Latest / Logosofia no Dia a Dia / Israel's Dairy Paradox: Why Prices Stay High
Transcript
- [Prompt] custom: Today I want to talk about agriculture—specifically, the problems with Israel’s agricultural system | Hosts: corn, herman [Response] Corn: Hannah sent us this one, and it's a good one. She's pointing at a paradox that anyone who's done grocery shopping in Israel has felt in their bones. Israeli cottage cheese costs about forty percent more than it does in Poland, even though Israel is a dairy-exporting nation. Farmers are struggling, prices are sky-high, and the dairy products on the shelves feel industrial and samey. Her question is straightforward: what's actually broken in Israel's agricultural system, and what would real reform look like? She mentioned Switzerland as a model that seems to work better, and she wants to know what we can learn from it. Herman: The paradox she's identified is exactly right. This isn't just about dairy. It's a system-wide failure where protectionism, which was meant to save farming, has created the worst of both worlds: industrial-scale, expensive food that hurts consumers and small farmers alike. The people who win are the processors and the large quota holders in the middle. Corn: Let's unpack that paradox. How does a country that produces its own food end up with some of the most expensive groceries in the developed world? Herman: You have to understand the architecture. Israeli agricultural policy rests on three pillars, all built in the nineteen-fifties through the seventies, when food security meant something very different. Pillar one: import tariffs. On finished dairy products, these range from fifty to one hundred seventy percent ad valorem. That's essentially a wall. Pillar two: production quotas. The Ministry of Agriculture allocates who can produce dairy, eggs, and poultry, and exactly how much, in five-year plans. No new dairy farms have been permitted to enter since nineteen ninety-nine. Pillar three: what's called the Basket of Inputs subsidy system, which ties government support directly to production volume. The more liters you pump out, the more support you get. Corn: The system pays you to produce more, but also tells you exactly how much you're allowed to produce. That's already a strange tension. Herman: It's not a tension, it's a designed feature. The quotas create scarcity, which props up prices. The volume-based subsidies push the lucky few who hold quota to industrialize as aggressively as possible. And the tariffs make sure no one from outside can disrupt the party. The result is that Tnuva, Strauss, and Tara control roughly eighty percent of Israel's processed dairy market. These are not small family farms. These are industrial conglomerates. Corn: Hannah's observation was that the farmers themselves are still struggling. So if the prices are high and the market is controlled, where's the money going? Herman: Into the processing and retail margins. Let me give you the numbers. In Israel, a dairy farmer receives about one point eight shekels per liter of raw milk. The retail price for that milk is about six and a half shekels per liter. That's a margin of roughly four point seven shekels captured between the farm gate and the shelf. In Switzerland, by comparison, farmers receive about zero point seven five Swiss francs per liter, and the retail price is about one point ten francs. The margin is thirty-five rappen. The Israeli processor-retailer chain is taking a cut that is, proportionally, three to four times larger. Corn: The farmer gets squeezed, the consumer gets squeezed, and the processor sits in the middle like a troll under a bridge. Herman: A troll that wrote the bridge's zoning laws, yes. To understand why, we need to look at three specific mechanisms that turn protectionism into a regressive tax on consumers. Corn: Let's do it. Herman: Mechanism one: quota as a barrier to entry. The dairy quota system means that if you want to start a dairy farm in Israel today, you can't. The production rights were allocated decades ago, mostly to large kibbutz operations, and they're not giving them up. Some quotas are technically tradeable, but they've been consolidated. The number of dairy farms in Israel has fallen from about twelve hundred in two thousand to roughly six hundred and fifty today, while average herd size has doubled. You end up with fewer, bigger operations that face zero competitive pressure from new entrants. And because no one can enter, no one has to compete on price or quality. Corn: The retail milk price reflects that. Herman: Israeli retail milk runs about one dollar eighty per liter. Switzerland, which has higher labor costs, smaller herds, and alpine terrain that makes everything harder, retails milk at about one dollar twenty per liter. Israel's production costs are not higher than Switzerland's. The difference is entirely in the market structure. Herman: The tariff structure that favors industrial processors. This is the sneaky one. Tariffs on raw materials for animal feed, things like wheat, corn, and soy, are low or zero. But tariffs on finished products, cheese, butter, yogurt, are punishingly high. So what does that incentivize? It incentivizes large industrial operations that can import cheap feed at global prices, produce commodity dairy at scale, and sell it into a market