Analysis / Are the Flour Mills a Cartel?

Wheat prices jumped 30 percent in a few weeks to a 12-year high as a result of shrinking grain inventories around the world, and following news that in the U.S. - the world's largest wheat exporter - harvest delays were expected.

Also, the growing demand for wheat in China has added pressure on prices. In addition, the rise in Israeli flour prices includes the recent increases in the dollar-shekel exchange rate.

It was clear that it was only a matter of time before Israeli bakeries would ask the state to allow them to update the price of price-controlled bread.

It is doubtful whether anyone thought that the flour mills would actually present an ultimatum to the bakeries, saying: pay us another 40 percent or you won't get any more flour.

It is clear that the flour mills must be compensated for the rise in wheat prices, and the bakeries must be the ones to do so.

However, this means the bakeries must be compensated as well. The Trade and Industry Ministry is aware of this, but the emotional baggage connected to a rise in bread prices usually has a political price, too. Therefore the decision on the matter is not only economic.

For a long time plain bread has been a symbol of a benevolent social-welfare policy. It is seen as the staple food for the weaker classes and any increase in its price is considered a blow to the poor. Industry and Trade Minister Eli Yishai comes from Shas, which identifies itself as representing the weakest classes of society. Therefore, raising bread prices will be even harder for him - and his agenda is clearly a social one.

Yishai will have to maneuver between his instincts and the need to allow the bakeries to make reasonable profit - in addition to worrying about the jobs of bakery employees.

But in addition to the question about the price of bread, there is another, similarly interesting aspect to this affair.

Are the flour mills operating as an illegal cartel by coordinating prices?

There are a number of such mills in Israel, owned by a few families. How is it that at least four such mills sent letters with exactly the same message: Pay 35-40 percent more from July 1 or you will not receive any more flour?

The mills and flour prices were removed from state price supervision two years ago. The ministry hoped at the time that competition would open up as a result, while the bakeries were worried about price fixing - an illegal cartel. At the time, the ministry warned the mills about the matter.

At first glance it seems that the bakeries' fears have come true. This is a good reason for Antitrust Commissioner Ronit Kan to start examining the issue, even if a formal complaint is not filed.

After all, what are the chances that a bakery owner will complain if he is threatened that the flour mills will cut off his supplies?