Analysis

Milk Prices Are Still Too High and the Blame Falls on Israel’s Moo-nopoloy

The big problem is that if prices and quotas are fixed, farmers have little incentive to cut their costs

FILE PHOTO: Cows wait to be milked in a milk farm
ANDRES STAPFF/REUTERS

Could Israel be on the precipice of another giant cottage-cheese protest, like the one that brought hundreds of thousands into the streets six years ago?

If not, it could because the country’s three big dairies are being careful. This month the Agriculture Ministry announced a 2.4% rise in the price dairies must pay for raw milk. Yet the big three dairies — Tnuva, Strauss and Tara — decided to absorb the increase for now, rather than pass it on to consumers.

How much longer they will continue to do so is anyone’s guess, but price trends are running against them. Since the end of last year, the controlled price of raw milk has risen 16 agorot (5 cents) a liter to 2 shekels.

That puts the price at 50 euro cents, compared to 33 cents in the European Union and 36 cents in the United States. And don’t blame the Israeli cow, who yields more milk than her sisters anywhere else around the world.

The cottage cheese protests of 2011 soon expanded to include a host of other grievances before dying out. Still, the government did its level best to address the high price of milk — that is, without touching the powerful dairy cartel. It was all to no avail and prices for dairy products in Israel remain high by international standards.

The reason is the cartel. While the government has pursued monopolies and near-monopolies in other industries, the dairy cartel is protected by the Milk Law, which sets unified prices and production quotas and is controlled by the dairy farmers themselves.

That makes Israel an outlier in the world of farm policy, that costs consumers dearly.

Over the past decade, every country in the developed world with the exception of Canada had discarded milk quotas entirely in favor of a completely free market, as in Australia and New Zealand, or replaced them with price supports, as in the EU.

The result was falling prices, as inefficient dairy farms closed or merged with other to become bigger, more efficient producers. In the freest markets, farmers’ incomes were unchanged or even grew. New Zealand boasts the most profitable dairy industry in the world.

In Europe, the results were less successful. Many farmers suffered big losses and went under, but prices have recently begun to stabilize at lower levels and efficiencies mean the farms that remained are profitable.

In 2013 Harel Locker, then-Director General of the Prime Minister’s Office, made a deal with Israel’s dairy farmers: Cut raw milk prices by 11% over the next three years and open the market to imports, in exchange for 200 million shekels in support payments to small farmers who agree to close up shop. Bigger farms could buy their quotas.

It worked. About 10% of Israel’s dairy farms shut down, and the average family farm boosted milk production by one-third. But the efficiencies never came: A survey conducted in 2016 by the Israel Dairy Board found that costs were down just 4%. At the end of the three years, the price of raw milk began to rise again.

Why did the Locker plan fail? The aid to farmers who quit was so generous that even efficient producers took the option. In many cases, inefficient farms took over their quotas. But the big problem is that if prices and quotas are fixed, farmers have little incentive to cut their costs.

But the inefficiency hasn’t hurt consumers so far, just the dairies, because they are the ones feeling the impact of imported cheese and other dairy products. Super-Sol’s private label dairy products has made the market even more competitive.

For the dairies that’s an unsustainable trend. The question is this: When they finally “cry uncle” and start raising prices, will Israeli consumers accept it quietly or launch Cottage Cheese Protest 2.0. Then the dairies will have no choice but to use their power to take on the dairy cartel.