Rummaging through boxes of vegetables in a local supermarket recently, I noticed something on my quest for the holy trinity of quality and freshness at an affordable price. The level of debate going on amongst shoppers about the quality of vegetables relative to their cost seemed to be greater than for any other food types. Perhaps it’s due to the rising popularity in trends for vegetarianism, veganism and more eco-conscious lifestyles? Perhaps the tighter squeeze on everybody’s pockets has led us to question what we are prepared to spend? Perhaps people are just feeling more patriotic and want to question their food sources more?
The cost of importing food is rising, particularly in the case of vegetables. Figures from Statistics Iceland show that the consumer price index (the CPI tracks the price consumers pay for a basket of everyday products) for the category of vegetables has risen steadily on average since January of 2008. The index peaked at 150 points in April this year, leading to an overall increase of 50% in the price of vegetables in less than three years. I set out to investigate why we consumers end up paying the price we do for Icelandic vegetables, and as a consequence came across some curious trends happening within the industry as a whole.
Supply and demand
A stroll through any supermarket will reveal that some Icelandic vegetable varieties are priced fairly competitively with imports (tomatoes, for example) while others cost a good deal more than their foreign equivalent (like zucchinis). So what makes for this variation in price?
Gunnlaugur Karlsson and Kristín Sveinsdóttir of Sölufélag Garðyrkjumanna (SFG – “The Gardener’s Sales Collective”), the company behind the brand Íslenskt.is, explain that the amount consumers end up paying for Icelandic vegetables depends on supply and demand. Here comes the science.
“The demand for products depends on the time of year. In summertime we are very competitive in price, as we have greater quantities of vegetables, especially tomatoes and cucumbers. It’s much more difficult to be competitive on price during winter as there’s less quantity and fewer varieties,” Gunnlaugur explains.
He adds that while there are variations, “It’s a myth that Icelandic vegetables are vastly more expensive than other countries.” This, he says, is an issue that again comes back to supply and demand. “We’re not exporting, so if farmers can respond to a high demand for produce by producing a lot, prices can then be kept down. For example, we had a situation during the summer, where Icelandic cucumber portions were cheaper in Bónus than their equivalent in Tesco supermarkets in the UK”. That’s a surprising fact to digest but illustrates just how competitive domestic produce can be if enough is produced. It seems that if you want to get value for money when shopping for Icelandic vegetables, there’s a much greater chance if you shop for varieties that are in season and plentiful. If you want strawberries in December, you have to expect to pay a lot more.
Another part of the process where end costs tend to get inflated is with suppliers and middlemen. “The suppliers are few and in a powerful position in relation to the producers. There has been a monopolistic trend,” says Ólafur Dýrmundsson of the local Farmers’ Association (Bændasamtök Íslands).
In view of this SFG’s Gunnlaugur explains that his organisation’s part in the chain is to collect, package, market and resell to suppliers on behalf of farmers. He stresses the fact that because SFG is owned by farmers themselves, the company is not in the business of making a profit. “We run our operations on the basis of a 10% cost to farmers, ensuring they receive 90% of the price of their produce. The supply chain only works as long as it’s a convenient system. If someone in between is taking more than he should, then it’s going to change”.
Bananar (“Bananas”) is Iceland’s main distributor of both imported and Icelandic vegetables. Bananar Manager Kjartan Friðsteinsson argues that the popular notion of distributors exploiting the devaluation of the króna through the application of higher margins is a misconception. “Of course we are running a business, but we are not increasing the margin or anything like that. The fluctuation of the króna means we have to pay the rate of exchange at any particular time. Actually I think the percentage margin has gone down rather than up, relatively speaking, and the margin in vegetables is very low anyway, compared to other items such as electronics.”
Explaining Bananar’s pricing structure, Kjartan tells me “Sometimes we have to buy oranges from South Africa, for example, other times from Argentina or Spain. Prices can fluctuate in different countries at different times of the year, and you also have to import from further distances when oranges aren’t in season closer to home. This all adds to the costs the consumer pays.” Kjartan balks at suggestions of suppliers having possible financial motive to support imports over domestic produce. “We’re just here to fill in the gaps, if it comes to a time that domestic production satisfies demand in a particular product, then we’ll happily stop importing it.”
But what about the costs involved in production. Just how expensive is it to produce vegetables in Iceland?
