Plugging the Holes in the Cheese Monopoly

Canceling VAT on basic goods would mean bolstering Tnuva and other companies' control over their markets.

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Including VAT Price-controlled products, NIS

One of the best-selling cheeses in Israel, Tnuva’s Emek brand, is sold in stores throughout the country at the regulated price of 45.45 shekels ($11.43) per kilogram. That is just about the lowest price for yellow cheese in Israel – at least until recently.

The situation has changed following recommendations from the Finance Ministry, as well as the Economy Ministry, that opened the cheese market to competition from abroad. Following the decision, the Economy Ministry published tenders for cheese importers for large amounts of cheese, on the condition that the goods will eventually be sold at low prices to consumers. This forces stores and importers to cooperate.

The first tender was won by Willi-Food, together with the supermarket chain Super-Sol. They are importing Alma brand cheese and selling it at Super-Sol outlets at a price of 35 shekels ($8.80) per kilogram – a 22% reduction in price.

For the first time in Israeli history, the country’s dairy monopoly has been exposed to competition. The beads of sweat on Tnuva executives’ foreheads could be seen from miles away. Tnuva, having just been sold to the Chinese corporation Bright Food, was quick to file a complaint against the Alma brand, claiming that its packaging was too similar to Emek’s, thus confusing customers. Instead of competing, the monopoly is trying with all of its might to boot the competition out of the market.

Tnuva’s worries are understandable. Not only is its best-selling cheese under attack, but the attack is aimed against its cheapest cheese, the one under price regulation. And if it’s possible to import better quality European cheese at a 22% lower price, what can be said about our dairy monopoly’s profit margins (or its shocking incompetence)? What can be learned from the ineffectiveness of price regulation, and how easy it is for food monopolies to entice regulators to set high prices?

It has once again been proven that there is nothing like competition to lower prices, and nothing like competition to expose Israeli monopolies’ incompetence and shocking exploitation of the consumer, using, of course, the government’s absurd price controls.

The government’s absurd mediation has not said its last word, however. This week, it seems, Tnuva executives, now responsible for creating returns for the Chinese investors, can breathe a sigh of relief. The government is doing everything in its power to kill the competition and cement Tnuva’s monopoly status. That is the main significance behind a proposition from every political party in their coalition negotiations: cancelling the value-added tax on basic, price-regulated goods – including food, half of which are dairy products produced by Tnuva, with government-regulated prices.

Cancelling the VAT on these regulated goods would constitute an immediate drop of 1 billion shekels in the government’s yearly revenue. In effect it would be much more, because every attempt at doing away with VAT gives rise to tax evasions, and the subsequent costs of dealing with those tax evasions. In any case, we’re primarily interested in the indirect costs of cementing Tnuva’s monopoly, which has destroyed the chances of any competition in the dairy market and drastically limited the number of dairy products available for sale in Israel.

This influence on competition is certain, because the effect could not be otherwise. As soon as the regulated goods receive an additional 18% drop in price – and because the prices are regulated, the government can ensure that the full 18% is dropped – no other dairy producer will be able to compete with the regulated goods. In effect, the regulated goods will receive protection from competition in the form of an 18% price reduction. Not only that, but the protection will be permanent, because lifting the exemption from VAT on these goods would spell an immediate price increase of 18%, and no politician would ever dare approve such a move. That is the honey trap when it comes to VAT exemptions: They’re easy to implement, and almost impossible to cancel.

Monopolies want price regulation

Recall that price regulation exists for some 20 food products, not because they are basic items – the government doesn’t regulate the price of such basic goods as chicken, pita bread, baby food or flour. The decision to regulate the price of certain goods stems only from the existence of monopolies, which the government fears will utilize their market power to exploit customers and raise prices, like Tnuva with dairy, the bread cartel with sliced bread, or similar companies with eggs.

That is to say the government goes to extraordinary efforts to regulate food monopolies in order to protect consumers, but at the same time keeps those monopolies in power by giving them a substantial relative advantage, which no other competitors receive – an 18% tax break.

The cost of cancelling the VAT exemption on regulated products is not just the 1-1.5 billion shekels per year down the drain, but rather making Tnuva that much stronger and keeping the market closed to competition. The huge benefit to Israeli consumers, a 22% discount on cheese stemming from importing competition, is at risk. Soon, no company will be able to compete with Tnuva, and its executives can go back to earning millions without lifting a finger – earnings guaranteed to them by the government.

In effect, not only the Chinese owners of Tnuva can sit back and relax. Anyone who works in the food industry in Israel, and was worried these past three years about the social protests and consumers’ demands to lower prices, can also put their feet up.

All the monopolies have to do now is hire lobbyists to convince politicians to regulate the prices on their products, too. The list of regulated goods will grow and competition will shrink, along with the variety in our refrigerators. And monopolies like Strauss, Osem and the Central Bottling Company (Coca Cola Israel) will just get stronger and stronger.

So here are the results of the ridiculous medicines the politicians are prescribing us: Competition in the food industry will disappear, along with the chance to reduce prices. The variety in dairy products will dwindle. Food monopolies will grow even stronger. The government will lose billions in income. Israel will slowly deteriorate back to the 1950s, with one brand of milk in the fridge and without the variety of high-quality dairy products available to the rest of the world. And all this with no benefit whatsoever to Israeli consumers’ wallets.

A study conducted by the Monitor company in 2012 found that food prices in Israel are higher than in other countries at relative rates between 10% and 20%, and only 3% of the gaps could be explained by Israel’s high VAT. Most of the difference was attributed to the lack of competition. In other words: Only competition can benefit Israeli consumers.

Budding competition in the cheese market this year proved that this observation is correct. What a shame that we won’t get to benefit from it – as the government is trying to flip the switch back in the other direction and nip this competition in the bud.

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