With the cost of living rising throughout Israel, Israelis are concerned about the price and availability of basic goods such as butter. According to a new study, a recent government attempt to increase the supply and shelf availability of butter has come at an unexpectedly high cost to consumers.
Starting in 2018, a series of reforms were implemented which increased Israel’s dairy quotas and cut tariffs. Several years later, consumers are paying an average of 14% more for butter than they were back then, despite the dairy products price index increasing by only 5.4% during this period.
The study, conducted by Shlomit Arbel, a researcher at the Yesodot Center, in collaboration with the Histadrut Consumer Authority, undermines the assumption that removing tariffs on food products to make imported goods cheaper will necessarily enhance competitiveness in the Israeli market and reduce the cost of living. In fact, this government policy has exacerbated the cost of living crisis. While the volume of butter significantly increased due to imports, market concentration in the Israeli butter sector remained high, and consumer prices rose.
Despite clear recommendations from the OECD to accompany trade reforms with economic analyses both before and after their implementation, these reforms were not supported by sufficient research at any point.
The story of the Israeli butter market reflects the broader narrative of many “instant reforms” in Israel.
In the wake of the 2011 public protests against rising food prices, the Kadmi Committee was established to investigate market competitiveness and pricing of food and consumer goods. Its recommendations, which were adopted by the government in July 2012, included a gradual reduction of tariffs on various food products. However, since then, many questions have arisen regarding the success of these import reforms in achieving their stated goals.
In 2016, the Israeli butter market was divided into two segments: block butter, which is mostly produced domestically and subject to price control, and imported butter sold in plastic tubs. The price of block butter has been controlled in Israel since 1996 and was linked to the price of raw milk. Until 2018, the import duty on butter was between 126% and 140%, keeping imported butter’s market share low.
In 2016, the government introduced import quotas for butter exempt from tariffs, expecting that increased supply would lead to lower prices. Israeli consumers gained access to alternatives for purchasing foreign butter, with prices sometimes up to 10% lower than those of the leading local brand. The market share of Tnuva, Israel’s most dominant dairy brand, dropped from 86% to 73%, while the market share of imported butter increased.
However, marketing imported butter at regulated prices proved unprofitable for importers. Despite doubling duty-free quotas in 2018, the quantity of imported butter on supermarket shelves did not increase. Market concentration grew, with Tnuva’s share rising while its competitor Tara and import brands’ shares declined. This shift was driven by an 8% price reduction in regulated butter, itself following a drop in raw milk prices.
In 2018, the butter supply in Israel fell 8%, causing widespread shortages due to a global milk fat shortage and reduced local production. The latter stemmed from then-Finance Minister Moshe Kahlon’s refusal to approve a 3.4% price hike on the government-controlled price of butter, as was recommended by the Pricing Committee. Consequently, both butter imports and Israeli butter production dropped sharply through early 2019.
Finance Minister Kahlon’s decision, aimed at curbing price hikes and reducing Tnuva’s dominance, led to prolonged shortages. The standoff escalated to court, which ultimately forced the Finance Minister to approve a 3.4% price increase. However, during this period, imported butter prices rose, as importers leveraged the local shortage to raise prices.
The government sought to address the shortage by adhering to the belief that increased imports would help lower prices. Whether intentional or not, the Finance Ministry’s actions led to the removal of tariffs on table butter imports and its release from strict price controls.
The process of lifting the import tariffs on table butter began as a temporary measure in March 2020, when tariffs stood at 140%. In 2020, an unprecedented peak in butter consumption was recorded, driven by increased demand during the COVID-19 crisis and the entry of imported brands into the market.
In early 2022, Finance Minister Avigdor Lieberman removed tariffs from butter entirely, leading to a 32% increase in butter product variety in Israel. While store shelves offered a broader selection, consumer prices continued to climb. Between 2019 and 2022, the regulated price of butter rose by 5%, and the average price of all butter—domestic and imported—grew by about 13%.
The government also reformed the price control mechanism, shifting from strict maximum pricing to regulating profit margins for medium and large producers and importers. This change spurred the growth of the “premium” butter segment, which had previously been negligible.
Before the price controls were lifted, imports were divided into “regular” butter, regulated to match the price of locally produced butter, and “premium” butter, which was exempt from price controls. “Premium butter” was defined as any product “dissimilar” to Israeli butter.
