Michael Humphries
Michael Humphries

In the name of competition

Israel’s Ministries of Finance and Agriculture recently announced reforms in the agriculture markets in an effort to increase competition in the agriculture market. Their goal is to increase competition among farmers by allowing more imports of agricultural goods from Europe and elsewhere.

Economists define competition as a situation where a consumer is offered a range of choices by multiple suppliers, and is able to choose a product based on price, quality, service and any other relevant features. The key terms here are “range of choices” and “multiple suppliers” — it’s unclear if the Ministries of Finance and Agriculture fully understand this definition. There are two models at play here:

Model 1: People shop at multiple supermarkets. Different supermarkets have less expensive prices than their competitors on different products. For a given shopping list, customers will buy some items at one supermarket and other items at another. On some days and weeks, they will shop at three or four supermarkets, getting the lowest prices for items on their shopping list.

Model 2: There are multiple supermarkets customers can buy from, each offering a different range of special price discounts. However, customers are limited to buying an entire shopping list at one supermarket. They compare the various supermarkets and look for the one that has their preferred list of items at cheaper prices and better quality than the competitor.

While the first model meets the definition of competition, the second model clearly does not, even though they both have the same number of supermarkets to choose from. Model 2 offers a range of suppliers but the limitation of buying from only one supplier — giving that supplier a monopoly on purchases. Yet the government ministries seem to believe Model 2 is somehow as competitive as Model 1.

For example, Israel formerly had three main public transportation bus companies: Egged (on a national level), Dan (serving the Tel Aviv area) and Metropolin (in Be’er Sheva). Over the past few years, the Ministries of Finance and Transportation have greatly increased the number of public transportation bus companies, all in the name of competition. But is there competition in public transportation? Each bus line is serviced by one company. Competition would require that a rider be able to choose between multiple bus companies on each route. Instead, the bureaucrats in the Ministry of Transportation assign a route to one company and a rider has only that one choice. The routes are often allocated on a bid basis, with the Ministry of Transportation collecting bids from several companies. For the Ministry, there’s competition for the rights to service a particular route. But for the rider, there isn’t any competition, as is the case in Model 2 above.

Now, the Ministries of Finance and Agriculture are promising Israelis increased competition at the supermarket by allowing more agriculture imports. But civilian shoppers don’t buy agricultural products from farmers or from abroad — they buy food from supermarkets. Reducing farmers’ prices as suppliers to supermarkets won’t reduce prices for shoppers at the cash register. As in past cases, the Ministries seem to believe that consumer prices are a function of wholesale costs. Back in the day, the Ministry of Housing offered land in the Lod area at a discounted price to builders on the assumption that this discount would be passed on to homebuyers.  Needless to say, the homes were sold at the full market price and the builders benefited from the discount, not the home buyers. If consumers are prepared to pay   X shekels for an item, reducing the wholesale cost to retailers isn’t going to lead to reduced retail prices.

The problem with farming is that it’s a lousy business to be in, from an economic point of view.  In every other business model, the owners/managers know what the market price of their finished good is before they begin producing. They also know their input costs and are able to control their output based on assessments of what the market will buy from them and at what price. Farmers don’t have this information until it’s too late. They put all their money in the ground four to six months before they have their final output. When they plant, they don’t know what their output will be (nature keeps this a secret), and they don’t know what the price of their output will be until it’s harvested (four to six months down the road). By the time they harvest their crop, the market price may have dropped below the profit level. The reason is that agriculture is one of the few economic branches where competition between producers truly exists. If all or most farmers have a good harvest, prices fall dramatically. If all or most farmers have a poor season, prices rise dramatically. Additionally, farm products are commodities — identical to each other, and bought and sold based on price. Shoppers don’t care which farmer grew the wheat, corn, or peaches. They only care about the quality and price. In virtually every other business, sector branding is rampant, and consumers will often pay a higher price for the same item but from a particular brand. Not so in agriculture.

No other industry faces this business model. No sane businessperson would enter farming as a business. Farmers are generally those who see farming as a way of life, not a business venture.

The result is that in all advanced economies, governments heavily subsidize agriculture. The US, EU countries, Japan, and others all actively support and subsidize their agricultural sectors. Most also limit agricultural imports in defence of their farmers. Per the OECD’s “Agricultural Policy Monitoring and Evaluation 2020” report, all OECD and EU countries as well as 12 emerging economies subsidize their farmers to the tune of $700 billion per year. In 2019 China ($185.9 billion), the EU ($101.3 billion) and the US ($48.9) were the largest subsidizers by dollar amount, and Norway (57.6%), Iceland (54.6%) and Switzerland (47.4%) were the largest as a percent of gross farm revenue. In comparison, Israel had $1.5 billion in subsidies, with subsidized farming accounting for 17.4% of gross farm revenue. When local news outlets in Israel compare food prices in Israel to those in the U.S. and EU, they are typically comparing heavily subsidized prices (outside Israel) to lightly subsidized prices (in Israel) — the proverbial apples and oranges comparison.

The two Ministries talk about increasing competition in Israel’s agricultural sector by opening Israel up to increased EU agricultural products — products heavily subsidized by the EU. It isn’t clear how importing heavily subsidized goods to “compete” with non- or lightly subsidized imports constitutes competition. For competition to exist, there needs to be an even playing field between the competing parties. Israel doesn’t compete (or even try to compete) with the level of subsidies that European countries offer their farmers. What this does mean is that European taxpayers will be subsidizing Israeli retailers. And Israeli consumers will continue paying the same retail prices that retailers think (know) they are willing to pay.

Similarly, the two Ministries’ economists don’t seem to be speaking to each other. In a recent radio interview, the minister of agriculture said that the reform would lead to a 25% reduction in food prices for consumers. The Ministry of Finance said the reduction would amount to NIS 840 (about $260) a year — or NIS 70 ($22) a month — per household. That isn’t 25% of my monthly food bill. It’s the equivalent of two packs of cigarettes (I don’t smoke, but some folks do). For this nominal savings, the government is proposing to push farmer income down when it’s already borderline.

When government ministries promise Israelis a better life through competition, consumers should watch their wallets.

About the Author
Michael Humphries teaches marketing and management at the Jerusalem College of Technology and is deputy chairman of the Business Administration Department at Touro College Israel, where he teaches finance.
Related Topics
Related Posts
Comments