Earlier this month, when prices rose once more, we were reminded of the Israeli dairy industry’s stringent planning regime. The regulation and central planning of Israel’s dairy market is among the strictest in developed countries, and covers all phases of the dairy production chain. How much milk will be produced and who will produce it is decided through quotas; price controls decide what price dairies pay for the raw milk thus produced; tariffs restrict importation and allow only for a small number of imported dairy goods; and finally, price controls determine a ceiling price for a significant portion of the end products. There are currently eleven products under price control, including four types of fresh milk, two types of yellow cheese, two types of yogurt (leben), two types of cream and one white cheese. Estimates put these products at close to 50% of all dairy and dairy product sales.
The regulated price is determined by a formula established in a 2022 ordinance that came into effect in April 2023, and includes four components: the raw milk price, the consumer price index, wages in the food industry, and fuel and electricity. While the price rose in the most recent update due to increases in the price index and wages, the primary component of the formula is the raw milk price, which constitutes a central element in calculating the total production cost used to set the regulated price. The raw milk price is determined through a minimum price-setting method known as the “target price” – the minimum price that dairies are required to pay to dairy farmers.
The target price is set based on a biennial cost survey of dairy farms and is updated every quarter. Because this survey includes smaller farms that were on average loss-making throughout all survey years, the target price from which consumer prices are also derived is driven up. Furthermore, approximately 22% of the dairy farms selected for the survey sample refused to participate, according to a 2023 State Comptroller report. Since participation is voluntary, and efficient farms know that their participation would lower the target price they receive, there is a built-in incentive to refuse to participate. As far back as 2012, the Kadmi Committee recommended that participation in the survey be made mandatory, but this recommendation was never implemented. Beyond that, another key component affecting the production costs from which the target price is derived is the cost of fodder, which is a primary input in the milk production process. This cost is relatively high in Israel, due in part to regulations on the import of raw materials and high tariffs, which restrict the availability of cheaper raw materials on the international market.
As a result, both the price of raw milk and the price of consumer dairy products are higher in Israel by tens of percentage points relative to the average prices in OECD countries. It should be noted that many countries are in favor of supporting their dairy farmers for a variety of reasons, such as supporting certain geographic areas or due to the claim that the short shelf life and necessity of daily collection can create the dependency of dairy farmers on dairies, and unfairly advantage the latter. Nevertheless, the scope and intensity of the combined regulatory mechanisms in Israel, including production quotas, minimum prices for dairy farmers, price controls for consumers and significant import restrictions is an outlier among developed countries. In the US for example, the price for farmers is derived from a pricing mechanism based on wholesale prices determined by the previous month’s market demand, with additional insurance mechanisms for income margins. In the European Union, all quotas were abolished in 2015, and the Common Agricultural Policy transfers subsidies directly to farmers.
Consequently, it is clear that changes must be made to Israel’s dairy market and central planning reduced. The alternative is to keep the dairy prices that are among the most expensive in the developed world.
