locked into producing subsidised commodities under changing climatic conditions.

• 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 agricultural sector is assumed to play a significant role in the national action plan for social adaptation to climate change, but a comprehensive climate-change adaptation policy and measures for agriculture have not yet 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 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.

• Expenditures for general services (General Service Support Estimate, GSSE) represent only 4% of total support to agriculture (Total Support Estimate, TSE), much lower than the 14% OECD average. 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.

Development of support to agriculture

Figure 12.1. Iceland: Development of support to agriculture

Table 12.1. Iceland: Estimates of support to agriculture

Million USD

.	1986-88	2000-02	2021-23	2021	2022	2023p
Total value of production (at farm gate)	236	150	305	283	304	327
of which: share of MPS commodities (%)	80.32	82.11	86.38	84.69	86.63	87.82
Total value of consumption (at farm gate)	205	136	278	252	276	305
Producer Support Estimate (PSE)	193	139	188	194	185	185
Support based on commodity output	180	113	125	134	116	125
Market price support¹	179	72	81	91	74	79
Positive market price support	179	72	81	91	74	79
Negative market price support	0	0	0	0	0	0
Payments based on output	2	40	44	43	42	46
Payments based on input use	13	4	15	14	16	14
Based on variable input use	3	0	3	3	4	3
with input constraints	0	0	0	0	0	0
Based on fixed capital formation	6	2	7	7	8	7
with input constraints	0	0	0	0	0	0
Based on on-farm services	4	2	4	4	4	3
with input constraints	0	0	0	0	0	0
Payments based on current A/An/R/I, production required	-1	-3	13	12	13	13
Based on Receipts / Income	-1	-3	0	0	0	0
Based on Area planted / Animal numbers	0	0	13	12	13	13
With input constraints	0	0	0	0	0	0
Payments based on non-current A/An/R/I, production required	0	20	36	34	40	33
Payments based on non-current A/An/R/I, production not required	1	5	0	0	0	0
With variable payment rates	0	0	0	0	0	0
with commodity exceptions	0	0	0	0	0	0
With fixed payment rates	1	5	0	0	0	0
with commodity exceptions	1	5	0	0	0	0
Payments based on non-commodity criteria	0	0	0	0	0	0
Based on long-term resource retirement	0	0	0	0	0	0
Based on a specific non-commodity output	0	0	0	0	0	0
Based on other non-commodity criteria	0	0	0	0	0	0
Miscellaneous payments	0	0	0	0	0	0
Percentage PSE (%)	77.19	63.98	45.57	50.36	44.53	42.62
Producer NPC (coeff.)	4.16	2.44	1.56	1.70	1.50	1.50
Producer NAC (coeff.)	4.38	2.78	1.84	2.01	1.80	1.74
General Services Support Estimate (GSSE)	18	11	8	8	8	9
Agricultural knowledge and innovation system	5	5	1	1	1	1
Inspection and control	1	2	5	5	5	6
Development and maintenance of infrastructure	2	1	0	1	0	0
Marketing and promotion	1	1	1	1	1	1
Cost of public stockholding	9	2	1	1	1	1
Miscellaneous	0	0	0	0	0	0
Percentage GSSE (% of TSE)	6.94	7.39	4.14	3.87	4.07	4.46
Consumer Support Estimate (CSE)	-112	-65	-77	-85	-71	-76
Transfers to producers from consumers	-157	-66	-78	-85	-72	-76
Other transfers from consumers	-1	-2	0	0	0	0
Transfers to consumers from taxpayers	46	3	1	1	1	1
Excess feed cost	0	0	0	0	0	0
Percentage CSE (%)	-70.44	-48.30	-27.70	-33.64	-25.76	-24.90
Consumer NPC (coeff.)	4.38	1.98	1.39	1.51	1.35	1.33
Consumer NAC (coeff.)	3.38	1.93	1.38	1.51	1.35	1.33
Total Support Estimate (TSE)	257	153	197	203	193	194
Transfers from consumers	158	68	78	85	72	76
Transfers from taxpayers	100	87	119	118	122	118
Budget revenues	-1	-2	0	0	0	0
Percentage TSE (% of GDP)	4.94	1.72	0.70	0.79	0.69	0.63
Total Budgetary Support Estimate (TBSE)	78	81	116	111	119	116
Percentage TBSE (% of GDP)	1.52	0.91	0.41	0.44	0.43	0.38
GDP deflator (1986-88 = 100)	100	264	715	660	719	766
Exchange rate (national currency per USD)	40.94	89.37	133.39	126.95	135.27	137.95

Note: p: provisional. NPC: Nominal Protection Coefficient. NAC: Nominal Assistance Coefficient. A/An/R/I: Area planted/Animal numbers/Receipts/Income. 1. Market Price Support (MPS) is net of producer levies and excess feed cost. MPS commodities for Iceland are: milk, beef and veal, sheep meat, wool, pig meat, poultry and eggs.

