Analysis Why You Pay 30% More for Milk

Israel's milk prices are a third higher than the global average, mostly because the government intentionally distorts the market to subsidize the dairy industry, choosing farmers over consumers.

Meirav Arlosoroff
Meirav Arlosoroff
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Meirav Arlosoroff
Meirav Arlosoroff

On the eve of the Sukkot holiday, Israelis were informed that dairy was about to become more expensive. Yet just a year ago hundreds of thousands of people took to the streets, waving signs to protest the rising price of cottage cheese and the general cost of living.

Why are dairy prices rising now? Because the Agriculture and Finance ministries agreed to let dairy farmers raise their price for raw milk by 9.5%.

The biggest dairy processors and distributors, including Tnuva Food Industries, which drew huge consumer wrath over its charges for cottage cheese, said it would have to jack up prices again, by about 5%.

This is some way to mark the first-year anniversary of the cost-of-living protests, which in effect were kicked off by the dairy protests. Following the outcry, the government promised to do everything, truly everything. Except, serve consumers' interests in lowering dairy prices.

This isn't just our assessment - the Organization of Economic Cooperation and Development says so too.

In its report on Israeli agriculture in 2011, released a few weeks ago, the OECD referred directly to the cottage cheese protest and said no significant changes in the agricultural sector have occurred in response to the social justice protests, except a few minor changes in protective tariffs. Despite the dairy protest, the state-controlled price of milk is significantly above the global norm.

According to the data (based on numbers from the Agriculture Ministry), the price of raw milk rose 13% in 2011 – nearly double the increase in other developed countries. As a result, the price of raw milk in Israel in 2011 was 34% higher than the global average.

Yes, the average price of milk in Israel is one-third higher than what citizens of other developed countries pay, and most of these countries are much wealthier than Israel.

This price, by the way, doesn't include the recent 9.5% increase. It appears that the gap between the Israeli and global prices will grow to record heights, since the global price of milk is actually trending down this year.

The Agriculture Ministry says production here costs more.

For one thing, Europe has more grazing pasture in Europe, it explains, and in Israel 70% of bovine nutrition is imported concentrated feeds. Also, Europe supports agriculture directly. Israel doesn't except through protective tariffs, the ministry said.

True, but it must be said that this expensive feed also allows Israeli cows to produce record amounts of milk, which should compensate, at least in part, for the feeding costs.

Of course, this nutritional argument doesn’t account for a 34% difference in price or explain why our local milk becomes more expensive while in the rest of the world it’s getting cheaper.

The Agriculture Ministry likes to wave around the OECD figure that shows Israeli farmers receive only 13% support from the government, compared to the OECD average of 19%. In contrast to most developed countries, Israeli farmers receive very little direct support from the government, except through subsidized land and water prices and access to cheap foreign workers, which are hard numbers to quantify.

The ministry, however, is downplaying another OECD figure – market distortions.

Basically, instead of paying farmers out of the government budget, the consumer pays out of his own pocket. As a result, the support farmers receive from distorted consumer prices constitutes 89% of the total support they receive in Israel, compared to 50% in other developed countries.

The biggest distortion is found in dairy. In the case of the price of milk, the OECD calculated that the burden on the Israeli consumer originates from two sources – protective tariffs, which prevent unrestricted competition in the dairy market, and the dairy market law that in practice creates a cartel of dairy farms. Together these two factors, according to the OECD, add an NIS 675 burden to the Israeli consumer pocketbook each year – a 40% increase from 2010.

Yes, the people protested. And following the protest their burden increased 40 percent. This clearly illustrates the priorities of the Agriculture Ministry, or the "Farmers' Ministry" as the cynics prefer to call it, when faced with the choice between farmers and consumers.

Tnuva milk cartonsCredit: Dan Keinan



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