Analysis

Why Israel Has a Soviet-style Butter Shortage

Agriculture Ministry officials are striving to prevent the lifting of butter tariffs, even temporarily, because it could threaten dairy farmers

Tnuva butter.

When the state mandates the quantity of milk produced, its wholesale price, the retail price of dairy products and import volumes via high tariffs, the unavoidable outcome is a lack of butter. Finance Minister Moshe Kahlon is considering ending all this by lifting all tariffs on butter imports.

Just as it was in the Soviet Union, in the Israel of 2020, whenever people see butter on the supermarket shelves, they buy up the stuff and stash it in the fridge to make sure they won’t run out. How is it that a Western, capitalist, advanced society has been lacking such a basic commodity for more than a year? It seems Kahlon has been asking himself the same question.

Kahlon has announced that he’s leaving politics, which may be the reason he’s standing up to the aggressive agriculture lobby. Or maybe he simply realizes that the public is furious about the butter shortage.

Finance Minister Moshe Kahlon with Prime Minister Benjamin Nentanyahu.
Alex Kolomoisky

Israel’s butter battle is being waged between the Agriculture Ministry, which opposes any reform, and the Finance Ministry. The big question is whether the country should cap duty-free imports or simply not tax imports.

Currently butter is subject to tariffs of 120% to 160%, which makes it economically unviable. This of course is to protect Israeli dairy producers.

Israel’s dairy industry is a government-planned cartel: The state tells the dairy farmers how much milk each can produce. It dictates the wholesale price they receive from the three large dairy manufacturers: Strauss, Tara and Tnuva. And it dictates import duties on competing products and retail prices for many products so that Tnuva can’t take advantage of its monopoly status. The unavoidable consequence is inefficiency and shortages.

The butter problem began when Tara shuttered its butter production at the end of 2018, opting to manufacture more profitable products as opposed to fixed-price butter. Tnuva, Israel’s main butter producer, didn’t increase production to compensate for Tara’s departure from the market.

To compensate, Israel would have had to import the appropriate quantity of butter at a reduced tariff. So in 2019, the state decided to permit 6,500 tons of tariff-free butter imports, up from 2,200 tons. Along with the 6,500 tons of local production, this should have met the country’s needs.

But this didn’t happen. Only 4,500 tons of butter were imported as of the end of November. The reason apparently is the Economy Ministry’s strict terms for the bidding process for importing tariff-free butter: The tenders were issued late and were restricted to small importers to keep Tnuva, Strauss and Tara from controlling this market as well. Plus the importers were required to sell butter at the government-mandated price for Israeli butter – 3.94 shekels ($1.14) for 100 grams (3.5 ounces), even though this is below global prices.

These terms seem to have made it very difficult for importers. Meanwhile, the Agriculture Ministry apparently is celebrating. Sources there say the Economy Ministry has learned its lessons: It needs to issue tenders sooner, and it needs to let the three big dairy manufacturers win them.

Butter is weighed in Israel.
Gil Cohen-Magen

The economy and finance ministries counter that the three big manufacturers shouldn’t be winning the import bidding, and that bureaucracy is an inseparable part of Israel’s dairy import controls. As long as the government is controlling the quantity of butter imports and dictating who’s allowed to import it and at what price, importing will be complicated, inefficient and expensive. So the two ministries are starting to ask: What do we need this headache for and why can’t the free market handle it?

Fortunately, a proposal is coming together to allow for unfettered, tariff-free butter imports without any government involvement. In the meantime, a proposal is being discussed to allow for free imports for one year. But the problem is that this runs counter to Israel’s heavily controlled dairy industry.

Butter production accounts for only 10% of all raw milk produced in Israel, and imported butter isn’t likely to replace all local production. (Forecasts are that it will replace only 3% to 5% of raw milk production.) And yet, this has been enough to shake the foundations of Israel’s Bolshevik-style dairy regime.

Three Agriculture Ministry deputy director generals are digging in their heels to prevent the lifting of butter tariffs, even temporarily, because it could threaten dairy farmers. They call such a move “a direct, immediate threat to local production.”

As a defense, the Agriculture Ministry decided to cut the dairy farmers’ production caps by 60 million liters (15.9 million gallons). This would further worsen the butter shortage, at a time when imports are still being blocked.

The Agriculture Ministry is less worried about the lack of butter than about Israel’s dairy farmers losing 3% to 5% of the market for raw milk. It’s a good thing that the Agriculture Ministry isn’t the one deciding – and that Kahlon is favoring public interests instead of farmers’ narrow interests. There’s a limit to how far Bolshevism can take you.