Source: OECD (2024), “Producer and Consumer Support Estimates”, OECD Agricultural policy monitoring (database), https://data-explorer.oecd.org/.

Policy landscape

Main policy instruments

Based on Iceland’s key agricultural policy objective to maintain and strengthen a diverse agricultural sector to the extent that physical and marketing conditions allow, its policies centre around price support and direct payments. 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. The key policy 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.

As a foundation of the support system for agriculture, the government negotiates, in regular intervals, 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. The 2023 revisions focused on issues related to food security, environment, and climate change.

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. A national dairy production quota is 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 are connected to historical production. However, receiving a full payment 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.

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.

Innovation for sustainable productivity growth

In 2023, Iceland adopted a new food policy as a guideline in all decision making when it comes to food production until 2040. The main goal is to increase value creation in food production in Iceland and guarantee food security and food safety and thus improve economic welfare in harmony with the environment and nature. The food policy is based on six pillars, the first of which is sustainability of food production. All production based on living resources should meet all criteria for sustainability, guided by an ecosystem approach and the precautionary principle. Furthermore, all produce should be fully utilised, food production should be carbon neutral and carbon offsets are to be based on nature-based solutions. A five-year action plan is under development.

Iceland has adopted an action plan to encourage organic agriculture. It is considered an important factor in increasing sustainability and responding to growing demand for certified organic products both domestically and abroad. Promoting organic production is seen as part of strengthening Iceland’s competitive position, in addition to maintaining biological diversity and being a part of the circular economy. The purpose of the plan is to stimulate demand for organic products, support adoption of organic production, and strengthen the organic value chain.

In 2023, Iceland adopted an action plan to lay the foundations for increased cereal production. Iceland is reliant on imported cereals for human consumption. Domestic production is mainly of feed crops, especially barley. Following COVID-19 and Russia’s war of aggression against Ukraine and other market disruptions, cereal production and food security has received more attention and the government has earmarked around ISK 2 000 million (USD 14.5 million) to be spent in the next five years in extensive research, development, and other measures to increase cereal production. Emphasis will be given to developing and breeding varieties of barley, oats and wheat adapted to Icelandic climate and soil and to building competence and capacity in plant breeding in Iceland. In addition, investment support will be made available for building infrastructure in the sector. The action plan also foresees the provision of ISK 500 million (USD 3.6 million) annual support for increasing cereal production. Planned support measures include both production-coupled support measures (payment based on output, ISK per kg of output) and investment support measures (for example, for investments on grain drying, storage and transport equipment).

In the beginning of 2024, the Land og Skógur (Land and Forest) institute was established by merging the former Landgræðsla ríkisins (Soil Conservation Service) and Skógrækt ríkisins (Icelandic Forest Service). The new reinforced institute is a knowledge-based institute in the field of vegetation and soil resources, to play an important role in research, monitoring, and education to protect, restore and improve land-based resources and to promote their sustainable use.

The Food Fund Act (entered into force in May 2020) has the goal to support development and innovation in producing food and food products from side products in agriculture and fisheries. The fund mainly emphasises innovative and sustainable projects for food production in general, not limited to agriculture. It supports research projects aimed at creating new knowledge that promotes innovation, sustainability, value creation and competitiveness of Icelandic food. The research must be related to the use of Icelandic food, including primary raw materials or by-products created in the production process. The fund also supports individuals and legal entities for special purposes marketing efforts, as well as the development of their infrastructure related to market penetration abroad (for example, to create a marketing plan, design of websites, branding, and promotional material as well as for consulting in sales and marketing matters).

There is increased emphasis on strengthening environmental consultation and advisory services within the agricultural sector, to implement green accounting for farmers and to 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, reduction of the use of mineral fertilisers; improved livestock feeding to reduce enteric fermentation; and increased domestic vegetable production. An ongoing programme based on the co-operation of several ministries and institutions in the field of environment, food and agriculture, aims to make agriculture more climate friendly through reduction of GHG emissions from agriculture, improvement of feed and resource use, optimisation of land use and preserving and increasing carbon in soils and vegetation.

The climate action plan further aims at improved treatment of livestock manure and improved efficiency in synthetic fertiliser use, utilisation of aquaculture waste and other nutritious by-products that can be used for land cultivation or land reclamation. Emphasis is given to improve farmers’ access to practical information and consultation regarding how they can best reduce GHG emissions from their operations. Finally, reducing the emissions intensity of production, i.e. GHG emissions per kg of product, is considered of importance.

