In the Money

Why Are Food Prices in Israel So High? (Hint: It's the Government)

Worries about the safety of imported foods, the squeezing of small importers and Israel’s Rabbinate make real competition almost impossible.

It all started with the national trauma caused by the Remedia baby formula scandal in 2003. Three infants fed with the imported product died and 23 others suffered irreversible damage. The State Prosecutor’s Office, in a move of questionable wisdom and perhaps some degree of self-righteousness, decided to file criminal charges against the Health Ministry officials responsible for importing food into Israel. Ever since then, Health Ministry officials have all but stopped permitting food imports to Israel for fear they could end up in a court.

A report prepared by Monitor Group, which analyzed the food market for the government’s Kedmi Committee examining the food industry, cited the enormous difficulties involved in gaining approval to import food products as one of the main factors underlying high prices. The report compared criteria for food importers in the United States and the European Union with those imposed on Israeli importers.

Most developed countries generally don’t require every imported food product to be subject to testing. A list of authorized plants overseas and an importer’s declaration that the products conform to the country’s import standards are usually sufficient. Just a sampling of products is tested − perhaps 1.5% to 2% for all foods imported into the U.S., with only particularly sensitive products such baby formula or fresh produce subject to more extensive analysis.

In Israel the percentage is a substantially higher 3%. Israel also requires that every imported product be registered and approvals renewed annually after passing lab tests. The country doesn’t have a program for recognizing approved factories overseas whose products enjoy blanket approval, so a plant that has been approved for pasta, for example, will be required to obtain a separate certificate if the importer wants to bring in chocolates produced at the same location. Importers’ declarations aren’t sufficient.

The Health Ministry’s strict requirements mean that only very few importers succeed in making it through the process. Those that do are mainly the largest importers that have long-term agreements from overseas manufacturers designating them their exclusive representatives in Israel. So, on top of the enormous concentration in Israeli food manufacturing the food import business is also in the hands of a small group of businesses. Many products have just one (exclusive) importer who can raise prices to more or less the levels of the local producers, who are also enjoying monopolist profits. And so the promise of imports creating competition in the food market is false.

Small is impossible

To put an end to this, what is needed is parallel importing − allowing the same products from the same manufacturer to be brought into the country by multiple importers, not all of whom are sourcing their inventory from the manufacturer itself. One way to make parallel imports a source of products is by buying from the subsidiary of a manufacturer in a different country. Another is to source products from the large supermarket chains in Europe, which buy in quantities in excess of what they need to qualify for manufacturer’s discounts and then sell off the surplus.

Parallel importing is regarded by people in the food industry as one of the most important ways of opening the market to competitive pressure in food, since it will influence the pricing policies of both local manufacturers and the exclusive importers.

But the problem remains that if food imports need to meet such onerous Health Ministry requirements, parallel imports will never take off. The demands placed by the ministry on small importers that aren’t official manufacturer representatives are almost impossible to meet, effectively blocking the way for parallel imports. Within the EU there are virtually no restrictions on parallel imports. The same goes for the U.S., unless a manufacturer proves that the parallel import differs substantially. But the burden of proof lies with manufacturer and usually such a claim doesn’t stop parallel imports at U.S. Customs. The manufacturer needs to go to court to prove such a claim.

In Israel, by contrast, the parallel importer needs to provide the Health Ministry with proof from the manufacturer that it produced the goods. But, since the manufacturer is tied to a contract with the exclusive importer, the parallel importer clearly won’t receive the confirmation. Moreover, every product brought in as a parallel import requires new import permits each time, even though the product is already being sold in Israel by the exclusive importer. It also needs to undergo full lab testing rather than sampling.

The ministry’s main defense for its policy is the fear of what would happen in the event of a product recall. Since the manufacturer has no connection with the product being brought into Israel, the argument holds, it won’t be able to inform the public if a problem is discovered. Proposed solutions, such as linking up with the European recall system, haven’t succeeded in dispelling the ministry’s concerns.

The Health Ministry’s requirements also apply to food products that aren’t considered sensitive, such as pasta or other dry items where any potential damage to the public due to a production flaw is negligible or nonexistent. The damage caused by blocking competition and keeping food prices in Israel high is less negligible.

Rabbinate makes things worse

The Kedmi Committee, based on the Monitor report, recommended easing the criteria for importing food into Israel by making it possible to receive approval for a factory for three years without any need to have each of its products approved separately. It also recommended looking into what could be done to facilitate parallel importing. Monitor recommended allowing the import of every product from anywhere in the world made by a company already approved for the Israeli market. Alternatively, it suggested that Israel adopt the U.S. system for importing food into the country.

The cabinet approved the Kedmi Committee’s recommendations in October 2012. At the same time, it stipulated that the Health Ministry submit a bill for facilitating the importing of food into Israel within a year and form a team to find ways to facilitate parallel imports within three months. A year has passed, no bill has been submitted, and the team hasn’t been appointed.

This week Harel Locker, director general of the Prime Minister’s Office, ran out of patience and had an amended decision passed by the cabinet stating that the government itself will establish a team for considering ways to ease parallel importing. The Health Ministry will obviously have a member on the team so it’s too early to say whether it will manage to convince the regulator − the ministry in this case − to ease up somewhat on its testing and allow for competition.

This is a recurring problem throughout Israel’s food-marketing chain: The state almost always gets in the way of competition instead of encouraging it. For instance, either heavy import tariffs are imposed on dairy products or import quotas are assigned, red tape that deters most importers and leaves them with quotas too small to take advantage of economies of scale.

The Health Ministry’s concern for our health leaves us with just a handful of exclusive food importers, at the consumer’s expense, obviously. The same goes for the price control mechanism, which tends to accept most claims by food producers and retail chains concerning cost increases.

So too the arrangements governing the dairy market, legally declared a cartel, which destroy any possibility of competition to the great benefit of the three large dairies controlling the market under state sponsorship. Permission granted to large food producers by the Antitrust Authority over the years to swallow up more and more small food manufacturers until leaving the market free of competitors has also played its part.

But the greatest and most problematic barrier to trade is the Chief Rabbinate, which stubbornly insists on keeping to particularly strict rules on the import of kosher food products. For dairy products, for example, rather than being satisfied with checking the kashrut of dairies abroad it also requires that the farms themselves be checked, while putting its own internal interests ahead of allowing the import of foodstuffs into Israel.

All these factors join together to obliterate any shred of competition in Israel’s food market and explain why food prices here exceed the average in the Organization for Economic Cooperation and Development by 19%.

“The bill to facilitate food imports into Israel will be submitted shortly for government approval,” the Health Ministry responded. “As for parallel imports, importing a food product not directly from the manufacturer prevents the receiving of critical information like the product’s composition and allergens known only to the manufacturer. The missing information can be filled in by means of extensive lab testing whose purpose is to examine product quality and safety.

“Incidents like Remedia show the need for changing the method of supervision such that the most resources go toward overseeing dangerous foods, while on the other hand there will be an easing of the process for importing foods that aren’t sensitive,” the ministry explained. “This approach is similar to the one taken by the U.S. Food and Drug Administration.”

Ilan Assayag