Consumers will be paying 5% more for price-controlled dairy products, following a sharp increase in the cost of production.

Prices of dairy products not under government control are likely to increase even more.

The price dairies pay for raw milk went up by 9.5 percent this week, as recommended by an interministerial committee headed by Uri Tzuk-Bar, director-general of the Agriculture Ministry.

In an effort to boost competition over prices, however, the Finance Ministry decided on Thursday that it would stimulate dairy imports by reducing import duties on them. At Finance Minister Yuval Steinitz's request, the Israel Tax Authority is examining which imported dairy products should be eligible for reduced import tax.

The 9.5% hike in the price dairies pay dairy farmers for raw milk is based on the increased cost of animal feed and farm labor.

The ten price-controlled dairy products subject to the 5% increase include milk sold in cartons and plastic bags, yellow cheese with a fat content of over 4%, domestically produced butter and sour cream, and other popular Israeli dairy products such as 3 percent gil and eshel, which are similar to yogurt.

Dairy industry sources noted that import duties on dairy can be as high as 150% or even 200%, the purpose being to keep them out of the country and protect similar local products from foreign competition. These potential imports include yogurt, whipped cream, soft cheeses and butter, the sources said. The duties on these products are now being reexamined with the aim of increasing the competition local products face.

At a meeting on the subject of duties on dairy products among Finance Ministry officials just before the Sukkot holiday, it was argued that if greater competition is injected into the market, even if the cost of producing a product locally increases, the retail prices of the dairy products will not rise to the same extent because manufactures and retailers would absorb some of the increased costs. Currently in the dairy sector there is no real competitive marketplace, industry sources said.

However, dairy farmers here are mounting a battle to block stepped-up imports of dairy products out of concern that local demand for raw milk will decline. Nonetheless, Steinitz signed a directive ordering the gradual cutting of customs duties on hard cheeses, which is expected to boost the amount that is imported.

Reacting to Steinitz's stance, the CEO of the Israeli Cattle Breeders Association, Yaakov Bachar, said: "The finance minister's thuggish conduct is not new to us and we will act to foil [the plan]." He added that the approval for the price hike dairy farmers get for their raw milk is the result of automatic price adjustments based on production costs from the prior three-month period.