So what did importers do? They filled the shelves with premium butter at higher prices. The share of unregulated butter sales skyrocketed from 20% at the beginning of 2019 to 50% by the end of the year. However, by 2020, this share began to decline, dropping back to 16% by the end of the year. Israeli consumers largely preferred locally produced “regular” butter at affordable prices, leaving Tnuva as the dominant player in the regular butter market.
The removal of price controls also drove up the price of “regular” butter. Contrary to the expectations of the Finance Ministry and in line with warnings from opponents of the move, the price of imported “regular” butter climbed to levels comparable to that of “premium” butter. A review by the Ministry of Agriculture in February 2023 reveals that since the removal of price controls, the average consumer price has increased by about 20%, primarily due to the rise in imported butter prices.
An analysis by the State Comptroller found that the price of butter in Israel has risen by about 60% since it was removed from strict government control. By comparison, in the UK, the average price of butter increased by 29% during the same period, and in the US, prices rose by only 23%.
What Went Right
The analysis conducted by Yesodot points to a clear connection between consumer prices and price controls. Moreover, it was found that local butter is what drove down the average price in Israel, even as producer prices in Europe rose. The explanation is simple: the increase in European prices and higher import costs from Europe to Israel reduced the consumption of imported, more expensive butter. Consequently, the share of local butter increased, keeping overall prices in Israel lower than those in Europe.
This was also the case during periods when a tariff-free import quota was in place: the overall consumer price in Israel remained lower due to local butter. No evidence was found to support the claim that the removal of tariffs led to a reduction in consumer prices.
Does Competition Reduce Prices?
A common argument for reducing regulation, particularly for removing tariffs, is that it increases competitiveness and reduces market concentration. While imports did raise the overall quantity of butter on shelves, the market concentration in the Israeli butter industry remained high. By the end of 2023, Tnuva’s market share stood at around 70%.
The main period when Tnuva’s market share did decline occurred when the government refrained from updating the regulated price. The Israel Antitrust Authority interpreted this as a sign of reduced market concentration, but the effect lasted only for a short period. Extending the analysis period reveals a shift in trend and renewed growth in Tnuva’s market share beginning in 2020. It seems this change was incidental rather than a result of deliberate efforts to reduce concentration.
The fundamental idea behind price controls is the ability to intervene in the price mechanism when it leads to less than ideal outcomes, aiming to ensure the efficient functioning of the economy. The justifications for price controls on a commodity often relate to the existence of monopolies or high market concentration, the lack of competition or limited competition, subsidies, considerations of public interest to ensure the supply of essential goods, shortages due to exceptional circumstances, inflation control, or achieving economic and social policy goals set by the government.
The discussions of the Price Committee regarding price control for butter highlight that the committee’s primary goal is to prevent producers from exercising monopolistic market power in highly concentrated markets with limited competition. In other words, the purpose of price control is not necessarily to ensure that the product remains affordable for the public, but rather to maintain a balance between producers and consumers and to prevent excessive profit-taking by producers.
The committee concluded that the abolition of import duties provided sufficient balance in the market, reduced market concentration, and fostered competition. Therefore, there was no need to continue imposing a maximum price on butter, and control shifted to profit margins instead. However, the reasons cited by the Ministry of Economy and the Ministry of Finance for abolishing import duties primarily focused on addressing a shortage of essential consumer goods. They argued that eliminating import duties would increase butter imports, diversify sources, and prevent future shortages of a basic consumer product. The Ministry of Economy even predicted that the move would prevent shortages in the local butter market and promote competition, which would lead to lower consumer prices.
The Price Committee insisted on linking the abolition of price control on butter to the removal of import duties. The question arises, what is the goal of this policy? Is it the state’s responsibility to ensure the accessibility of basic products to the public in terms of both quantity and price, or is the sole role of price control to prevent the extraction of excessive profits?
Despite the transition of butter to profit margin control at the end of 2021, no data on profitability assessments have been presented in the discussions of the Price Committee, and there has been no evaluation of whether this shift in control has achieved its intended goal, as perceived by the committee.
According to the research, in order to truly benefit the public, trade reforms must be accompanied by sufficient economic analysis and evaluation both before, during, and after their implementation, rather than relying solely on theoretical assumptions. Researchers from the Yesodot Center and the Histadrut Consumer Authority hope that their research will lead to the institutionalization of the evaluation of trade reforms as an integral part of the work of professional bodies within the Ministries of Finance, Economy, and Agriculture.
This article was translated from Hebrew by Nancye Kochen.
