Because of the butter shortage, which has lasted for about a year, Finance Minister Moshe Kahlon announced last week that he will approve a quota for imported butter, without customs duties, to try to solve the problem. A year ago, the Tara dairy stopped producing butter, and this week it was reported that the company also intends to reduce the amount of fresh milk it produces. Both of these products have price controls, which means the government sets their maximum price. Tara’s actions are a result of realizing miniscule profits on these products because the supervised prices are too low.
In the last year and a half the price of raw milk that Tnuva and Tara buy from the dairy farmers has been raised, but Kahlon has not given approval for the dairies to raise the prices of their price-controlled products for populist considerations of pleasing the public. At least until the High Court of Justice forced him to. At the same time, this week the Israel Dairy Board announced it wants to reduce the production of raw milk with the goal of “regulating” the handling of milk surpluses.
This chaos in the dairy industry teaches us about its distorted structure. It is a closed and uncompetitive market, managed from above by the Dairy Board, which is controlled by dairy and other farmers. They are the ones who decide on the price of raw milk (known as the “target price”) to be paid by the dairies (Tnuva, Tara and Strauss) to the dairy farmers. This is the reason that the price of raw milk in Israel is about 30 percent higher than in the European Union.
To preserve the inflated price, the Agriculture Ministry sets exacting milk production quotas for every dairy farm, which has created a cartel in the industry. In addition, to prevent competition, the government imposes high customs duties on imports of dairy products, which can reach 212 percent. So it is not worth importing soft cheeses, yogurt, cream, butter, whipped cream, milk and milk powder. The final result is that dairy product prices in Israel are much higher than in Europe.
This distorted structure has a solution: to free the market and allow competition. We must cancel the setting of the price of raw milk by the Dairy Board, and also cancel the quota system. Every dairy farmer will produce as much milk as he wants. It would also be appropriate to cancel all the tariffs on imported dairy products – which will lead to competition, greater efficiency and lower dairy prices – so there will not be any need for price controls. Unrestricted imports is the best price supervision.
When the dairy industry switches to being competitive, the butter shortage will no longer exist, nor will there be threats to halt milk production. The range of products will grow and their quality will improve. Dairy farmers, who are worried about such steps, will also profit from such a reform: They will become more efficient and innovative, and will even begin exporting to Europe.
The above article is Haaretz’s lead editorial, as published in the Hebrew and English newspapers in Israel.