The Big Cheese Charade

Manufacturers blame cottage cheese prices on rising costs, but the numbers don't add up.

The rising price of raw materials could prove to be a smoke screen behind which Israeli manufacturers are raising prices for other reasons, not the least of which is a lack of competition in dairy.

Food prices, excluding fruit and vegetables, rose 4.4% in the last 12 months. Manufacturers blame rising production costs because they pay more for raw materials such as oil, flour, sugar and cocoa.

Yes,the price of these staples has risen due to a rising demand in emerging markets and contracting supply following a series of natural disasters. But one area in which Israel has no competition at all from imports is raw milk and raw milk products. This protectionism has enabled Tnuva Food Industries to jack up its prices by far more than the equivalent price increase for milk, its main raw material. One of the more painful examples is cottage cheese, a favorite in Israeli households, responsible for nearly one-third of all their cheese purchases. It is also one of Tnuva's most lucrative products.

The price that food manufacturers Tnuva, Strauss and Tara pay to Israeli dairies for milk is set by the Israel Dairy Board. From January 2008 to June 2011, Tnuva increased the price of its cottage cheese by 39%. During that time, the price of milk increased by 3.9%.

That increase in price helped Apax Partners and Mivtach Shamir, which bought the controlling interest in Tnuva in January 2008, to increase Tnuva's profit.

The argument that the price of raw milk underlies its increase in product price is further undermined by the fact that, from January 2008 to January 2010, the price of raw milk fell by 8.8%. During that time, the price of cottage cheese increased by 28%.

Widening profit margins for cottage cheese are significant for Tnuva, given that its market share is 70% and that the product makes the company NIS 500 million in sales a year.

The disproportionate increase in the price of cottage cheese compared with milk is perhaps due to the sheer concentration of the dairy market, and the fact that the government removed price controls over the cheese in August 2006 - although Tnuva could be considered a monopoly, given that its cottage cheese market share is more than 50%.

The ability to widen the margin in areas where Tnuva has a monopoly may explain why Apax consistently refuses to publish Tnuva's financial statements.

Sources close to Tnuva claim there is no connection between the change in ownership and the increase in cottage cheese prices. Any owner would have raised the product price, sources say, because in 2007-2008 the price of milk sold to Tnuva increase by 24%, an increase that was not reflected in the price of cottage cheese.

The sources note that the price of cottage cheese has risen by 35% since 2007, while the price of milk rose by 28% during that time. The difference is reasonable, they say, given that other production increased also, including energy and wages.

The sources claim that the increase in prices did not correspond in time with the increase in raw materials costs. In October 2010, the price of raw milk rose by 15%, while the price of cottage cheese did not change because of public sensitivity.

Sources also say the dairy market has become more competitive following Tara's acquisition by the Central Bottling Company, known as "Coca-Cola Israel." They add that the manufacturers' profitability is mid-range compared with their overseas subsidiaries. Therefore, they claim, it is wrong to suggest that the Israeli public is being robbed.

Regarding prices in general, the sources say that raw milk in Romania - where Tnuva also has a dairy - costs NIS 1.35 per liter, compared with NIS 2.20 per liter in Israel. That's the cost of protectionism, they say.

Not everyone is taking the price increase in stride.

Two Facebook groups with more than 40,000 members are calling for a one-month consumer boycott on cottage cheese. One of the groups is calling for members to boycott a given product each month in protest of disproportionate price increases.