Agriculture

Employment in Agriculture
In 2002, 3.9% of the labour market was employed in agriculture.

Farming
Agriculture was the mainstay occupation for centuries and censuses from the mid-19th century show that 70-80% of the nation lived from farming then. This proportion decreased as the 20th century wore on and in 1993 there were 4,700 farms, accounting for 5,900 man-years of labour, or 4.9% of total man-years worked.

Family farming is overwhelmingly the most common arrangement and in some cases two families work the same farm. Most farmers own their land and many farms have been owned by the same families for centuries. The average Icelandic farm is small, with 18 milk cows and 152 sheep in the past decade.

Most farms are engaged in sheep rearing. In 1993/1994, production quotas were issued to about 3,250 farms. Of these, 550 were largely dairy-based farms, 1,830 were predominantly sheep farms and 880 were in mixed farming. The number of farms with quotas has gone down drastically in recent years; by comparison, production quotas were issued to 4,379 farms in 1987.

In terms of value, cattle farming is the most important segment, accounting for about 35% of the estimated value of production, against 28% in sheep farming. The contraction in farming in recent years has hit sheep farming the hardest, and the value of its production shrunk considerably in the past two decades.

Livestock
Sheep farming and cattle farming are by far the most common types of farming in Iceland. The policy towards selective breeding has been very cautious, even though this might allow the productivity of animal husbandry to be raised. Some Galloway cattle have been imported for breeding, under strict control, at a single, well-isolated station on the island of Hrisey in the north.

Statistics for the number of sheep are generally compiled for end of the year, after slaughtering and before lambing. At end of 1998, there were around half a million sheep in Iceland but with the addition of lambs in summer, a total sheep stock of 1.1-1.2 million may be assumed. The scale of the contraction in sheep farming in the past 10-15 years is clearly reflected in the fact that at the end of 1976, the number of sheep totalled almost 900,000. Sheep farming in Iceland differs from that of many other countries in that, for three months of the year, the sheep are released for free-range grazing in highland pastures. There are about 30,500 milch cows number 30,500, producing a total of around 100 million litres of milk per year. Average annual yield of milch cows is substantially lower than in other countries, reflecting the quality both of the stock and the feed. Yet average yield has increased rapidly since the 1940s. In 1994 the annual average yield was 4,148 kg, as compared to 2,420 kg in 1945.

The Icelandic horse has been important in economic terms and is linked up, in a way, with the Icelandic identity. The stock of horses has been on the increase and the figure of 78,400 animals at the end of 1998 was almost 50% higher than in 1980. About 2,500 horses are exported annually, mostly to Germany, and they are gaining popularity in other countries as well, such as the USA and Sweden. It is estimated that the stock of Iceland horses outside of Iceland may be as great as 60,000 animals.

Crops
Grain is grown in very limited quantites in Iceland and most agricultural land is devoted to grass for production of hay and silage as fodder for sheep and cattle, which are the main livestock types in Icelandic farming. Other crops include potatoes (the harvest of which meets about 80% of domestic consumption), turnips and carrots. Cultivation of vegetables and flowers in geothermally heated greenhouses is extensive. In total, greenhouses produced about 800 tonnes of tomatoes in 1998, which was two-thirds of annual consumption. By area under cultivation, cucumbers come second in importance after tomatoes, and the output of 700 tonnes supplies over 70% of domestic demand.

Afforestation
Afforestation (or reforestation) is on the increase and Most planting is for non-economic use.

Agricultural Policy
The prolonged depression of the 1930s and the boom of the World War II years shaped the economy in general and agricultural policy in particular. It is true that the government had supported investment in agriculture, in particular land improvement, prior to that time, but it had mostly left pricing of produce, etc., to market forces. The Great Depression of the 1930s led to a drastic fall in world prices of agricultural products which consequently affected the prices of produce in Iceland; likewise, the fall in purchasing power of consumers further depressed prices and thereby affected the economic situation of the farmers from another angle. In response, a very active pricing policy was adopted. Imports of many agricultural products were prohibited. Prices were determined by a price review board and set considerably above world market prices.

The main course of agricultural policy was confirmed by legislation in 1943 and its main objective was to secure farmers an income similar to that of wage earners at large. The most important policy instrument was pricing of the product. A high price policy was adopted and subsidies were paid at the processing level to lower the final price to the consumer. Prices were set on the basis of production accounts collected from many farms, and the average combined into a reference account. The cornerstone of this policy was prohibition of competition, not only importation of the same agricultural products as Iceland's own farmers offered, but also, in effect, domestic competition, when marketing areas were established and it was declared illegal to sell products from one marketing area in another.