where no foreign cheese can touch them. A small farmer who wants to graze animals on pasture, produce a distinctive artisanal cheese, and sell it locally gets none of those advantages. They can't access cheap feed because they're not buying it at industrial volumes. They can't compete on price because the industrial players have economies of scale. And the quota system probably means they can't even get into dairy production in the first place. Corn: The system actively selects against the kind of farming Hannah was describing in Switzerland. The small, family-run, quality-focused operation. Herman: And that brings us to mechanism three: the Basket of Inputs distortion. Israeli subsidies are tied to volume of production. Not to land stewardship, not to animal welfare, not to biodiversity or soil health or any of the things we might think of as public goods that farming provides. This incentivizes maximum yield per cow at the expense of everything else. Israeli Holsteins average about twelve thousand liters per year. The European Union average is about seven thousand five hundred. That sounds impressive until you ask what you're trading off. Taste, for one. Animal welfare, for another. Soil health, water quality, the viability of pasture-based systems. The system actively punishes extensive, pasture-based farming because every day a cow spends grazing is a day it's not being pushed to maximum output in a controlled feeding operation. Corn: Israel's water situation makes this even more perverse. Each liter of milk produced in this industrial system requires about a thousand liters of water. Herman: In a country that has been fighting water scarcity since its founding. The system is not just economically broken, it's ecologically irrational. Corn: We've got a system that picks winners, locks everyone else out, and then pays the winners to produce in the most industrialized way possible. And the consumer pays for all of it. Herman: The proof that this is artificial, not some inevitable cost of doing business in Israel, is the cottage cheese boycott of twenty-eleven. Consumers had watched the price of Tnuva cottage cheese rise forty percent in three years. They organized a Facebook boycott. Within weeks, Tnuva dropped the price twenty-five percent. That margin existed the whole time, they just didn't have to give it up because there was no competition. But here's the part that matters for Hannah's question: the structural reforms never came. The boycott worked as a tactical protest, but within eighteen months, prices had crept back up. The quotas were still there. The tariffs were still there. The concentration was still there. Corn: That's almost a perfect case study in why consumer pressure alone can't fix a structural problem. You can shame one company into a temporary price cut, but if the rules of the game don't change, the game reverts to the mean. Herman: The mean is a cartel. Corn: Israel's system is broken. But Hannah's plane conversation pointed to a model that seems to work better. Let's look at Switzerland, and then at the EU's CAP reforms, to see what a better system actually looks like. Herman: Switzerland is the right comparison because it disproves the most common defense of Israel's system. People say, well, Switzerland also has high agricultural tariffs, some of the highest in the OECD, averaging about forty-five percent on dairy. And that's true. But Switzerland does three things fundamentally differently. First, subsidies are decoupled from production volume. Swiss farmers are paid per hectare of managed land, per animal on pasture, and for what's called ecological performance. That means biodiversity strips, reduced fertilizer use, maintaining hedgerows. The money supports the public goods farming provides, not just how many liters come out of the cow. Corn: The farmer gets paid for stewarding the landscape, not just for maximizing output. Herman: Second, import quotas in Switzerland are auctioned, not allocated to politically connected players. The government sells the right to import a limited amount of dairy, and the revenue from those auctions goes back to consumers through reduced VAT on food. It's a closed loop: protection creates some cost, but the cost is partially offset by the auction revenue. And third, and this is the crucial one, the border protection is calibrated to allow ten to fifteen percent import penetration. Swiss retailers like Migros and Coop can import about fifteen percent of their dairy from EU countries. That fifteen percent is enough to discipline domestic pricing without flooding the market. Corn: It's a pressure release valve. Domestic producers know that if they push prices too high, the retailers have an alternative. Herman: And the Swiss dairy paradox proves this works. Swiss milk costs more to produce than Israeli milk. Higher labor costs, smaller herds, that alpine terrain I mentioned. Yet retail prices are lower. Because that fifteen percent import window means Tnuva-style margin capture is impossible. If a Swiss processor tried to take a four-shekel-per-liter margin, Migros would just buy more from Bavaria. Israeli retailers have zero import option for most dairy. It's a hundred percent domestic cartel. Corn: The Swiss model is not free trade. It's smart protection. It protects farmers, not processors. Herman: