The same script plays out every time a reform in some agricultural sector comes up for discussion. The farmers and their lobby in the Knesset vigorously oppose any change and warn that the proposed reform will not achieve its goals and lead instead to serious economic harm. The discourse focuses on two central claims: the first is that producers are not linked to the high prices; the second that opening the market to imports is an ineffective move that will not translate into lower prices for consumers.
The recent dairy sector reform proposal is no different. In order to examine whether the perennial claims are correct about the current issue, we must first understand how milk prices in Israel are determined and what exactly the reform proposes to change.
The dairy sector in Israel is a prime example of an economic sector that is almost entirely planned, characterized by high concentration and cartel-like features throughout the entire chain of production. In the dairy sector, supply, price, and even the identity of producers are all determined in advance through regulation.
Each year, the Minister of Agriculture sets the “total national quota” for milk according to an estimate of projected consumption. This quota is divided into personal quotas allocated to milk producers, and only quota holders are permitted to produce and market milk in Israel. The allocation is carried out by the Quota Committee, based on the quotas assigned in the previous year – thus, this structure maintains centralized control while preventing the entry of new players. Alongside the planning of domestic supply, the state almost completely blocks the possibility of importation through high tariffs on milk and dairy products.
The restriction on quantity is not the only control mechanism. Another central pillar is the “target price” – the minimum price that dairies are obligated to pay producers for raw milk produced within the quota. This price is calculated once every quarter, based on a survey of the average production costs at Israeli dairy farms. Since the survey also includes many small and family farms where the cost per unit is significantly higher than at large farms, the resulting average cost is raised, driving up the target price. The share of quotas allocated to such small farms stands at approximately 40% of total quotas.
But there is yet another issue here: the survey on which the target price is based does not include all dairy farms. As far back as 2012, the Kadmi Committee recommended that producers be required to participate in the survey, but the recommendation was never implemented. According to the State Comptroller’s 2023 report, an average of approximately 22% of the farms selected for the sample refused to participate in recent surveys. It would not be unreasonable to assume that the farms refusing to participate are those with lower production costs, and that their participation in the survey would have led to a reduction in the target price.
The new reform seeks to abolish the quota system, and replace it with a mechanism named “protected liters” that includes a protection price. Under this mechanism, producers who previously held quotas would be granted the status of “protected producers” and permitted to sell a certain quantity of milk – the protected liters – at a minimum price, which will be based on the recommendation of a professional committee that includes representatives of the Israel Competition Authority, the Ministry of Finance and the industry. The amount of liters to be bought from producers by the large dairies will also be determined each year.
Through the protected price, beginning at 15% of the previous target price, the Ministry of Finance expects high-cost dairy farms to choose to leave the industry, with compensation from the government for their historical quotas. The vacuum created will be filled by milk importers or by new, larger and more efficient dairy farms that can be established once the existing legal quota barrier is removed.
The argument over the dairy reform is one of priorities: Should the state continue to manage a closed market that benefits an organized minority, or open it to competition that allows all Israeli consumers to pay a fair price for a basic product?
(First published in Hebrew in Makor Rishon)
