Dairy Prices Still High, and Comptroller Blames Regulation

Report shows that controls keep the price of raw milk high even though Israeli cows are highly productive

File photo: A shopper browses the dairy aisle at a supermarket in Israel.
Hagai Frid

The 2011 social justice protests were sparked by a hike in the price of cottage cheese. Seven years on, cottage is cheaper, but that small victory pales compared to the continued high cost of dairy products in Israel.

State Comptroller Joseph Shapira found that prices for domestically produced dairy products were as much as 234% higher than they were for imported products on a per kilogram basis during the years 2013-15.

For butter, the difference was 63% – 29.90 shekels ($8.27 at current exchange rates) for locally produced versus 18.30 for imported one – while for yogurt it was 22.40 shekels versus 6.70, or 234%.

The reason for the huge gaps isn’t kashrut standards, the comptroller said in a report, but the high price of raw milk, which he blames on the government’s system of quotas and controlled prices.

The report found that the price of dairy products in Israel last year was 32% higher than the average for 15 European Union countries – a difference of 1.94 shekels to 1.47 shekels per liter. The gap has varied over the years: In 2010 and 2011 it was just 19% but in 2015 and 2016 it was 44%.

The milk industry, like the equally regulated egg industry, is subject to elaborate rules. The price of raw milk is controlled and production quotas are assigned to every dairy farm. The system is a cartel, but one managed by the government, with legal sanction under the Dairy Farm Law. The result is that even though Israeli cows are some of the world’s most productive, the price of milk remains high.

Israel relies on indirect subsidies for its farmers, in the form of quotas, tariffs on farm products, official prices and mandatory planning.

That makes it an outlier in the developed world, where most countries have moved to a more efficient system of direct aid over the last 20 years in the form of grants to growers, the comptroller noted. Direct subsidies are more efficient, although they come directly out of the government’s budget.

Moreover, the comptroller warned, Israel’s system of regulating farm prices has indirectly put it in violation of the rules of the World Trade Organization, which Israel joined in 1995.

The WTO allows indirect subsidies, even if it frowns on them. But Israel was in violation of the standards for indirect aid in 2008 and again between 2011 and 2014. In 2015-16, Israel was not in violation, but the extent of its quotas is at 90% the permissible level, putting its dangerously close to the edge.

The so-called target price for milk has been rising in recent months, and there is a good chance that Israel will again be in violation, which could expose it to complaints by other countries and even international sanctions.

In the last year, the system has been fraying. Prices for farm goods have been rising but the government doesn’t want to pass the costs on to consumers by raising the controlled prices on the retail side. The result has been that profits at the dairy companies have been squeezed, notably at Tnuva, the country’s largest dairy.

Tnuva is controlled by the Chinese company Bright Food, which has tolerated declining profits since it bought control in 2015. However, many in the industry fear that it may lose patience and ram down productions, which would reverberate throughout Israel’s farming sector.