For decades, Israel’s dairy industry has been controlled by strict government planning, under which the state determines how much milk will be produced, who produces it, how much may be imported, at what price milk is sold to dairies, and at what price to consumers. The result of this comprehensive planning is milk prices that are among the most expensive in the developed world. For comparison, the State Comptroller’s report from 2003 showed that while the average price per liter of milk in the European Union was close to one dollar (3.5 ₪ that year), the price in Israel was around 1.8 dollars (6.2 ₪) – a gap of 77%. The Ministry of Finance is currently formulating a new plan to abolish central planning in the dairy sector. According to the plan, milk production quotas for dairy farms will be cancelled, and all new and existing farms will be permitted to produce unlimited quantities of milk. Simultaneously, the state will work to phase out milk production by smaller and less efficient dairy farms awarded quotas. These dairies, which currently produce about two-thirds of Israel’s milk – approximately 500 million liters – are mainly dairy farms located in moshavim, while the rest is produced by large dairy farms on kibbutzim.

At the same time, the target price – according to which dairy farms decide at what price they sell milk to dairies – will remain in place, but will be determined according to production on the large farms; the idea being to take advantage of economies of scale. Since the total costs of large dairy farms are spread over a larger production quantity, the average cost per unit is smaller. And since the the target price is determined according to the average cost of producing a liter of milk in the larger farms, it will consequently be lower. The quantity of milk that the small farms produced will be provided by increasing production on existing large farms, establishing new large farms, or through imports; in any case the quotas will be abolished.

Even before the plan was published in full, well-known voices opposing all change began reiterating the worn-out arguments trotted out in every discussion about opening the market. The reasons for opposition vary, as usual, between the argument that central planning and the current format of operating dairy farms are unconnected to milk prices, and the concern for the country’s food security, served, apparently, by current conditions. While the first argument is fundamentally absurd – the direct connection between dairy sector planning at all stages and the exorbitant prices in Israel is unambiguous – the concern for food security sounds logical to many. The Ministry of Agriculture even attempted to strengthen this feeling when it changed its name to the Ministry of Agriculture and Food Security around a year ago.

Nevertheless, this justification is no less absurd, for several reasons: First, food producers in general, and milk producers in particular, are no exception to the general rule in this context, being completely dependent on imports to continue producing. Cattle feed, for example, is largely imported, being completely dependent on corn imports, the most basic feed grain in the world, or on imports of agricultural mechanical equipment, spare parts and more. Secondly, Israel does not have the ability to supply all agricultural produce and therefore imports food, including products that it first restricts. Milk powder, for example, carries a tariff of 212% except for a quota of 1,000 tons, but almost every year, once it becomes clear that the quota and local production are not meeting demand, importation is permitted by temporary order in a quantity above the original quota, and this plays out in a similar fashion with liquid milk. Moreover, the OECD has also been warning for years that Israel’s planning method in the dairy industry is inefficient and creates distortions. Combined with the growth in Israel’s population, the continuation of the existing system may well cause milk shortages in the future.

Obviously, Israel’s dairy sector is in urgent need of change. Despite the expected opposition, the Ministry of Finance’s new plan offers a logical way to improve the situation – reduce central planning, abolish production quotas, and redirect the industry to economic efficiency based operation. The alternative to this change is to maintain milk prices at rates among the highest in the developed world, and cause milk shortages in the long term .