Knútur Ármann, a tomato grower based in Bláskógabyggð, explains that growing vegetables in greenhouses requires a variety of imported materials such as glass, steel and lamps. While these were always costly, the price has soared since 2008. “In the last two years the low value of the króna has made the cost of the materials we need to import, such as fertiliser, very expensive. They are now double the price,” Knútur says.
Knútur cites electricity as his single biggest production cost. “My energy costs equate the salary I have to pay for six people. We understand that most Icelandic people want their food to be fresh and locally produced where possible, and that people have less money in their pockets. But it’s very difficult in the current climate to keep prices fair and affordable, when the price of production is going up all the time.”
SFG’s Gunnlaugur supports these claims: “In this industry the biggest single issue is the price of electricity. It’s not the price of the electricity itself that’s the problem, but the costs associated with its distribution and transportation,” says Gunnlaugur. This sentiment was echoed by the Farmers Association’s Ólafur Dýrmundsson who believes, “the cost of electricity is a major cost item and one of particular concern for greenhouse growers.”
On the back of these comments the energy issue was put to The National Energy Authority, Orkustofnun, for comment. Their representative Haukur Eggertson proposes a few suggestions as to why the industry might be feeling the price pinch now more than ever. Competition was introduced into the market for electricity distribution in 2005, in a move away from a previous monopoly held by national power company Landsvirkjun. Haukur explains the impact this brought about. “For years, Landsvirkjun had run an experimental scheme, selling surplus electricity at lower rates to emerging industries. With greenhouses and vegetable production just emerging as an energy intensive new industry, growers were a main benefactor. However, this practice couldn’t continue within this new energy environment, as selling electricity at lower prices to certain groups over another, for no apparent business reason, would be against competition law”.
He goes on to explain that the initial plan was to have an adjustment period at the end of the scheme, “but this didn’t happen, so the price changes came as a big shock to growers”. He suggests that these previous discounts, and the subsidy system that replaced them, hasn’t forced the industry to be smart about their energy usage. “A weakness of the subsidy system is that it has not been rewarding, or given incentive to farmers to reduce their electricity costs. Farmers haven’t exploited the current tariff system in order to get most value out of rewards that exist for large volumes of usage, for working at off-peak times and using electricity in an even, consistent manner.”
Haukur declines to comment on whether the energy industry is setting its prices too high, but adds, “Orkustofnun’s job is ensure that energy distributors behave in a correct manner and demand a fair price for their services, and that they must ask the same price of all users. As far as we know, noone is getting rich from distributing electricity.”
Growing demand – weakening production
Meanwhile, it seems consumer demand for Icelandic products has grown strongly since the economic collapse of 2008. Bananar’s Kjartan Friðsteinsson notes that the demand for Icelandic produce is actually much higher than current production levels. “At the moment approximately 30% of our business is in Icelandic vegetables, but in fact demand for Icelandic produce is greater than the supply.” Kristín Sveinsdóttir of SFG believes the demand was strong before 2007, but that it has increased strongly since. “Healthier lifestyles are helping us. Farmers use very little fertilisers, and we have very high quality water which is extremely important for production”.
Brynhildur Pétursdóttir, a representative of Neytendasamtökin, the consumer association, also agrees. “It seems evident that Icelandic consumers believe Icelandic vegetables are of good quality, and consequently many are willing to pay that little bit more. People are increasingly concerned with the environmental impact of importing food, as well as the fact that Icelanders need all the work they can get.”
However while consumer demand may be pushing forward, production figures surprisingly appear to be in decline. Figures from Samband Garðyrkjubænda (The Icelandic Horticultural Association) show that while production had been increasing year on year (from c. 7.000 tonnes in 1995 to c. 19.000 in 2006) it has actually decreased since 2007, to just over 15.500 tonnes in 2009. Bananar also supported the notion that production has decreased in the past three years.
Food for thought
It seems the current situation is a paradoxical one. In the context of today’s extremely tough economic climate where every industry is fighting tooth and nail to stimulate demand for their products, here is an industry which, incredibly, is in decline despite growing consumer demand. While the arguments are admittedly complex, the dynamics multifaceted and the stakeholders numerous, its nonetheless a difficult logic to grasp.
While the domestic horticulture industry is limited in some ways by geography and environment, one is left with the impression that the industry has yet to fully stretch its legs and discover its full potential. Although its future is to a large extent in the hands of farmers, policymakers and industry stakeholders, we consumers also have a role to play through the choices we make. Some food for thought the next time you stroll through those supermarket aisles.