Recent policy developments

Domestic policy developments in 2023-24

New agricultural policy until 2040

In 2023, the Parliamentary Resolution in Agricultural Policy until 2040 was passed as a new comprehensive agricultural policy and after several years of co-operation and consultation with agricultural stakeholders. It sets guidelines for developing the agricultural system until 2040. The main objectives include strengthening and supporting Icelandic agriculture and strengthening its foundations for the future with sustainable development as a guiding principle. The policy is based on three key pillars including land use, climate and environmental protection, and technology and innovation.

The policy sets out a vision for the future that affects the framework of the value chain of agriculture in a broad context. The agricultural vision covers the environment, society and competitiveness and some of its major ambitions are:

• agriculture uses natural resources sustainably

• food security ensured

• greenhouse gas emissions are significantly reduced, and carbon neutrality and high adaptability to climate change are enhanced

• agriculture contributes to the conservation and promotion of biodiversity

• grazing and other land use should take into account the state and capacity of ecosystems and be managed in accordance with sustainability criteria

• cultivation, land use and improved land quality support diverse economic activities and residences throughout the country

• agricultural education meets the needs of industry and the market, and producers have the skills and capacity to meet the challenges and opportunities of the future in line with consumer demand

• production practices consider the health, welfare and housing of animals.

The focus of the new policy is on environmental and social matters and improving the competitiveness of Icelandic agriculture. For example, agricultural support policy should:

• Strengthen and expand agricultural production based on sustainable use for climate, environment and nature conservation and crop diversity.

• Help diversify agricultural production, with increased emphasis on tillage and other land use, forestry, ecosystem restoration, nature conservation and land conservation based on economic, social and environmental sustainability.

• Facilitate generational exchange and recruitment.

• Provide a stable and solid basis for domestic food production and national food security.

The policy will be implemented through regular five-year action plans until 2040. The first action plan is under development. For the vision to become a reality, it is suggested that emphasis be placed on ten core subjects: food security, adaptation and mitigation to climate change, biodiversity, land use and land preservation, circular economy, international market issues, consumers, innovation and technology, education and R&D and the agricultural support system.

The agriculture policy is an integral part of a newly adopted food policy in Iceland until the year 2040. The food policy takes all major aspects of food production in Iceland into consideration, including fisheries, agriculture, and aquaculture. The focus is for instance on sustainability and the circular economy of food production, food security and safety, R&D, consumers, and society.

Agricultural agreements between the government and the Farmers’ Association

In 2023, the second revisions of the ten-year agreements between the government and the Farmers’ Association took place. The result was only minor adjustments as the contracting parties agreed to begin focusing on developing the future of the agricultural support system. The main change was to delay the abolition of the support scheme for sheep farmers which had been expected by the end of 2026. Minor changes were made to the horticulture agreement as well as to the general framework agreement to encourage organic production.

In protocols to the 2023 revision agreement, contracting parties agreed for agriculture in Iceland to become carbon neutral no later than 2040, and for necessary steps to be taken to prepare implementation of climate accounting for agriculture.

Responses to high inflation and rising costs

In the autumn of 2023, the government established a working group across three ministries to assess a difficult situation that had arisen in agriculture due to high inflation, rapid increases in interest rates and input prices. Farms financed with inflation indexed loans and variable interest rates had become increasingly vulnerable and there were signs of farmers leaving the sector. Most Icelandic farms are closely linked to farmers’ households, as the family home is a part of farm assets, so farmers’ financial problems concerns both their business and livelihood.

A comprehensive analysis on the financial situation across all farms was undertaken, with consultation with farmers, financial institutions, and other stakeholders. To accommodate the most vulnerable farmers, several one-time support measures were implemented. The actions emphasised promoting recruitment and generational change in the sector by helping younger farmers, who have a generally higher debt ratio. It was seen as important for the future of the sector to prevent a significant proportion of young farmers from leaving the industry. Furthermore, by analysing farmers’ balance sheets, those family farms most vulnerable in the short term due to increased capital costs and a long-term lack of profitability were targeted with increased support.

Support measures were increased by ISK 2 100 million (USD 15.2 million) or approximately 12%. Of the total support, ISK 600 million (USD 4.3 million) was allocated as addition to recruitment payments to newcomers since 2017, ISK 450 million (USD 3.3 million) was added to investment support in cattle, dairy and sheep farming, ISK 450 million (USD 3.3 million) was allocated to farmers which rely mostly on income from sheep farming and ISK 100 million (USD 0.7 million) was allocated to cattle farmers and ISK 500 million (USD 3.6 million) to dairy farmers.