That's the distinction. And the EU's Common Agricultural Policy reforms over the last decade show how you get from here to there. The twenty-thirteen and twenty-twenty-one CAP reforms shifted from production subsidies, paying per liter of milk, to area-based payments and eco-schemes. The result was counterintuitive but instructive. EU dairy production actually increased because more efficient farms could expand. But small farms didn't disappear. They survived by diversifying into direct sales, agritourism, premium products. The key insight is that decoupling support from volume allows market forces to drive efficiency while public money supports public goods: landscape, animal welfare, rural employment. Corn: France's agro-environmental schemes are a concrete example of this. The MAEC program pays farmers between one hundred fifty and six hundred euros per hectare for practices like reduced tillage, hedgerow maintenance, and organic conversion. Herman: Israel has no equivalent program. The Ministry of Agriculture's budget is roughly eighty percent production subsidies. Environmental and land management programs get about five percent. It's not even in the same category of thinking. Corn: We know what works. The question is: why hasn't Israel done it? And what would it take to break the political logjam? Herman: There are three veto players, and they form an iron triangle. First, the dairy quota holders themselves. These are large, politically connected kibbutz operations that have held quota for decades. The quota is an asset worth millions of shekels. Any reform that phases out quotas destroys that asset, so they fight it. Second, the processing oligopoly. Tnuva, Strauss, and Tara have a business model built on captive supply and protected markets. An import window would force them to compete, which would compress those margins we talked about. They have significant lobbying power. Third, the Ministry of Agriculture itself. Its budget, its staff, its entire reason for being is built around administering the quota system. Reform would mean the Ministry losing direct control over production, which it has guarded jealously since the nineteen-fifties. Corn: You've got the beneficiaries of the current system, the processors who capture the margin, and the bureaucracy that administers it. All aligned against change. Herman: The costs are diffuse across nine million consumers who each pay a few hundred extra shekels a month on groceries. That's a classic political economy problem. Concentrated benefits, diffuse costs. The beneficiaries organize; the consumers don't. Corn: What breaks the triangle? You mentioned crisis as a possibility. Herman: Historically, these things change in one of two ways. Either an external shock, a WTO challenge, a severe inflation crisis that makes food prices politically explosive, or a coalition government moment where compensating the losers becomes possible. The second path is more likely. A government could fund a quota buyout, essentially paying current quota holders for the value of their quota over a five-year phase-out, using a temporary import levy to fund the compensation. That turns a veto player into a paid-off stakeholder. Corn: What would a full Swiss-style reform package look like if someone actually tried it? Herman: One: phase out production quotas over five years, with a compensated buyout for current holders. Two: replace volume-based subsidies with per-dunam land management payments and animal welfare premium payments. Pay farmers for the public goods they provide, not just for output. Three: introduce a competitive import window. Allow ten to fifteen percent of dairy, eggs, and poultry to be imported tariff-free, with import licenses auctioned to retailers. The auction revenue can offset the cost of the buyout or reduce VAT on food. Four: mandate retail price transparency. Require stores to label the farmgate price and the retail markup on dairy products. Shine a light on that margin. Corn: The transparency piece is interesting because it's almost costless to implement, and it changes the political dynamics immediately. Once consumers can see that the farmer got one shekel eighty and they're paying six fifty, the question writes itself. Herman: That's exactly what makes it politically powerful. It doesn't require breaking the iron triangle in one go. It just makes the triangle visible. Corn: What can consumers actually do? The twenty-eleven boycott worked temporarily because it was simple, focused, and had a clear target. Is there a modern equivalent? Herman: A modern campaign could target what I'd call the ten percent solution. Push for Knesset legislation requiring the Ministry of Agriculture to auction import licenses for ten percent of dairy, egg, and poultry products. The ten percent solution is politically viable because it doesn't eliminate quotas. It just introduces marginal competition. The quota holders keep ninety percent of their protected market. The processors face just enough pressure to compress those margins. And consumers get a proof of concept. Once people see that a ten percent import window brings prices down without destroying domestic production, the argument for expanding it becomes much easier. Corn: The political narrative matters too. The Swiss model is often held up as protectionist, conservative, traditional. Israeli