February 22, 2020

Israel, Butter, and the Free Market

“Because of the butter shortage, which has lasted for about a year, Finance Minister Moshe Kahlon announced last week that he will approve a quota for imported butter, without customs duties, to try to solve the problem. A year ago, the Tara dairy stopped producing butter, and this week it was reported that the company also intends to reduce the amount of fresh milk it produces. Both of these products have price controls, which means the government sets their maximum price. Tara’s actions are a result of realizing miniscule profits on these products because the supervised prices are too low.

In the last year and a half the price of raw milk that Tnuva and Tara buy from the dairy farmers has been raised, but Kahlon has not given approval for the dairies to raise the prices of their price-controlled products for populist considerations of pleasing the public. At least until the High Court of Justice forced him to. At the same time, this week the Israel Dairy Board announced it wants to reduce the production of raw milk with the goal of “regulating” the handling of milk surpluses.

This chaos in the dairy industry teaches us about its distorted structure. It is a closed and uncompetitive market, managed from above by the Dairy Board, which is controlled by dairy and other farmers. They are the ones who decide on the price of raw milk (known as the “target price”) to be paid by the dairies (Tnuva, Tara and Strauss) to the dairy farmers. This is the reason that the price of raw milk in Israel is about 30 percent higher than in the European Union.”

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