Policy context

Key economic and agricultural statistics

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.

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.

Table 12.2. Iceland: Contextual indicators

	Iceland		International comparison
	2000*	2022*	2000*	2022*
Economic context			Share in total of all countries
GDP (billion USD in PPPs)	8	27	0.02%	0.02%
Population (million)	0.3	0.4	0.01%	0.01%
Land area (thousand km2)	100	101	0.10%	0.10%
Agricultural area (AA) (thousand ha)	1 889	1 872	0.10%	0.10%
			All countries1
Population density (inhabitants/km2)	3	4	52	64
GDP per capita (USD in PPPs)	29 785	69 616	9 363	25 965
Trade as % of GDP	24.9	30.4	12.3	16.6
Agriculture in the economy			All countries1
Agriculture in GDP (%)	8.1	4.8	2.9	3.8
Agriculture share in employment (%)	8.3	4.1	-	-
Agro-food exports (% of total exports)	7.9	6.2	6.4	8.0
Agro-food imports (% of total imports)	7.3	8.9	5.8	6.9
Characteristics of the agricultural sector			All countries1
Crop in total agricultural production (%)	13	12	-	-
Livestock in total agricultural production (%)	87	88	-	-
Share of arable land in AA (%)	7	6	32	34

Note: *or closest available year.

1. Average of all countries covered in this report.

Sources: OECD statistical databases; International Labour Organization (ILO); UN Comtrade; World Bank, WDI; FAO database and national data.

In 2023 Iceland’s economy grew by 4.9%, the unemployment rate was 3.5%, and consumer price inflation was about 9%. The economy is projected to grow by 2.0% in 2024 and 2.3% in 2025, the unemployment rate is expected to be around 4.5% and consumer price inflation about 8% in 2024 (OECD, 2023[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).

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.

Output growth in agriculture (9%) has clearly outpaced the global average over the 2012‑21 period, which has been driven by commensurately robust growth in total factor productivity (TFP) of over 10% per year – which was also much higher than the global average TFP growth. This is mostly related to a significant output growth in aquaculture and much less so in crop and livestock 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. The share of agriculture sector of the total 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.

Table 12.3. Iceland: Productivity and environmental indicators

	Iceland		International comparison
	1991-2000	2012-2021	1991-2000	2012-2021
			World
TFP annual growth rate (%)	-0.3%	10.3%	1.7%	1.1%
			OECD average
Environmental indicators	2000*	2022*	2000*	2022*
Nitrogen balance, kg/ha	8.0	6.2	32.1	28.2
Phosphorus balance, kg/ha	1.8	0.8	3.3	2.3
Agriculture share of total energy use (%)	1.9	1.4	1.7	2.0
Agriculture share of GHG emissions (%)	15.4	13.3	8.7	10.1
Share of irrigated land in AA (%)	..	..	-	-
Share of agriculture in water abstractions (%)	42.9	22.3	47.0	49.5
Water stress indicator	..	..	8.7	..

Note: * or closest available year.

Sources: USDA Economic Research Service, Agricultural Productivity database; OECD statistical databases; FAO database and national data.

Historical trends in agricultural policies

Iceland’s agricultural policy has focused 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 relatively 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.

Table 12.4. Iceland: Agricultural policy trends

Period	Broader framework	Changes in agricultural policies
Prior to mid-1990s	Closed economy	Minimum prices Agricultural tariffs and non-tariff measures Consumer subsidies
Mid-1990s-2016	Gradual reforms to open market	EFTA, EEA Phase out of administered prices (except milk) Decoupled payments introduced to substitute price support measures Act Production, Pricing and Sale of Agricultural Products No. 99/1993 Act on Agriculture No. 70/1998
2017-2022	Continuation of gradual reforms	Revisions of agreements for sheep and cattle farmers Several FTAs signed EEA agreement enhanced Reduction of agricultural tariffs
2023	New comprehensive agricultural policy

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 43% of total support to agriculture. Two-thirds of producer support is provided based on prices (Figure 12.7). TSE has declined over time, averaging 0.7% 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 inspection and control represent 63% and the rest is split between agricultural knowledge and innovation system, marketing and promotion, and public stockholding.

References

[1] OECD (2023), Economic Outlook Note - Iceland, https://www.oecd.org/economy/iceland-economic-snapshot/.

[2] OECD (2019), “Water: Freshwater abstractions (Edition 2018)”, OECD Environment Statistics (database), https://doi.org/10.1787/09a848f4-en (accessed on 7 April 2022).