- 1) Brief History of the Israeli Milk Sector
Since independence, the number of pure-bred dairy cattle has increased from 37,400 in 1948-1949 to 211,000 in 1992. As shown in Table 1, the increase was not evenly spread over the years, and there has been relative stagnation in dairy cattle for the past 20 years.
Cow milk output has grown from 78.8 million liters in 1948-1949 to 987.1 million liters in 1992. As with dairy cattle, cow milk output increased rapidly during the first few years after independence, and then stabilized.
- Production Quotas
2)
Milk production quotas are mandatory by law. An individual quota must be obtained by every farmer who wants to sell milk. Quotas are determined yearly by the Ministry of Agriculture for the following year. Though final decision rests with the Ministry, the Milk Marketing Board and the Agricultural Center play an active role in determining the new quota. The Israel Cattle Breeders Association is also a powerful participant in the process.
2)
The Milk Marketing Board (or Dairy Board) is a private, non-profit organization which includes representatives of the government, Tnuva, and other agricultural institutions. In spite of its "private" status, it is a quasi-governmental institution because it has a government-delegated authority to implement regulations such as quota allocation and price control. It also represents the interests of Israel's milk producers vis-a-vis the government.
Table 1
Pure-bred Dairy Cattle Inventory and Cow Milk Output Variation in % Source: Central Bureau of Statistics, Statistical Abstract of Israel 1993 (Jerusalem: Central Bureau of Statistics, 1993) pp. 419-421.Dairy Cattle Cow Milk Output 1948-1949/1952-1953 +85.5 +62.5 1953-1954/1957-1958 +63.5 +48.9 1958-1959/1962-1963 + 7.5 +14.5 1963-1964/1967-1968 +16.5 +29.2 1968-1969/1972-1973 +17.5 +28.2 1973-1974/1977-1978 - 2.2 +22.9 1978-1979/1982-1983 + 0.49 + 8.9 1983-1984/1988 + 8.15 +17.4 1988/1992 + 5.35 + 5.45 Note: Statistics' reporting switched to calendar year basis in 1986
The Agricultural Center is another independent institution representing agricultural producers. It is instrumental in establishing milk prices and quotas.The Israel Cattle Breeders Association (I.C.B.A.) acts as a "workers committee" for dairy cow farmers. 2 It provides professional services to breeders and represents the farmers' interests vis-a-vis the Dairy Board and the Ministry of Agriculture. Membership in the I.C.B.A. is virtually mandatory for any Israeli farmer who wants to breed cows.
Quota implementation operates on two levels. A national milk production quota is set for the year on a national level, while personal production quotas are assigned individually to each kibbutz, moshav or private milk producer. The production distribution is currently as follows:
Table 2
Distribution of Total Milk Production by Production Sector
Source: Israel Dairy Board, Israel Dairy Figures 1993 (Tel Aviv: Israel Dairy Board [no date]).1991 1992 Kibbutzim 52.28% 52.39% Moshavim 41.05% 40.83% Cooperative moshavim 4.84% 4.96% Other 1.81% 1.82% The national quota is determined for the year to come on the basis of a forecast. The current year's per capita demand for milk and milk solids (protein and fat) and a projected population increase are taken into account to establish that forecast, which shows the projected demand for the following year. 3 Various other factors are also considered, such as the demand for specific families of products (e.g., hard cheese, soft cheese, milk and dairy drinks) in the year that is ending, and projected increase in income. The forecast includes an estimate of product-by-product consumption for the year to come.
The final volume of the quota, set in liters for the following year, is based on projected demand for whichever milk solid is in higher demand. In recent years the demand for protein has been higher than the demand for fat. The average proportion of protein in a liter of milk is therefore used today as a basis to determine how many millions of liters will have to be produced in a year to cover the projected demand for milk protein.
Yearly quotas are usually raised to match the consumption increase of the previous year. The volume of milk that has been produced above the quota (an average of five percent over the past few years, see Table 2) is integrated into the next quota, with the necessary adjustments to match projected consumption. Therefore, surpluses in a given year are usually added to the new quota for the coming year, which will in turn generate new surpluses.
It is difficult to assess whether this forecast of demand for the year to come is realistic. For example, an official claim about the demand is that milk fat and dairy products with a high fat content are unpopular in Israel because of culinary traditions. However, market studies conducted by supermarket chains show that last year the demand for low-fat cheese decreased by 20 percent while the demand for cream cheese rich in fat went up ten percent, even though calorie-consciousness is rising among Israeli consumers. 4 The same trend has been observed by dairy company managers in the private dairy industry.
Yet the estimate of demand, both national and per capita, produced by the Ministry of Agriculture determines output and supply. To what extent actual demand is taken into account remains unclear, and the claim that government-controlled supply is adequate to the demand cannot be verified. Furthermore, ideal demand can obviously not be considered in a market where retail prices are fixed.
The professed goal of the Dairy Board, the Agricultural Center and the I.C.B.A. as representatives of the farmers is to ensure that production quotas increase every year, so producers can "sell as much milk as possible." 5 This can only be achieved if demand increases. The Dairy Board and Tnuva encourage milk consumption through broad-scale advertising campaigns and sales promotions. The Board develops marketing programs aimed at boosting demand, and offers special grants to retailers to help them enhance their sales of dairy products.
Part II
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THE MILK SECTOR IN ISRAEL
Introduction
Over the past few years, modest attempts to introduce a measure of liberalization in the agricultural sector have been initiated by the government of Israel. These limited reforms, however, have bypassed the milk branch, which remains one of the most thoroughly controlled and regulated markets in the Israeli economy. This is not only true of milk production and distribution, therefore of the agricultural milk market. It applies as well to the dairy industry, thus to the consumer market.
Competition appears to prevail in the Israeli dairy products market, where a variety of private manufacturers are represented. But the fact is government control covers the entire dairy sector and extends from the producer to the retailer. The paradox is this creates a consumer market of a kind where demand is in large part determined by the supply, as is demonstrated in the following pages. The purpose of government control is to artificially maintain a whole sector of agricultural production at the expense of the public. This can only be achieved by shielding production from the uncertainties and fluctuations of a genuinely competitive domestic market. Israeli government policies in the milk branch strive to prevent the development of such a market.
Milk production and distribution are controlled through production quotas and fixed milk prices. The dairy industry is regulated by a price control system which applies to every single dairy product sold on the consumer market. These three tools of control are shaped by quasi-governmental agencies such as the Milk Marketing Board, the Agricultural Center, and the Israel Cattle Breeders' Association. These tools and their distorting effects on the dairy market will be reviewed in the pages that follow.
Tnuva, the cooperative owned by Histadrut-affiliated kibbutzim and moshavim, acts as a near-monopolist distributor of milk (90 percent of milk distribution in Israel), and manufacturer of dairy products (75 percent of the consumer market). In keeping with the guiding principle of collectivism that has shaped much of Israel's economic structure and its entire agriculture, Tnuva professes to serve objectives that are "beyond the profit motive." 1 Tnuva plays a crucial role in preserving the controlled and concentrated character of milk production. It strives to keep the dairy industry anticompetitive. Tnuva's dairy activities will be examined in this paper as well.
Finally, reforms will be suggested. In this respect, it must be pointed out that an attempt to restructure the milk branch in Israel would face a double obstacle: (1) the scope of government control over the entire production process calls for drastic changes; (2) concurrently, the scope of government control allows special interest groups to prevail in determining milk policies. As things stand now, those interest groups are in a position to block any reform that would not cater to their own needs. To what extent any government, supposing it wanted to do so, may be willing to take on such groups and implement a reform on behalf of which there is no public outcry is questionable.