Many farm products were in short supply at the end of World War II and dairy products were rationed during the winters. However, production was increasing at a rapid rate as a result of the price policy and also through the granting of various investment grants to farmers. Farming became ever more capital-intensive and use of fertilizers increased rapidly. Production increased, especially in the 1950s when the volume of agricultural products rose by close to 50%. Production volumes have remained largely unchanged since 1980.

It is estimated that, by the early 1960s, the market for agricultural produce had reached equilibrium. Output, however, continued to increase at a fast rate and the rate of growth in supply far outstripped that in demand. The difference was met by exports, but these became increasingly difficult and costly for the Treasury, which footed the bill for export subsidies.

Concomitant with the rise in supply of farm products, demand for them decreased significantly. A more liberal foreign trade policy meant that an increased variety of food became available at favourable prices and led to a decrease in consumption of meat, especially of mutton and lamb.

This large discrepancy between demand for and supply of agricultural products was, of course, the outcome of the agricultural policy conducted until recently, which has proven to be extremely costly. The cost to consumers in high prices is well established; agricultural prices are much higher in Iceland than in other Nordic countries, let alone in the rest of Europe. In addition, subsidies and export grants paid by the government have taken up a considerable proportion of treasury spending. Through various measures, not least the abolition of export subsidies, Treasury outlays on agriculture have been lowered significantly in recent years.

The OECD measures the direct and indirect support given to agriculture by the so-called Production Subsidy Equivalent (PSE), which seeks to quantify the compensation farmers would have to receive so as not to lose if imports at world market prices were allowed and all farm subsidies were suspended. These calculations have shown that Icelandic agriculture ranks among the most protective, along with Norway and Switzerland.

There is considerable excess capacity in Icelandic farming. Estimates show that the current output could be produced by as few as 1,500 farmers, one-third of the present number.

In recent years, Icelandic agriculture has gone through an adjustment period which in many cases has been painful. More structural changes were undertaken with the entering into force of the GATT agreement, which openen the Icelandic market for limited imports of foreign products. This is an important challenge for Icelandic farmers, both as regards the domestic market and in terms of gains on export markets. It is clear that the competitive advantage of Icelandic agriculture lies in the fact that Iceland has a relatively clean environmental and that no hormones are used in meat production.

Subsidiary Farming
Subsidiary farming has always been important in Iceland. In the old days, access to a beach where a lot of driftwood could be collected was of great importanceGathering of eider down, from wild or reared eider colonies, has been lucrative, but the price of the product has been subject to fluctuations. Ownership of salmon fishing rivers has been of great importance to many landowners; most farmers rent rivers out and only a handful lay nets for commercial fishing.

Many farmers have ventured away from traditional farming into new branches. At one time, many of them took up fur farming. Mink were initially imported in the early 1930s for fur farming. However, many of the animals escaped from captivity, managed to survive in the wild and multiplied quickly. Mink have taken a toll of birds and trout. Mink farming was prohibited by law in 1951, but the ban was lifted in 1969. In the wake of a more restrictive policy towards traditional agriculture in the early 1980s, many farmers began breeding mink and foxes for their fur, largely as a subsidiary branch of farming. This diversification was eagerly encouraged by the authorities, who to a considerable extent supplied soft loans for investment. At the peak in 1983, about 150 fur farms were in operation. The industry went through very difficult times in the latter half of the 1980s when fur prices collapsed as fashion changed. The problems of Icelandic fur farms were compounded by the fact that, due to factors including lack of experience and know-how, their products fetched considerably lower prices than those of competitors from other countries.

Fish farming was yet another branch of agriculture which grew fast in rural Iceland, in many cases with substantial interest by the farming community. At the peak in 1988 there were no fewer than 125 fish farms in operation. This sector faced serious difficulties in the late 1980s, when prices of farmed salmon plummeted worldwide; in addition, farms in Iceland suffered from various technical setbacks, diseases etc. This led to a wave of fish-farm bankruptcies and severe loan losses by banks and financial institutions.

Fish and fur farming are classic examples of the danger of ill-designed industrial policy, based on the granting of soft loans against very small collateral and with inadequate equity capital provided by owners.

Many farmers all over Iceland have ventured into tourism. Now many farms offer accommodation to tourists. Most ventures are on a modest scale, offering a few rooms each for bed and breakfast. Others involve much larger operations, with facilities to accommodate groups of tourists and typically offering horse hire, fishing and other rural leisure activities.

Adapted from "Iceland - The Republic", Handbook published by the Central Bank of Iceland, ed. by Mr. Jóhannes Nordal and Mr. Valdimar Kristinsson, Reykjavik 1996. The Ministry is responsible for the adapted texts.