Land of Expensive Milk

Israelis love dairy products and spend more than 8.6 billion NIS a year buying them, an average of 3,425 NIS per household. This bill could be reduced by a third if the government stops protecting the economic interest of a few selected farmers with huge lobbies and political powers.

In a competitive market, the price of raw milk in Israel would have been 50% lower than it was, and dairy products would have been 33% cheaper on average. Overall, each Israeli household would have saved more than a thousand shekels, a total of 2.9 billion NIS a year at the national level. The lowest income family would benefit the most from lower prices, as they spend a bigger portion of their income on food compared to the most well off households. For example, the most impoverished families allocate approximately 4% of their total food bill on milk, four times more than the better-off households.

Israel Katz, our new Finance Minister, has a unique opportunity to break the food monopolies and give back some money to Israelis consumers. Today, the milk council, in collaboration with the Ministry of the Economy, controls the domestic supply of dairy products. The government gives them the power to operate as a monopoly, extracting extra profit from the consumers. The insularity of the market allows local producers to charge higher prices without worrying about competition. They are protected internationally by import restrictions but also from new entrants on the local market.

The OECD measures the "Producer Protection" as the difference between the average price received by producers and the price prevalent on the international market. In 2018, the last year of available data, the ratio was 1.5, meaning that Israeli farmers received prices 50% above international market levels for the milk they produce.

From 2014-2018, consumers transferred 5.3 billion NIS to the farmers. Israel is one of the few countries left in the world, where consumers are the ones paying subsidies to the agriculture sector. As reported in the 2019 OECD report, "the share of potentially most market-distorting forms of support in Israel (91%) is much higher than the OECD average."

If Israel Katz stands firm against the agricultural lobby as he did during the butter saga, he could be the one finally bringing lower food prices in Israel. He needs to give every local farmer the freedom to produce as much as it wants and sell it at market price. It will help not only Israeli consumers but also the Israeli agricultural sector.

The argument that we need a national food industry doesn't legitimize having a bolshevik socialist allocation of food. Many Israelis are involved in agriculture abroad and are building high tech farms in Vietnam and Africa, but they aren't allowed to operate in Israel. Breaking the food monopolies doesn't imply giving up on our domestic production; it means that our farmers will become more efficient and competitive. As more Israelis start producing better dairy products, the overall agricultural sector will be healthier and more prosperous.

This article is based on a study by the Jerusalem Institute for Market Studies available in English

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