Milking Israeli Consumers With Dairy Price Controls

The system for supervising prices is complicated and full of distortions. It’s the consumer who pays.

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Tnuva dairy products.
Tnuva dairy products. They're not as simple as they look. Credit: Tomer Appelbaum

Israeli grain prices have jumped about 30% this year, while hay prices have surged nearly 50%. The official reason is the severe drought we’re going through, but the finance and agriculture ministries suspect that grain and hay growers are using the dry period as an excuse, knowing they have a captive market in the form of the Israeli taxpayer.

Yes, in a sense, the average taxpayer is a major consumer of hay. The cut-and-dried stuff is the primary feed with which dairy farmers nourish their cows, and since raw-milk prices under the cartel system are set by the government, and since this so-called target price is based on the cost to produce the milk, dairy farmers don’t care much what hay costs.

They don’t care even when the price jumps 50%, because they’re compensated via the price-control mechanism. They simply pass the increase on to you and me when we buy milk. Last week the Agriculture Ministry announced a 7% increase in the target price.

So yes, this passing on of higher hay prices to households reflects the distortion in Israel’s price-control system. If you think price controls ensure lower prices on the store shelf, you should rid yourself of your illusions.

The chain of distortions only begins with the target price for raw milk. It then affects the price of all price-controlled dairy products, including packaged milk, butter, sour cream, some cheeses and two products similar to yogurt called eshel and gil. These price controls aren’t much more effective than the first stage.

A committee with people from the finance and agriculture ministries sets the retail price of dairy products under supervision. The panel’s work should be simple: Check whether the cost of production has increased, and if so, increase the retail price by the same proportion.

In the case in question, there is no doubt that the cost of production has increased — remember that 7% increase in the price of raw milk that dairies pay farmers. The committee tends not to act when costs increase less than 3%, but 7% is a different matter.

Toothless law

Alas, unexpected complications surfaced. Finance Minister Yair Lapid announced that he would accept a price increase for dairy products, even before the price committee convened and gave its recommendation.

Technically, the committee’s decisions are recommendations that the ministers can accept or reject. But it’s a bit strange that even before the committee met to consider the issue, the finance minister declared that he would not sign off on a price increase. So why should we have a committee at all?

Lapid’s approach shows that the price-control law is toothless; the finance minster is the one who sets the price regardless of what the professionals might recommend. This is another example of strange conduct on the part of our vaunted finance minister. On the one hand, he touts price controls as a way the government can reduce the cost of living. On the other, he’s undermining the professional underpinnings of the entire price-control system.

This contradiction puts the Finance Ministry people who deal with price controls in a very uncomfortable position that might hit Lapid one day. It’s unprecedented that the prices of other price-controlled dairy products are not increased following a 7% rise in the price of raw milk. So the matter is likely to be brought to the High Court of Justice if Lapid digs in his heels.

The court might remind the honorable minister that price controls are an institution that requires everyone to be treated fairly. It’s not clear that raising the price of raw milk without then authorizing a rise in the cost of the price-controlled items that are manufactured from it meets the fairness test.

The debate’s other complication lays bare the contradiction in the whole system of price controls. The convention has been that whenever production costs increase by more than 3%, the retail price of price-controlled dairy products rises accordingly.

This has only been a convention, however, because the law does not specify how price controls are to be imposed. Therefore, there is no legal obligation to raise dairy prices when the price of production goes up.

The law’s aim isn’t clear, nor is it obvious whom the law is supposed to protect. Is it there to protect the profits of the farmers and dairies, or the consumer? Or maybe it’s just supposed to make life easier for the people overseeing the process.

In the absence of a clear purpose and implementation method, the application of the law is open to interpretation. So the people involved have made things easy on themselves. There’s a price that is controlled, even if that’s a matter of convention rather than law. And it’s adjusted automatically based on the changes in the cost of production.

A system of shortcuts

The issue is only looked at thoroughly every five years. Bureaucrats say reexamining prices is long and complicated, so it can only be carried out once every several years. But even in the interim, no one is checking whether the automatic adjustments are reasonable.

Instead, we have a system of shortcuts; Lapid’s latest refusal to approve price increases is the latest shortcut. And invoking the automatic adjustment mechanism without looking at the substance of what’s going on can produce absurd results.

Nesher, the country’s cement monopoly, found itself a few years ago in the absurd situation of not being able to sell cement at the price it received permission for. Ironically, that price was above the maximum that another provision of the price-control system allowed.

In the case of dairy products, the approved government-controlled price takes into consideration the cost to the dairies — Tnuva, Strauss and Tara — of discounts they give to supermarkets. If manufacturers are able to give discounts, it prompts the question whether they’re being allowed to charge too much for price-controlled items.

If all that weren’t enough, it turns out that no one can explain the initial price-control formula itself, which was established for all price-controlled products in 1996. That’s why, with an elegant delay of 18 years, the Finance Ministry has begun examining the mechanism through which prices are revised.

Maybe after it releases its conclusions, which should happen soon, we’ll understand the process.

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