Are food price rises in Israel justified?

Not according to commodity price indexes, but the importers and manufacturers blame other factors, while on the consumer side there are calls for radical market restructuring.

In the past month, Israel has again been hit by a wave of price rises. G. Willi-Food, Strauss, Shastovich, and Wissotzky are among the food manufacturers and importers that have announced rises of up to 15%, and even 25% on some products, from February 1. The companies claim that the rises have been forced upon them by rises in prices of raw materials: suppliers have upped their prices, the attacks on ships in the Red Sea have led to higher shipping costs, and the weakening of the shekel also makes importing more expensive. "Because of the steep rises in sea cargo prices, the Swords of Iron war, and the international crisis caused by the Houthis in Yemen, container shipping prices have risen from $1,500 to $7,200, and delivery times have doubled," food importer G. Willi-Food said in a statement last week.

The available data show a very different picture. A survey by investment house Meitav Dash found that prices of most agricultural commodities actually fell in the past six months (except for cocoa, coffee, and rice). The price of milk, for example, fell 11%, while soy prices fell by 21% and wheat prices by 27%. "The price rises announced by the food companies are not in line with the change in prices of raw materials," says Meitav Dash chief economist Alex Zabezhinsky, who points out that the rise in the index of food prices in Israel is large by global comparison (5.9% in the past year). "Even if the price changes are translated into shekel terms, the index of agricultural commodity prices still shows a fall."

Bank Hapoalim carried out another survey that yields similar insights. The bank’s chief financial markets strategist Modi Shafrir says that although prices of some agricultural commodities rose, the food production index, which looks at local food production costs, fell by 0.5% in December - which was when the price rises in Israel started - its second successive monthly decline.

Market blames the government

Michal Fink. deputy director of strategy and policy planning at the Ministry of Economy and Industry, said in the Knesset Economic Affairs Committee last week that there was a large gap between Israel and the other OECD countries, amounting to 20-30%, in price rises. The market, for its part, points an accusing finger at one main factor, namely the state, which market players say burdens them with costs, from a 17% VAT rate (in many other OECD countries there is no VAT on food), to taxes, fees, and kashrut requirements, and higher power and fuel costs, all of which contribute to rising prices.

"While food companies are under scrutiny for raising prices, no-one deals with the causes of Israel being an expensive country," a market source said. "Food is expensive in Israel in comparison with the rest of the world not because of those reasons, but because of the state’s policies. In the past decade, the average wage has risen by much more than food prices, and the general Consumer Price Index has risen by 10% while the food component has risen by less. The state doesn’t deal with what could solve the problems. Why is there VAT on food in Israel, unlike in other countries where the VAT rate on food is zero or reduced, and the are now raising it by another 1%? The state retains a quotas regime that harms Israeli agriculture, including on honey, milk and eggs. Why do we need egg quotas?

"In other countries they raise taxation on capital, in an attempt to protect the weaker sections of the population. There is no reason for Tnuva to be buying raw milk at a price 35% higher than at a dairy farm in Germany. And as though that were not enough, factories work just five days a week for reasons of kashrut. The state doesn’t help the farmers, and allows local taxes to be collected and taxation on energy."

According to this same source, the recent price rises have nothing to do with the war, and most of the companies were planning to raise prices after the Jewish holiday season. "The rises were frozen after October 7, but everyone realizes that the war will be with us for a long time, and now Passover is approaching and they have no choice but to raise some prices."

As for the falls in prices of raw materials, the source says that they came after much greater rises in the course of the year. "There are products on which we are paying tens of percentage points more than we paid at the beginning of last year. Sugar has become 27% more expensive in the past year, and the dollar exchange rate may have fallen, but that’s after it reached a peak. An importer is still paying 7% more than last year. So it’s easy to argue that the dollar exchange rate has fallen, but it’s higher than it was last year."

Price falls are not on the horizon at the moment. "Cocoa prices are at an all-time high - 3,800 pounds sterling per ton, compared with 2,000 last year. Sugar is also at a peak that hasn’t been seen in over a decade, in the region of $700 per ton, compared with $500 a year ago," says Adi Pinhas, CEO of consultancy Commodex, which specializes in hedging and trading in commodities and raw materials. "In the dairy industry, in produce, corn, and wheat, there has been a fall this year, but much of that is offset by the shipping premium because of the war. The current fall in raw materials prices is mostly minor."

Pinhas adds that, in the past few years, because of the war in Ukraine, a great deal of merchandise was purchased in Israel at high prices, and now, when existing stocks are used, costs still can’t be reduced. "The suppliers stocked up in order to maintain nutrition security," he says. Nevertheless, he is optimistic: "I believe that in the first half of this year we will start to feel the market calming down and prices falling."

"Most commodities don’t go via the Red Sea"

From the consumer side, there are those who argue that the problem lies in the structure of the market itself. Adv. Rachel Gur, VP at Lobby 99, which lobbies in the Knesset and the government on behalf of the public interest, thinks that the food market in Israel needs to change substantially and systemically. "It’s not something that just began with the war; it was there years before," she says. "There is no other country in the developed world that suffers from such high concentration, with half the market controlled by a handful of companies. The big companies must therefore be split up. It won’t make a difference tomorrow, reforms aren’t made overnight, but if we look at what has happened to prices of clothing and footwear thanks to competition from overseas, prices have fallen drastically in the past fifteen years.

"Food prices are climbing steeply. When companies can charge high prices, they do. But when they have an interest in taking into account consumers’ needs on account of competition, because they are scared of losing them, that’s where the change will begin."

According to Gur, most of the recent price rises are not justified. "Prices of raw materials such as cocoa, sugar, and olive oil have risen, but by the same token prices of other products have fallen. The problem is that no company has a commercial interest in lowering prices. When we examined the financial statements of a major importer, we calculated the cost of shipping per product. We’re not talking about big items that take up a lot of space, like cars, but about food products and cosmetics, which can be stuffed in large quantities into one container, and so the cost is relatively tiny, representing about 1% of the cost of the product.

"As for the crisis in the Red Sea: that shouldn’t have a dramatic effect on food prices, but it’s very easy for the importers to blame it for the recent price rises. In general, most of the products don’t go through the Red Sea at all. Pasta and olive oil come from Europe."

The supermarket chains will save us? Don’t count on it

A year ago, when the importers and manufacturers raised prices, it was the supermarket chains that led the protest against them. Will that happen this time too? As things look now, it would seem not. In November 2022, at the height of a tidal wave of price hikes, the food retailers announced that they would refuse to raise their prices. In response, the manufacturers and importers did not supply them with the product that had become dearer, and the retailers were left with empty shelves, until they were forced to reach understandings with the suppliers. Shufersal, Israel’s largest supermarket chain, found itself the last one standing in the battle, which reached its climax when Tnuva announced that it was raising prices. Shufersal not only saw its shelves emptying, but also saw its customers abandoning it for other chains.

Now, it looks as though none of the chains is prepared to enter into a fight the results of which are not certain, especially when, in the past, consumers have shown that they are prepared to pay more when necessary.

Published by Globes, Israel business news - - on January 30, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

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