politicians could adopt that framing: we don't need to abandon agricultural support, we need to modernize it. We're not getting rid of protection for farmers; we're redirecting it so it actually reaches farmers instead of getting captured by processors. Herman: The budget math makes this plausible. Israel spends about one point two billion shekels a year on agricultural subsidies. Redirecting thirty percent of that from production subsidies to land management payments would transform the incentive structure without increasing the budget. You're not asking for more money. You're asking to spend the same money differently. Corn: The small farmers who are currently locked out of quota entirely would suddenly have a pathway. If support is tied to land management and animal welfare rather than production volume, a small pasture-based dairy with fifty cows can compete on quality. Right now, that farm can't even exist legally. Herman: That's the part of Hannah's question that gets at something deeper. She described sitting on a plane next to a couple from farming families in Switzerland, and the sense that farming there is still a viable family business. In Israel, the number of dairy farms has halved in twenty-five years, and the ones that remain are industrial operations. The system hasn't preserved the family farm. It's presided over its extinction. Corn: Which brings us to the deeper question her prompt was really asking. Not just what to change, but why Israelis accept a system that serves almost no one well. Herman: I think there are two answers. One is the security narrative. Food self-sufficiency was a genuine existential concern in the early decades of the state. The quota system was built when Israel was under blockade and embargo. That history is real, and it's been used ever since to justify protectionism as national security. The problem is that the security argument has outlived its usefulness. Israel is not under embargo. It's a major agricultural exporter. The idea that we need to protect domestic dairy production from French cheese to survive is not serious. Corn: The second answer? Herman: The beneficiaries are organized and vocal, and the costs are diffuse. Nine million people each paying an extra few hundred shekels a month don't form a lobbying group. But six hundred and fifty quota holders do. Three processing conglomerates do. The Ministry bureaucracy does. The system persists because the people it hurts don't feel the hurt as a single, mobilizing injury. They feel it as a thousand small annoyances in the grocery store. Corn: Until twenty-eleven, when they did mobilize. And the system blinked, and then went right back to normal. Herman: Which tells you the mobilization worked, but it wasn't sustained and it didn't target the structural rules. A boycott changes a price. Legislation changes a market. Corn: There's also a forward-looking dimension here that makes reform urgent beyond consumer prices. Climate change is going to force reform anyway. Israel's water-intensive dairy system is unsustainable in a warming climate. The current system can't adapt because quotas lock in production methods. If you hold quota for a thousand Holsteins in a zero-grazing operation in the Jordan Valley, you can't suddenly switch to a drought-resistant pasture system. The quota doesn't give you that flexibility, and the subsidy structure punishes you for even trying. Reform now is adaptation. Waiting will make it more painful. Herman: That's the note I'd want to end on. Hannah's instinct was right. The worst of both worlds, industrial food that's also expensive, is not inevitable. Switzerland proves you can have expensive-to-produce food that's affordable at retail, if you design the system to pass efficiency gains to consumers rather than capture them in processor margins. The question is whether Israel can break the political logjam before the climate does it for us. Corn: The ten percent solution is sitting right there. Marginal competition, transparent pricing, subsidies redirected to public goods. None of it requires a revolution. It requires a government willing to tell the processors that the party's over, and willing to compensate the quota holders so they don't block the door. Herman: It requires consumers who remember that the twenty-eleven boycott proved something. The prices are artificial. They can come down. The question is whether we're willing to demand structural change, not just a temporary sale. Corn: Now: Hilbert's daily fun fact. Hilbert: In the early fifteen hundreds, a buzkashi match in the Namib Desert would have required a playing field roughly the length of one thousand seven hundred adult goats laid end to end, which is equivalent to about two point four kilometers of uninterrupted goat. Herman: I have so many questions about how anyone laid out seventeen hundred goats in the Namib Desert in the fifteen hundreds. Corn: I have questions about why they were measuring things in goats to begin with. But I suspect Hilbert has already moved on. Herman: That seems to be his way. This has been My Weird Prompts, with thanks as always to our producer Hilbert Flumingtop. If you enjoyed this episode, tell someone about it. Word of mouth is how we grow. You can find every episode at my weird prompts dot com. Corn: We'll be back next week.